Kazar v Kargarian
[2010] FCA 1381
FEDERAL COURT OF AUSTRALIA
Kazar, in the matter of Frontier Architects Pty Limited (in liq) [2010] FCA 1381
Citation: Kazar, in the matter of Frontier Architects Pty Limited (in liq) [2010] FCA 1381 Parties: HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF FRONTIER ARCHITECTS PTY LIMITED (IN LIQUIDATION) (ACN 099 631 982) v ROUHOLLAH KARGARIAN AND ANOR; HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF TECHNO BUILD DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (RECEIVER & MANAGER APPOINTED) (ACN 066 616 091) v ROUHIYEH KARGARIAN File numbers: ACD 51 of 2009
ACD 52 of 2009Judge: FLICK J Date of judgment: 10 December 2010 Catchwords: CORPORATIONS – voidable transactions – meaning of “transaction” – claims to be resolved on the pleadings – not an uncommercial transaction – unreasonable director-related transactions – insolvency – quantum meruit
PRACTICE AND PROCEDURE – application made to amend Defence – leave granted – application to further amend Amended Originating Process and Amended Statement of Claim – delay – no explanation – no leave granted to amend
Legislation: Corporations Act 2001 (Cth), ss 9, 588E, 588FA, 588FB, 588FC, 588FDA, 588FE, 588FF, 588FG
Federal Court of Australia Act 1976 (Cth)
Federal Court Rules, Order 11 r 10(b)Cases cited: Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27, 239 CLR 175, applied
Burness v Supaproducts Pty Ltd [2009] FCA 893, 259 ALR 339, cited
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233, 77 ACSR 410, cited
Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185, 164 FCR 83, applied
Capital Finance Australia Limited v Tolcher [2008] HCA Trans 184, cited
Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671, applied
Cooper v Commissioner of Taxation [2009] NSWSC 880, cited
Cussen v Sultan [2009] NSWSC 114, 74 ACSR 496, applied
D’Aloia v Federal Commissioner of Taxation [2003] FCA 1336, 203 ALR 609, followed
Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113, 73 ATR 801, followed
Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535, cited
Dwyer v R-Jay Pty Ltd [2007] SASC 115, 210 FLR 66, considered
Hall v Ledge Finance Ltd [2005] NSWSC 645, cited
Hill End Gold Ltd v First Tiffany Resource Corp [2008] NSWSC 866, cited
In the matter of SSET Construction Pty Ltd (in liq) -Sims v Khattar [2010] NSWSC 102, cited
Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243, 219 ALR 555, applied
Lumbers v W Cook Builders Pty Ltd [2008] HCA 27, 232 CLR 635, applied
Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187, followed
Merrag Pty Ltd (in liq) v Khoury [2009] NSWSC 915, cited
New Cap Reinsurance Corporation Ltd v Grant [2009] NSWSC 662, 257 ALR 740, cited
Parker v Tucker [2010] FCA 263, 77 ACSR 525, cited
Pavey & Matthews v Paul (1987) 162 CLR 221, cited
Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, cited
Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146, cited
Slaven v Menegazzo [2009] ACTSC 94, cited
Smith v Commissioner of Taxation (1997) 75 FCR 339, cited
Strazdins v Tomazou [2010] SASC 262, cited
Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230, 37 ACSR 477, followed
Trinick (as liquidator of Australian Foods Co Pty Ltd (in liq)) v EM & RM Williams & Sons (A Firm) [2009] WASC 297, cited
Wily (in his capacity as liquidator of Goltep Constructions (NSW) Pty Ltd) v Eastern Elevators Pty Ltd [2003] NSWSC 377, 45 ACSR 261, cited
Woodgate v Fawcett [2008] NSWSC 868, 67 ACSR 611, citedDe Jong, L, “The Corporations Act Approach to Uncommercial Transactions – Is It Working?” (2003) 11 Insolvency Law Journal 199
Duns, J, “‘Insolvency’: Problems of Concept, Definition and Proof” (2000) 28 Australian Business Law Review 22
Eagle, K, “Evidentiary Issues in Proving Insolvency” (1999) 7 Insolvency Law Journal 196
Keay, A, “Liquidators’ Avoidance of Uncommercial Transactions” (1996) 70 Australian Law Journal 390Date of hearing: 13, 14, 15, 16 September 2010 Date of last submissions: 27 September 2010 Place: Sydney (Heard in Canberra) Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 175 In ACD 51 of 2009: Counsel for the Plaintiff: Mr M J Heath Solicitor for the Plaintiff: Williams Love & Nicol Lawyers Counsel for the First and Second Defendants Mr S Ahmed Solicitor for the First and Second Defendants: Buttar, Caldwell & Co In ACD 52 of 2009: Counsel for the Plaintiff: Mr M J Heath Solicitor for the Plaintiff: Williams Love & Nicol Lawyers Counsel for the Defendant: Mr S Ahmed Solicitor for the Defendant: Buttar, Caldwell & Co
IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
ACD 51 of 2009
IN THE MATTER OF Frontier Architects Pty LIMITED (In Liquidation) (ACN 099 631 982)
BETWEEN: HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF FRONTIER ARCHITECTS PTY LIMITED (IN LIQUIDATION) (ACN 099 631 982)
PlaintiffAND: ROUHOLLAH KARGARIAN
First DefendantROUHIYEH KARGARIAN
Second Defendant
JUDGE:
FLICK J
DATE OF ORDER:
10 December 2010
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Leave to file a Further Amended Originating Process and a Further Amended Statement of Claim is refused.
2.The parties are to prepare Short Minutes of Orders to give effect to these reasons within 7 days.
3.The proceeding is listed at 9.30 am on 17 December 2010 in Sydney with a view to then making final orders disposing of this proceeding.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
ACD 52 of 2009
IN THE MATTER OF TECHNO BUILD DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (RECEIVER & MANAGER APPOINTED) (ACN 066 616 091)
BETWEEN: HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF TECHNO BUILD DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (RECEIVER & MANAGER APPOINTED) (ACN 066 616 091)
PlaintiffAND: ROUHIYEH KARGARIAN
Defendant
JUDGE:
FLICK J
DATE OF ORDER:
10 December 2010
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.Leave is granted to file an Amended Defence forthwith amending the answer to paragraph [19] of the Statement of Claim.
2.The parties are to prepare Short Minutes of Orders to give effect to these reasons within 7 days.
3.The proceeding is listed at 9.30 am on 17 December 2010 in Sydney with a view to then making final orders disposing of this proceeding.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
ACD 51 of 2009
IN THE MATTER OF Frontier Architects Pty Ltd (In Liquidation) (ACN 099 631 982)
BETWEEN: HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF FRONTIER ARCHITECTS PTY LIMITED (IN LIQUIDATION) (ACN 099 631 982)
PlaintiffAND: ROUHOLLAH KARGARIAN
First DefendantROUHIYEH KARGARIAN
Second Defendant
JUDGE:
FLICK J
DATE:
10 december 2010
PLACE:
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
ACD 52 of 2009
IN THE MATTER OF TECHNO BUILD DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (RECEIVER & MANAGER APPOINTED) (ACN 066 616 091)
BETWEEN: HENRY JOSEPH KAZAR IN HIS CAPACITY AS THE LIQUIDATOR OF TECHNO BUILD DEVELOPMENTS PTY LIMITED (IN LIQUIDATION) (RECEIVER & MANAGER APPOINTED) (ACN 066 616 091)
PlaintiffAND: ROUHIYEH KARGARIAN
Defendant
JUDGE:
FLICK J
DATE:
10 december 2010
PLACE:
SYDNEY
REASONS FOR JUDGMENT
There are presently before the Court two proceedings.
In the first proceeding (ACD 51 of 2009), the liquidator of Frontier Architects Pty Limited (Mr Henry Kazar) seeks relief as against Mr Rouhollah Kargarian and his wife, Mrs Rouhiyeh Kargarian. Mr Rouhollah Kargarian was referred to throughout the hearing as “Rohy”; his wife was referred to as “Ruby”. Without any disrespect to those parties, it is convenient to continue referring to them in that manner from time to time.
In very summary form, the liquidator maintains that seven properties in the Australian Capital Territory were sold to Mr and Mrs Kargarian at a price of $1,270,000. This represented a unit value of $181,428.57 whereas the properties are said to have been worth approximately $335,000 each. The liquidator seeks relief on the basis that the sale was:
·an uncommercial transaction within the meaning of s 588FB of the Corporations Act2001 (Cth) (“the Act”);
·an unfair preference within the meaning of s 588FA of the Act; and/or
·an insolvent transaction within the meaning of s 588FC of the Act.
The transaction is said to be voidable.
In the second proceeding (ACD 52 of 2009), Mr Kazar in his capacity as the liquidator of Techno Build Developments Pty Limited (“Techno Build”) seeks relief against Mrs Rouhiyeh Kargarian. Again, in very summary form, the liquidator maintains that the construction of a house on a property previously bought by Mrs Kargarian at Nicholls in the Australian Capital Territory and/or the disposal of property to Mrs Kargarian by Techno Build in the Territory involved:
·an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act2001 (Cth).
The transaction is said to be a voidable transaction within the meaning of s 588FE(6A). An order is sought pursuant to s 588FF(1) that Mrs Kargarian pay to Techno Build a sum of money.
A person involved in the construction and development of these properties in both proceedings was Mr Amrollah Aghili. He is the brother of Mrs Kargarian. He was referred to throughout the hearing as “Roland” and it is again convenient to continue to refer to him in that manner on occasion.
At the outset of the hearing held in Canberra commencing on Monday 13 September 2010 it was agreed between the parties that the two proceedings would be heard concurrently and the evidence in one proceeding was to be evidence in the other.
During the course of the hearing, an application was also made to amend the Defence in the Techno Build proceeding. An application was also made after the evidence had closed to file a Further Amended Originating Process and a Further Amended Statement of Claim in the Frontier Architects proceeding. As none of the parties sought to adduce any further evidence or to conduct any further cross-examination in either proceeding consequent upon either application, the question as to whether leave would be granted to file such documents was reserved. The only prejudice to any of the parties was the prospect of making further submissions addressing the proposed amendments without knowing whether any of the amendments would be allowed. But none of the parties opposed this course.
The Corporations Act 2001
The principles set forth in each of the provisions of the Act relied upon were not in question. What was in question was their application to the facts of the present proceedings. The present proceedings, fortunately, do not require the particular provisions to be relied upon to be addressed in any great detail.
But each of the provisions should be briefly addressed.
Division 2 of Chapter 5 of the Act deals with “voidable transactions”. Within that Division each of the following provisions is to be found. And notwithstanding the order in which the statutory provisions appear, it is convenient to start with a brief reference to s 588FF and thereafter s 588FE.
Section 588FF confers power upon the Court to make an order where it is satisfied that “a transaction of the company is voidable because of section 588FE”. And s 588FE, in turn, identifies the circumstances in which (relevantly):
·an “insolvent transaction”;
·an “unfair preference”; and
·an “unreasonable director-related transaction”
is voidable. The term “transaction” is defined in s 9.
The manner in which these provisions operate, and the task of the liquidator when invoking these provisions, has been succinctly described by Barrett J in Hall v Ledge Finance Ltd [2005] NSWSC 645 as follows:
[12] … Despite use of the word “voidable” as a label in Part 5.7B and references, in general parlance about Part 5.7B, to the “avoidance” of transactions and the “recovery” of moneys related to transactions, the statutory provisions are not concerned with undoing transactions or re-arranging the financial relationships of parties to transactions, vis-à-vis those transactions themselves. They do not involve reliance on contractual rights or the contractual consequences of events. The liquidator, in pursuing the statutory cause of action, does not sue upon a contract or for restitution consequent upon the invalidity of a transaction. Nor is the liquidator affected by any vitiating elements to which a transaction may be subject, except to the extent that those elements may be shown by a defendant to make unavailable the “transaction” foundation for the liquidator’s claim, in the sense that there never was in truth a transaction (even one liable to be rescinded or declared void). The liquidator’s task is merely to prove facts justifying a conclusion that the company became party to a “transaction” described in s.588FA, s.588FB, s.588FC or was the borrower under a loan described in s.588FD. If any of those things is proved and if, in addition, elements are shown as referred to in a sub-section of s.588FE such as to cause the transaction to be given by s.588FE the statutory designation “voidable”, the liquidator has access to the statutory jurisdiction conferred on the court by s.588FF(1).
The “transaction” – Section 9
Of central relevance in both proceedings is the correct identification of the “transaction” which is said to be “voidable”.
The dictionary to the Act relevantly provides in respect to the term “transaction” as follows:
transaction, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(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 includes such a transaction that has been completed or given effect to, or that has terminated.The definition is clearly a non-exhaustive definition.
In the context of considering s 588FB, Lindgren J has said that although it may be possible that “a transaction … may be composed of a series of steps, some or all of which may also be properly described individually as transactions”, those steps “must be linked as showing that [a] company disposed of property or incurred an obligation in [for example] an “uncommercial” way to its disadvantage”: Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185 at [74], 164 FCR 83 at 98 (“Capital Finance”) per Lindgren J. His Honour there dissented as to the characterisation of what constituted the “transaction” on the facts there in issue. On that question, Heerey J agreed with Gordon J. And the approach to the characterisation of the “transaction” attracted a grant of special leave: Capital Finance Australia Limited v Tolcher [2008] HCA Trans 184. In the Full Court, however, Gordon J relevantly observed:
[120] … the term “transaction” is a word of wide connotation. It may include a series of events in a course of dealings initiated by a debtor intended to extinguish a debt: …. The events can occur at different times and in different forms: …. The categories are not closed. It is not confined to transactions that are lawful or enforceable. The complexity of modern business relations necessarily requires the court to look objectively at the totality of the relationship between the parties in identifying and characterising the “transaction” for the purposes of the relevant provisions of Pt 5.7B of the Corporations Act: … [citations omitted]
After referring to these observations, Nicholas J in Cussen v Sultan [2009] NSWSC 114, 74 ACSR 496 at 502 summarised the position as follows:
[21] The court is obliged to look at the transactions between the parties in a manner which accords with commercial reality. It is not a matter of isolating particular individual steps in the course of a business relationship so as to give one element a different characteristic from that which the totality of that relationship would evidence, but of looking at the transaction as a whole: …. Thus, a transaction may include a payment by the company which has the effect of extinguishing the debt of another …, or it may consist of a series of events occurring at different points of time which are sufficiently connected together … [citations omitted]
Unfair Preferences – Section 588FA
Section 588FA provides as follows:
Unfair preferences
(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
(2)For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security.
(3)Where:
(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and
(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then:
(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.
For the purposes of this provision “[o]ne must assume a notional liquidation of the debtor company immediately prior to the impugned transaction and compare what the creditor would have received in such a liquidation with what the creditor has received as a result of the transaction”: Merrag Pty Ltd (in liq) v Khoury [2009] NSWSC 915 at [104] per Palmer J.
Uncommercial Transactions – Section 588FB
Also within Division 2, s 588FB provides as follows:
Uncommercial transactions
(1)A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(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
(d) any other relevant matter.
(2)A transaction may be an uncommercial transaction of a company because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
By way of example, in Parker v Tucker [2010] FCA 263 at [92], 77 ACSR 525 at 548, Gordon J concluded that a transaction was uncommercial in the circumstances, including the fact that the amount paid was “substantially less” than that originally paid and was paid by instalments with only a “limited amount … paid up front”. “While not dealing exclusively with undervalue”, one commentator has said that “undervalue is at the heart of the section”: Keay, A, “Liquidators’ Avoidance of Uncommercial Transactions” (1996) 70 Australian Law Journal 390 at 397.
When considering when it may be expected that a reasonable person would not have entered into the transaction, Gordon J in Capital Finance observed that:
[129] … the principles to be applied may be summarised as follows:
(1)as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: …;
(2)four criteria are to be considered — the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));
(3)the objective criteria are not considered in some vacuum but by reference to “the company’s circumstances” which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: …; and
(4)for a transaction to be “uncommercial” it must result in “the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice” or where “the consideration … lacks a ‘commercial quality’”: … [citations omitted]
The objective standard was also referred to by Giles JA in Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243, 219 ALR 555 (“Lewis v Doran”) at 589 as follows:
Was the debt restructuring an uncommercial transaction?
[156] The definition of an uncommercial transaction in s 588FB(1) of the Law raises considerations similar to those material to breach of the directors’ duties. The question is objective, whether a reasonable person in the company’s circumstances would not have entered into the transaction, and free from the subjectivity involved in some of the directors’ duties… The curious introductory words, “it may be expected that a reasonable person …”, were said in Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 not to qualify what a reasonable person would have done, but to emphasise the objective nature of the inquiry: at 366–7.
[157] It must positively appear that the reasonable person would not have entered into the transaction …
Hodgson and McColl JJA agreed with Giles JA.
Similarly, in Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 (“Demondrille Nominees”), Foster, Lindgren and Madgwick JJ also referred to the necessity to prove the conferral of a benefit “of such magnitude that it could not be explained by normal commercial practice” as follows at 548:
Demondrille had, at Cornelis’s expense, obtained “a bargain of such magnitude that it could not be explained by normal commercial practice”. Using those words, the explanatory memorandum stated that it was transactions of such a kind at which s 588FB was aimed (explanatory memorandum, para 1044). On the facts found by the trial judge, the conclusion was inevitable that the transaction embodied in the agreement was an uncommercial transaction.
…
The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, “transactions at an under-value” entered into within a specified limited time prior to the commencement of the winding up: …See also: Strazdins v Tomazou [2010] SASC 262 at [65].
The fact that a transaction is entered into when a company is insolvent “is not itself sufficient to make the transaction an uncommercial transaction within the meaning of s 588FB”: Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 at [222], 77 ACSR 410 at 457 per White J.
Insolvent Transactions – Section 588FC
Still within Division 2 of Chapter 5, s 588FC provides as follows:
Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
Section 95A of the Corporations Act further provides as follows:
Solvency and insolvency
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2)A person who is not solvent is insolvent.
The statutory phrase “as and when they become due and payable” makes it clear that “although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of ‘forward looking’. The reference to ‘prospective liability’ in s 459D(1) is consistent with this”: Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 198 per Lindgren J. His Honour further observed that s 95A “states a ‘cash flow test’ rather than a ‘balance sheet test’ of insolvency”. See also: Cooper v Commissioner of Taxation [2009] NSWSC 880 at [20] per Hammerschlag J. The ability to pay debts as and when they become due, it has been said, “is a question of fact, to be decided as a matter of commercial reality in the light of all the circumstances. It is necessary to consider the company’s financial position in its entirety, including its activities, assets, liabilities, cash and money which it could procure by sale or on the security of its assets, and its ability to obtain financial assistance by way of loan or subscription for share capital”: Trinick (as liquidator of Australian Foods Co Pty Ltd (in liq)) v EM & RM Williams & Sons (A Firm) [2009] WASC 297 at [95] per Murphy J. See also: Lewis v Doran at [93] and [107] to [112], per Giles JA (Hodgson and McColl JJA agreeing).
Unreasonable Director-Related Transactions – Section 588FDA
Section 588FDA provides as follows:
Unreasonable director-related transactions
(1)A transaction of a company is an unreasonable director‑related transaction of the company if, and only if:
(a) the transaction is:
(i)a payment made by the company; or
(ii)a conveyance, transfer or other disposition by the company of property of the company; or
(iii)the issue of securities by the company; or
(iv)the incurring by the company of an obligation to make such a payment, disposition or issue; and
(b) the payment, disposition or issue is, or is to be, made to:
(i)a director of the company; or
(ii)a close associate of a director of the company; or
(iii)a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
(c) it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(i)the benefits (if any) to the company of entering into the transaction; and
(ii)the detriment to the company of entering into the transaction; and
(iii)the respective benefits to other parties to the transaction of entering into it; and
(iv)any other relevant matter.
The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.
(2)To avoid doubt, if:
(a) the transaction is a payment, disposition or issue; and
(b) the transaction is entered into for the purpose of meeting an obligation the company has incurred;
the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).
(3)A transaction may be an unreasonable director-related transaction because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
The dictionary contained in s 9 of the Act relevantly contains the following definitions:
Close associate of a director means:
(a) a relative of the director; or
(b) a relative of a spouse of the director.Relative, in relation to a person, means the spouse, parent or remoter lineal ancestor, child or remoter issue, or brother or sister of the person.
Section 588FDA(2) makes it plain that the test in s 588FDA is to be applied to the transaction taking into account the circumstances as they exist at the time when the transaction was entered into. By way of example, in Slaven v Menegazzo [2009] ACTSC 94 Mansfield J concluded that a contract for the sale of land was an unreasonable director-related transaction for the purposes of s 588FDA. A director of the vendor company was the father of the purchaser. The benefits to the vendor company were “negligible” and the detriment clear as it received “no real consideration”. Although the benefits to other parties to the transaction were “a little more complex”, His Honour concluded that “a reasonable person in the company’s circumstances would not have entered into the transaction”. The contract was declared void. In doing so His Honour observed:
[46] The test of an unreasonable director-related transaction is relevantly expressed in s 588FD(a)(1)(c) [sic] itself. It is unhelpful to paraphrase the test, rather than simply to apply it. Nevertheless, the application of that test may be informed by the purpose of that provision: s 109H of the Act. In Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd (2002) 41 ACSR 369, Windeyer J took the same approach in considering the application of s 588FB of the Act to the facts of that case. Section 588FB(1) defines an uncommercial transaction in terms identical in relevant respects to s 588FDA(1)(c). The purpose is to prevent companies disposing of their assets through transactions which result in the recipient receiving a benefit from the company of such commercial magnitude that it is not explainable by normal commercial considerations. See also Woodgate v Fawcett (2008) 67 ACSR 611. As in this case, the transaction there considered inured to the substantial benefit of the family members of a director and to the significant prejudice (and at the time of this transaction to the significant potential prejudice) of its unsecured creditors: see per Hammerschlag J at [106].
In Woodgate v Fawcett, Hammerschlag J noted that the transaction there in issue was by a company under the control of a son and that it inured to the substantial benefit of his parents and to the prejudice of unsecured creditors: [2008] NSWSC 868, 67 ACSR 611 at [106].
Voidable Transactions – Sections 588FE and 588FF
Section 588FE identifies those “transactions” which are “voidable transactions” and s 588FF thereafter provides for the orders that may be made where the “court is satisfied that a transaction of the company is voidable because of section 588FE …”.
Section 588FE relevantly provides as follows:
Voidable transactions
(1)…
(2)…
(2A)…
(2B)…
(3)The transaction is voidable if:
(a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.
(4)…
(5)The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
(c) the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.
(6)…
(6A)The transaction is voidable if:
(a) it is an unreasonable director-related transaction of the company; and
(b) it was entered into, or an act was done for the purposes of giving effect to it:
(i)during the 4 years ending on the relation-back day; or
(ii)after that day but on or before the day when the winding up began.
(7)A reference in this section to doing an act includes a reference to making an omission.
Section 588FF provides as follows:
Courts may make orders about voidable transactions
(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;
(b) an order directing a person to transfer to the company property that the company has transferred 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;
(d) an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:
(i)money that the company has paid under the transaction;
(ii)proceeds of property that the company has transferred under the transaction;
(e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned–an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(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;
(j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.
(2)Nothing in subsection (1) limits the generality of anything else in it.
(3)An application under subsection (1) may only be made:
(a) during the period beginning on the relation-back day and ending:
(i)3 years after the relation-back day; or
(ii)12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.
(4)If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:
(a) the total value of the benefits provided by the company under the transaction; and
(b) the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).
When considering the terms of s 588FF(1)(a) in New Cap Reinsurance Corporation Ltd v Grant [2009] NSWSC 662, 257 ALR 740, Barrett J observed:
[21] The purpose of an order under s 588FF(1)(a) for the payment of money to a company in liquidation is not to compensate or make whole that company. The section does not create a proprietary right of any kind in the company: New Cap Reinsurance Corp Ltd v Faraday Underwriting Ltd (2003) 47 ACSR 306; 177 FLR 52 ; [2003] NSWSC 842 at [38]: Re Harris Scarfe Ltd (in liq) (2006) 203 FLR 46; [2006] SASC 277 at [26]. As with preference avoidance provisions in bankruptcy, the objective is to adjust the rights of creditors among themselves in such a way as to eliminate the effects of favourable treatment afforded to one or more creditors, to the exclusion of others, in the period immediately before an insolvent administration commences. As is said at para 11.400 of M G R Gronow “McPhersons Law of Company Liquidation”, fifth edition (current looseleaf):
… the focus on [sic] the relief that is available (under s 588FF(1)) where a payment or transaction is voidable under the Division is to enable the restoration to the company of money and other property that has been alienated, and to relieve it of the burden of liabilities of the kind mentioned. …
Notwithstanding the use of the term “may” in s 588FF(1), it has been said that the Court does not retain a discretion to refuse to make one or other of the orders set forth in s 588FF(1)(a) to (j): Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671. Einstein J there concluded in respect to a comparable provision:
[569] Cashflow submitted and I accept that the presence of the word ‘may’ in s 588FF does not mean that there is a discretion in the Court concerning whether to make an order in the circumstances of the present case. In this regard, I accept the following propositions which were put forward by way of Cashflow in its submissions as correct:
(i) S 588FF more naturally reads as conferring a jurisdiction on the Court, rather than stating that there is a discretion in the court.
(ii) The jurisdiction that is conferred by s 588FF(1) is to make ‘one or more of the following orders’. There is, I accept, clearly a choice to be made by the Court as to which of the orders, in the list set out in para (a) to para (j) of s 588FF(1), is appropriate to be made. That does not mean that, once the Court is satisfied that the circumstances exist which make it appropriate for a preference or uncommercial transaction to be set aside, there is then some separate discretion which the court can exercise on ‘palm tree justice’ grounds, in deciding whether to actually make the order.
(iii) The power conferred by s 588FF is one where:
‘The word ‘may’ is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise.’ [Per Windeyer J Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106 at 134–135 (with whom Barwick CJ agreed at 128). See also at 138–139 per Owen J.]
(iv) The decision in Re Pacific Hardware Brokers (Qld) Pty Ltd (1997) 16 ACLC 442, concerns a different situation to the present. That was a case where company funds were used to purchase an asset (an engagement ring) which was given to an unsuspecting third party. The question was whether the third party should be ordered to pay the value of the asset to the company. It is understandable that there might be a discretion in such a case. In any event, the discretion was there exercised in favour of ordering the payment of the money.
[570] If there was a discretion in the Court concerning the making of an order under CODFA, I accept Cashflow’s submission that it would need to be exercised in light of the purpose of s 588FF. That purpose is, I accept, to ensure that a creditor did not receive a benefit over and above that received by other creditors — Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLR 1293 at 1301 column 1 per Doyle CJ. Once it is shown that CODFA has received a payment which is indeed an insolvent transaction, I accept that there is no room for operation of any discretion in the court.
Appl’d: Cussen v Sultan at [27] to [28] per Nicholas J. Concurrence is expressed with the views there expressed and with the construction of s 588FF(1).
Defences – Section 588FG
Section 588FG provides for those circumstances in which an order pursuant to s 588FF is not to be made.
Section 588FG provides in relevant part as follows:
Transaction not voidable as against certain persons
(1)…
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and
(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
It is the defendant who bears the onus of making out this defence: Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230 at [38], 37 ACSR 477 (“Sutherland v Eurolinx”) at 483 per Santow J.
In Cussen v Sultan at 505, Nicholas J helpfully summarised the operation of s 588FG as follows:
[31] Section 588FG(2) protects a party to an unfair preference or an uncommercial transaction against the making of an order under s 588FF if it is proved that:
(a)the person became a party to the transaction in good faith (s 588FG(2)(a));
(b)at the time when the person became such a party the person had no reasonable grounds to suspect that the company was, or would become, insolvent, and whether a reasonable person in the person’s circumstances would not have so suspected (s 588FG(2)(b)(i) and (ii)); and
(c)the person provided valuable consideration under the transaction or has changed his, her or its position in reliance of that transaction.
His Honour there went on to observe:
[32] It is unnecessary to refer to authority for the proposition that the onus of proving the defence is on those who rely on it. Its requirements are cumulative.
[33] Section 588FG(2)(a) requires proof that a person became a party to the transaction in good faith. There is no presumption in the defendant’s favour. The defendant must establish a positive. The plaintiff is not required to prove the absence of good faith. The term “good faith” is to be given its natural meaning, namely to act with propriety and honesty. This component of the defence imposes a subjective test … The concept of good faith is a concept separate from the requirements of s 588FG(2)(b): …
[34] The concept of “good faith” encompasses notions of honesty of purpose, motive, or intention which actuated the defendant to become a party to the impugned transaction. The concepts are interchangeable. To show that a person became a party to the transaction subjectively in good faith it is necessary to prove that the motive which actuated the person to do so was honest and proper. The inquiry, accordingly, is directed to the party’s state of mind, with regard to his knowledge and belief about the nature of the transaction at the relevant time.
The phrase “good faith” is not defined but it “encompasses the state of mind of the creditor as to whether the transaction is to occur in circumstances which will, or may, advantage the creditor over other creditors of the company, so that the state of awareness of the creditor as to the company’s solvency will be directly relevant to that question”: Smith v Commissioner of Taxation (1997) 75 FCR 339 at 350 per Mansfield J. The onus of proving “good faith” is upon the defendant and there is no presumption in the defendant’s favour. This requirement imposes a subjective test.
The requirements that a person have “no reasonable grounds for suspecting that the company was insolvent” and that a “reasonable person … would have had no such grounds for so suspecting” are requirements “cast in a demanding form”: cf. Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 at 658 per Doyle CJ. The first of those requirements imposes “essentially a subjective test (albeit based on objective criteria)” whilst the second imposes an objective test: D’Aloia v Federal Commissioner of Taxation [2003] FCA 1336 at [18], 203 ALR 609 at 614.
It may well be, however, that it may not be helpful to approach the requirements set forth in s 588FG(2) as one being subjective and the other objective. In Dean-Willcocks v Commissioner of Taxation [2008] NSWSC 1113, 73 ATR 801, Barrett J set forth the terms of s 588FG(3) but then continued as follows:
[7] … That leaves for consideration paras (a) and (b) of s 588FG(2).
[8] As for para (a), there is no suggestion that the Commissioner (being, in s 588FG(2) terms, the “person”) received the several payments from Fashion Warehouse otherwise than in the due, proper and regular exercise of the Commissioner’s statutory functions. It may therefore be accepted that the Commissioner, as recipient, became party to each payment transaction “in good faith”. Ultimately, therefore, the focus is upon para (b) of s 588FG(2).
[9] Paragraph (b) directs attention to the circumstances existing at each time at which the Commissioner received and accepted from Fashion Warehouse a payment for or on account of its taxation liabilities. Two questions arise in relation to each such occasion: first, whether the Commissioner had “no reasonable grounds for suspecting” that Fashion Warehouse was insolvent at the time in question (or would become insolvent because of the payment, or matters including the payment); and, second, whether “a reasonable person” in the Commissioner’s “circumstances” would have had no such reasonable grounds for so suspecting.
[10] As Bryson J pointed out in Mann v Sangria Pty Ltd [2001] NSWSC 172; (2001) 38 ACSR 307 at [46], the first of these inquiries is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by the Commissioner, while the second is concerned with the existence of reasonable grounds for the formation of the relevant suspicion by a reasonable person in the Commissioner’s circumstances. I do not think it is all that helpful to attempt to characterise one inquiry as “subjective” and the other as “objective”. One should merely approach the two inquiries according to the terms in which they have been expressed by the legislature. I would, however, respectfully endorse Bryson J’s observation (at [46]) that
it would be seldom that the two tests would produce different results, although it is conceivable that a person might be afflicted by some personal difficulty in forming a suspicion.
[11] His Honour thus accommodates the possibility that the actual frame of mind of the particular person may be affected by factors to which the mind of the hypothetical “reasonable person” would be impervious, even though each formed a judgment on “reasonable grounds”. And the “reasonable person” to whom regard is to be had is, as the Court of Appeal confirmed in Cussen as Liquidator of Akai Pty Ltd v Commissioner of Taxation [2004] NSWCA 382 ; (2004) 51 ACSR 530 at [31], a “reasonable business person”.
[12] The relevant concept of “suspecting” — or “suspicion” — is that referred to by Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21l (1966) 115 CLR 266. It is more than idle wondering. It is a positive feeling of actual apprehension or mistrust without sufficient evidence.
[13] It is important to emphasise that the relevant suspicion is one of actual and existing insolvency, as distinct from impending or potential insolvency. …
These observations have since been cited with approval and applied by Gordon J in Burness (as liquidator of Denward Lane Pty Ltd (in liq)) v Supaproducts Pty Ltd [2009] FCA 893 at [52] to [53], 259 ALR 339 (“Burness”) at 349 to 350.
The Frontier Properties – An Overview
The first of the two proceedings now before the Court concerns Frontier Architects Pty Ltd (“Frontier Architects”). Mr Aghili was appointed a director and the company secretary of Frontier in February 2002. He was also, at all material times, a director and shareholder of Techno Build Developments Pty Ltd (“Techno Build”). Mrs Kargarian held one “B” class share and one “ordinary” share in Frontier Properties.
Mr Kazar was appointed liquidator of the company in August 2007 pursuant to a creditors’ voluntary winding up.
The facts concerning this proceeding started in 2001 when Mr Aghili approached either or both Mr and Mrs Kargarian with a view to obtaining funds to develop land located in Dunlop and Amaroo in the Australian Capital Territory.
The Amended Statement of Claim maintains that in 2001 Mr Kargarian, on his own behalf and on behalf of his wife, and Mr Aghili agreed that Mr and Mrs Kargarian would advance moneys for the purpose of the proposed development in Canberra and also agreed that Techno Build would construct the dwellings on that development. It was further agreed that any moneys advanced by Mr and Mrs Kargarian would be repaid in full and that thereafter there would be an equal share of profits as between the parties of 50/50.
It is said that the agreement constituted a contract or alternatively resulted in the establishment of a joint venture between Mr Aghili and/or Techno Build and the Kargarians.
Mr and Mrs Kargarian were also directors of a company called Rohy’s Painting Pty Limited. In 2002 and 2004 Rohy’s Paintings advanced moneys to Mr Aghili and/or the Techno Build account for the purposes of developing the Canberra properties. Also, in 2001 and 2002 Mr and Mrs Kargarian advanced moneys for the development of those properties.
A table prepared by the Defendants recorded the dates of each payment provided as follows:
Date of payment Payment from Payment to Amount 15.11.01 Rohy Roland $89.6K 14.5.02 Rohy’s Painting Roland $511K 17.10.02 Rohy’s Painting (as trustee of the Kargarian Family Trust) Roland $200K 17.10.02 Rohy’s Painting Roland $225K 17.10.02 Rohy Roland $75K 18.10.02 Ruby Roland $200K 17.10.02 Ruby Roland $400K Total $1,700,600 Save for the payment of $200,000 on 17 October 2002 the quantum and dates of payment were largely matters of common ground. Uncertainty especially surrounded the 17 October 2002 payment. Mr Kargarian maintained that he had caused Rohy’s Painting Pty Ltd to pay the money to Mr Aghili. The bank statement disclosed the fact of a withdrawal of that amount on that date. But a letter prepared on 17 November 2008 by solicitors representing Mr Kargarian also set forth a table as to loans made to Mr Aghili. No reference was made in that letter to a loan of $200,000 on 17 October 2002. Mr Kargarian could offer no explanation as to why the letter did not include the further payment of $200,000. It is nevertheless concluded that this additional sum of $200,000 was also paid to Mr Aghili. The fact of payment is consistent with the withdrawal of that amount.
A table prepared by the Defendants recording the repayment of these moneys provided as follows:
Date of payment Payment from Payment to Amount 9.9.03 Frontier Rohy $600K 12.12.03 Frontier Rohy $600K 2.3.04 Frontier Rohy $500K Total $1.7m The fact of repayment of these moneys was common ground between the parties.
Notwithstanding the sums of moneys being provided by the Kargarians, there was little documentary evidence supporting either the payments made or the basis upon which those payments were made.
The perceived need for some document recording the basis upon which moneys were provided, it would appear, began to emerge in October 2002 at that point of time when Mrs Kargarian provided two sums totalling $600,000. At about that time, Mr and Mrs Kargarian had visited the bank with Mr Aghili and signed documents and two cheques totalling $600,000. Mrs Kargarian was present when the following conversation occurred between her husband and Mr Aghili:
Rohy: Give me a document to prove that you will give me 50% profit.
Roland: Let’s go to my solicitor Ben Gulan and he will write it for you.
When they went to the office of Mr Gulan he was unable to see them and Mr Aghili then said:
“I will organise the document later.”
In March 2003 a document was signed by Mr and Mrs Kargarian and Mr and Mrs Aghili. That letter assumed some importance in the case sought to be advanced by the Plaintiff liquidator and should thus be reproduced in full. The text of that letter dated 5 March 2003 provided as follows (without alteration):
Dear Rouhollah & Rouhiyeh
Agreement between Rouhiyeh/Rouhollah Kargarian and Elham/Amrollah Aghili
This letter is to clarify the position between ourselves in relation to Techno Build Developments Pty Ltd (“TBD”) and Frontier Architects Pty Ltd (“FA”).
As you may recall a share in TBD was transferred to Rouhiyeh to facilitate the land purchases in Dunlop and Amaroo in the ACT, (70 blocks) and to reflect your financial interests and obligations in these projects. Subsequent to the share transfers being finalized, our accountant advised that a separate company be established (being FA) to acquire the land. A share in FA was transferred to Rouhiyeh at the relevant time, and accordingly, Rouhiyeh’s share in TBD agreed at the time to be transferred back to Elham Aghili.
Please note that the Kargarian Family’s share in TBD from day one was only applicable to the Amaroo and Dunlop projects; and as a result of this land having being acquired by FA, we agreed to execute a share transfer in relation to TBD transferring Rouhiyeh’s share to Elham Aghili.
We confirm that TBD undertakes construction work for FA in relation to the Dunlop and Amaroo projects on a contract basis and all costs, land purchase, constructions, labour, material, on site or off site work, management costs, legals, profits, losses (if may) taxes, insurances or any other costs or responsibilities will be shared equally between Kargarian and Aghili’s families. A net Fee of 8% of total gross realisation of Amaroo and Dunlop proceeds payable to Amrollah Aghili for project management. After all above costs. The funds provided to date by the Kargarian Family of $1.5 million and $840,000.00 (totaling $2.34 million) in relation to these projects have been utilized to complete some land purchase or to fund construction to date.
By February 2004 only 7 of the properties remained unsold – by March 2004, the proposed developments were completed or nearing completion.
Whatever may have been the degree of trust being expressed between the Kargarian and Aghili families previously, the relationship seems to have changed by (perhaps) March 2004. In that month, Mr Kargarian (on his own behalf and on behalf of Mrs Kargarian) made a demand upon Mr Aghili to account for 50% of the profit.
By about June 2005 Mr Kargarian was concerned that he was not “getting anywhere”. At that time he thus had the following discussion with Mr Aghili:
Rohy
“It seems that I am not getting anywhere with you about getting the money that you promised me. I want to finish with you. As you said, since 3.5 properties are mine, why don’t you just put them under my name?”
Roland
“I can’t do that because the 7 Dunlop properties are mortgaged for $1.27m for another project that I am doing.”
Rohy
“Why haven’t you told me about this before? Now I know why you have been delaying and playing games!”
Roland
“Why don’t you pay out the loan of $1.27m and take the 7 houses. Ruby and Elham are the shareholders of Frontier. So, why don’t you buy Elham’s shares and put it under your name. I will get my solicitor to send something to you.”
By 2 August 2005 there was apparent agreement as to how the “joint venture relationship” was to be finalised. A letter from Mr Aghili’s solicitors to Mr Kargarian thus stated as follows:
AGREEMENT
We understand that you have reached agreement with Mr. Roland Aghili (“Roland”) to finalise the joint venture relationship with respect to the relevant ACT developments on the following basis:
1. You (or nominated entity) to acquire Elham Aghili’s share(s) in Frontier Architects Pty Ltd for a sum of $1,270,000.00.
2. You (or nominated entity) to purchase Blocks 10 & 13 Section 577 Gordon at a price of $420,000.00 each (total consideration of $840,000.00).
3. $350,000.00 to be paid by you to Techno Build Developments Pty Ltd representing the building costs in relation to Block 2 Section 130 Nicholls.
Upon completion of the above transactions, each party agrees that there will be no liability by any party to the other for monies owing or for any other matters. Please confirm your agreement to this arrangement.
We understand that Roland has spoken with Mr. Steven Lucas-Smith of Westpac Bank to assist in arranging finance on your behalf with respect to the above transactions.
On 3 August 2005, following receipt of this letter, a facsimile was sent to Mr Aghili’s solictors on the letterhead of Rohy’s Painting by Mr Mahabat. Mr Mahabat was a trusted friend of Mr and Mrs Kargarian who both made inquiries to protect their interests and who also provided advice to them. Mr Mahabat was frequently referred to in the evidence as “Max”. Mr Kargarian had “delegated to him [the task of asking] some more questions”. The 3 August 2005 letter thus sought “clarification” that “Frontier Architect is free of all debts and all taxes (Income Tax and Property Taxes) have been paid to date”. “Copies of receipts”, it was stated “will be required”. The letter from Mr Mahabat also sought clarification that “Roland and Elham will guaranty [sic] to pay all debts or taxes that, prior to date of settlement, may arise in future”. The letter also sought to clarify that “Roy agrees to pay Techno Build $350,000.00 for the building costs in relation to [the Nicholls property]”.
Although there was no response to the “clarification” sought by Mr Mahabat, on 26 August 2005 Mr Kargarian was provided with the financial statements for Frontier Architects for the financial years 2002 through to 2005 disclosing the taxable income of the company as follows:
Financial year ending Taxable income 2002 Nil (not trading) 2003 $ 46,214 2004 $ 61,029 2005 $ 91,942 The balance sheet as at June 2005 also disclosed a “total equity” of $199,186.79.
On 5 September 2005, Mr and Mrs Kargarian approached Westpac with a view to borrowing moneys. On 26 September 2005, Westpac approved the loan application.
Following the demand made upon Mr Aghili, Mr Aghili agreed to distribute the profit by Mr and Mrs Kargarian agreeing to buy the remaining properties for the sum of $1,270,000. That purchase was completed in October 2005.
As at October 2005, the Plaintiff maintained that Frontier Architects had an outstanding liability to the Australian Taxation Office claimed to be in the amount of $1,493,612.
The purchase of the outstanding properties in October 2005 for the sum of $1,270,000 represented a sale of each property for approximately $181,428.57. The true market value for each property was said by the Plaintiff to be between $330,000.00 and $345,000.00.
Such is the account of the facts that can be distilled from the affidavit evidence as filed and such documents as were available and relevant to the issues to be resolved. Mr Kazar was required to attend for cross-examination and was in fact cross-examined. Mr and Mrs Kargarian were also required to attend for cross-examination and were cross-examined. Some language difficulties were experienced in the cross-examination of Mr and Mrs Kargarian. Mr Kargarian had available to him an interpreter but gave as much evidence as he could without that assistance. But the difficulties which emerged from time to time were such that any assessment of the evidence must necessarily take into account both the difficulty experienced by Counsel on behalf of the Plaintiff liquidator adequately conveying the questions being asked and some uncertainty as to the answers provided.
The Frontier Properties – A Voidable Transaction
In such circumstances it is said that the sale and/or transfer of the 7 properties to Mr and Mrs Kargarian was:
·an unfair preference within the meaning of s 588FA; and/or
·an uncommercial transaction within the meaning of s 588FB; and/or
·an insolvent transaction within the meaning of s 588FC.
The sale and/or transfer of the 7 properties is thus said to constitute a voidable transaction.
The Plaintiff claims either:
·the sum of $1,493,612 in respect of the liabilities incurred by Frontier Architects
or, alternatively:
·the sum of $1,080,000 being the benefit received from the unfair preference and/or uncommercial and/or insolvent transactions pursuant to s 588FF.
The Plaintiff liquidator contended that the effect of the transaction was to transfer the 7 properties to Mr and Mrs Kargarian at less than adequate consideration and to thereby deny to creditors the value of these properties. Such a result would be contrary to the policy considerations underlying these statutory provisions. See: De Jong, L, “The Corporations Act Approach to Uncommercial Transactions – Is It Working?” (2003) 11 Insolvency Law Journal 199 at 200 to 202.
To the extent that it may be concluded that the Plaintiff liquidator may otherwise succeed in his claims under ss 588FA, 588FB or 588FC, the Defendants place reliance upon s 588FG(2).
The Transaction
At the centre of the dispute between the Plaintiff liquidator and the Defendants is the correct identification of the “transaction” in issue for the purposes of Division 2 of Chapter 5 of the Corporations Act.
The Plaintiff liquidator’s contention was that the “transaction” was properly identified as the sale of the remaining 7 properties from Frontier Architects to Mr and Mrs Kargarian. If the “transaction” was properly so characterised, the Plaintiff liquidator then relied upon the discrepancy between what was paid and the objective value of these 7 properties to bring that “transaction” within ss 588FA, 588FB and/or 588FC.
The case for Mr and Mrs Kargarian was that the “transaction” was not to be so narrowly confined. On their approach, the sale of the remaining 7 properties was but the last step of a transaction more broadly defined as embracing:
·the agreement by Mr and Mrs Kargarian and Rohy’s Painting Ltd to lend or invest moneys for the purpose of the construction and development of properties;
·the repayment of moneys by Frontier Architects of $1.7 million between 9 September 2003 and 12 December 2003; and (finally)
·the sale and transfer of the remaining 7 properties.
As between 15 November 2001 and 17 October 2002, $1,700,600 was paid to Mr Aghili; and as between 9 September 2003 and 2 March 2004, $1,700,000 was repaid by Frontier Developments.
It is considered that the “transaction” cannot be as narrowly defined as is sought by the Plaintiff liquidator and that the transaction is more properly to be characterised as that advanced by the Defendants. The sale and transfer of the remaining 7 properties was but the last step in a “transaction” extending back to 2001. See: Capital Finance; Cussen v Sultan. That conclusion is supported by the period of time over which moneys were advanced and repaid, the terms of the discussions in 2001 and the terms of both the 5 March 2003 and 2 August 2005 letters.
Nor did the deterioration in the relationship with Mr Aghili in mid 2005 have the consequence that the original “transaction” to develop the properties was transformed into a new and discrete “transaction” confined to the sale of the remaining 7 properties. It may well be accepted that the proposal on 2 August 2005 to “finalise the joint venture relationship” by Mr Kargarian’s purchase of Mrs Aghili’s share in Frontier Architects for $1,270,000.00 was replaced by the purchase of the remaining 7 properties and that this was a change in the agreement influenced by:
·a concern arising from being told in or about June 2005 that these 7 properties were mortgaged for another project Mr Aghili was involved in;
·a concern arising from the fact that Mr and Mrs Kargarian’s properties at Worrigee and North Ryde were mortaged as security for a loan; and
·the failure to secure the “clarification” sought by Mr Mahabat on 3 August 2005.
The manner in which the “joint venture” ultimately came to be finalised, however, does not detract from the conclusion that the “transaction” was as contended by the Defendants.
An Unfair Preference?
The Amended Statement of Claim as filed on 10 March 2010 identified the claim in respect to the alleged “unfair preference” as follows:
Unfair Preference
30.Further and in the alternative, the sale and/or transfer of the remaining Frontier Properties to the Kargarians, constituted a transaction by Frontier to the Kargarians (being creditors of the company) and that resulted in the Kargarians receiving from Frontier, in respect of an unsecured debt (i.e. the 50% of the profit), more than if the transaction were set aside and the Kargarians were to prove for the debt in the winding up of Frontier and is therefore an unfair preference within the meaning of s588FA of the Act.
As pleaded, the claim fails.
The “sale and/or transfer of the remaining Frontier Properties to the Kargarians” is not the “transaction” for the purposes of s 588FA(1). This was the only way in which the Plaintiff liquidator sought to rely upon this provision.
It is unnecessary, however, to further consider whether the “transaction” properly characterised could fall within s 588FA(1) because of the conclusion later reached that the Defendants fall within s 588FG(2).
Uncommercial?
The sale of the 7 properties is said to be an “uncommercial transaction” essentially by reason of the fact that the 7 properties were sold for the sum of $1,270,000.00 whereas the true market value was said to be $2,350,000.00. The difference between $2,350,000 and the $1,270,000 is the benefit of $1,080,000 claimed by the Plaintiff liquidator.
When the “transaction” is properly characterised and not confined to the final step of sale and transfer of the remaining properties, it is not considered to be “uncommercial”.
When considering whether a transaction is an “uncommercial transaction” in this proceeding, s 588FB(1) requires that “regard” must be had to:
·the benefits to Frontier Architects of entering into the transaction;
·the detriment to Frontier Architects of entering into the transaction;
·the respective benefits to other parties, including Mr and Mrs Kargarian, of entering into the transaction; and
·“any other relevant matter”.
The benefits to Frontier Architects of entering into the “transaction” were considerable. The total of moneys advanced to the company was $1,760,000 and presumably assisted in the ability to construct 70 properties. Frontier Architects was also benefited by Mr and Mrs Kargarian providing their properties at Worrigee and North Ryde to be used as security for the development being undertaken.
And, when considering the benefit to Frontier Architects, Counsel on behalf of the Defendants correctly maintained that attention should not be confined solely to Frontier Architects. There was, it was said, a “derivative benefit” to that company by reason of a benefit jointly shared by what was described as “the Aghili group”. In support of the submission, reliance was placed upon the following observations of Giles JA in Lewis v Doran:
[148] ... It has nonetheless been recognised that a transaction benefiting one company in a group may have derivative benefits for another company in the group, even if the companies are not parent and subsidiary. In Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 … Brennan J observed (at CLR 183 …) that “it may be for the benefit of solvent companies in a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group”. In Equiticorp Finance Ltd (in liq) v Bank of New Zealand Clarke and Cripps JJA said (at NSWLR 146–7; ACSR 726):
It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B.
Hodgson and McColl JJA agreed. Concurrence is respectfully expressed with the approach there expressed by Giles JA.
When considering the detriment to Frontier Architects, and even if attention is confined to the sale of the remaining 7 properties, it is respectfully considered to be too deceptively simple an analysis to say that the Defendants purchased 7 properties at a unit value of $181,428.57 whereas the true unit value was closer to $335,000.00. To so approach the analysis is to focus too much attention upon that part of the transaction which effected the transfer of the 7 properties and to not give sufficient or adequate attention to the transaction in its entirety.
The benefits to Mr and Mrs Kargarian are to be assessed by reference to the fact that they advanced moneys to enable the development to proceed and provided their own properties as security. They were repaid $1,700,000 some time after the moneys were first advanced and “finalise[d] the joint venture relationship” by ultimately purchasing the remaining 7 properties. The agreement as recorded in March 2003 was that Mr and Mrs Kargarian were to receive 50% of the profits of the property development. Of the 7 remaining properties, Mr and Mrs Kargarian were on this approach entitled to 3½ units. They purchased the remaining 3½ units for $1.27 million, representing a unit price in excess of $335,000.
When taking into account those matters to which s 588FB(1) directs attention, it is not concluded that the “bargain” struck cannot be “explained by normal commercial practice”: Capital Finance; Demondrille Nominees.
It is not considered that the “transaction” was an “uncommercial transaction” for the purposes of s 588FB.
An Insolvent Transaction?
The sale of the 7 properties is also said to be an insolvent transaction essentially because at the time of the sale Frontier Architects was unable to pay all of its debts as and when they became due and payable.
The claim fails.
Section 588FC makes it clear that a “transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company or an uncommercial transaction of the company …”. As the “transaction” has been held to be neither an “unfair preference” as pleaded nor an “uncommercial transaction”, s 588FC does not apply.
Notwithstanding the accepted difficulties confronting a liquidator in proving insolvency, and even adopting what has been described as a “realistic attitude towards the liquidator’s onus of proof” (Eagle, K, “Evidentiary Issues in Proving Insolvency” (1999) 7 Insolvency Law Journal 196 at 197), it is nevertheless concluded that the Plaintiff liquidator failed to prove that Frontier Architects was insolvent as at the date of the sale and transfer of the 7 remaining properties. See also: Duns, J, “‘Insolvency’: Problems of Concept, Definition and Proof” (2000) 28 Australian Business Law Review 22 at 33 to 34.
Insolvency – The Benefit of the Presumption?
The Plaintiff liquidator sought to prove the insolvency of Frontier Architects both by reference to the presumption provided for in s 588E and by reference to the evidence.
Section 588E relevantly provides in part as follows:
(3)If:
(a) the company is being wound up; and
(b) it is proved, or because of subsection (4) or (8) it must be presumed, that the company was insolvent at a particular time during the 12 months ending on the relation-back day;
it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.
(4)Subject to subsections (5) to (7), if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
(5)Paragraph (4)(a) does not apply in relation to a contravention of subsection 286(1) that is only minor or technical.
(6)…
(7)If the recovery proceeding is an application under section 588FF, subsection (4) of this section does not have effect for the purposes of proving, for the purposes of the application, that an unfair preference given by the company to a creditor of the company is an insolvent transaction, unless it is proved, for the purposes of the application, that a related entity of the company was a party to the unfair preference.
The presumption provided for may be rebutted. Sub-section (9) thus provides as follows:
A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the proceeding concerned.
Notwithstanding a submission on the part of the Defendants to the contrary, it is considered that the Plaintiff liquidator did prove that Frontier Architects had failed to keep financial records as required by s 286. It may be noted that In the matter of SSET Construction Pty Ltd (in liq) -Sims v Khattar [2010] NSWSC 102 at [24], Austin J concluded on the facts of that case that the evidence did not amount to an admission that the company failed to keep or retain financial records and was insufficient to give rise to a presumption of insolvency.
But it is not considered that it is open to the Plaintiff liquidator to place reliance upon s 588E. The Amended Statement of Claim neither pleaded that the company had failed to keep or retain financial records nor did it otherwise plead reliance upon s 588E.
If reliance is to be placed upon s 588E, it is considered that such reliance should be pleaded in such a manner as to make such reliance apparent. To fail to do so has the potential to take an opposing party “by surprise” within the meaning of and for the purposes of Order 11 r 10(b) of the Federal Court Rules. A requirement to plead reliance upon s 588E is not satisfied by evidence that may have been filed relevant to a failure to keep records. A party is entitled to be informed as to the case to be met by reference to the pleadings rather than by reference to a case that may or may not be sought to be advanced upon such evidence as may have been filed and which may or may not be discernible by a careful review of such evidence.
Some support for the conclusion that it is necessary to expressly plead reliance upon the presumption, as opposed to a liquidator electing to prove insolvency by reference to evidence, may be gleaned from the decision in Dwyer v R-Jay Pty Ltd [2007] SASC 115, 210 FLR 66. Debelle J there observed in part as follows:
[24] The conclusion that a liquidator need not rely on the presumption may be reached by another route. In each action in which a liquidator in reliance on s 588FF seeks to recover a payment said to be a voidable transaction, the liquidator will plead in a statement of claim the facts on which the claim is grounded. The pleading will include an allegation of insolvency. The statement of claim will either plead the particulars of that allegation or, if available, plead the presumption in s 588E(8). If the statement of claim has been drawn before the liquidator has proved insolvency in another action, the liquidator will not be able to plead the presumption in s 588E. Should that issue be proved in a recovery proceeding, the liquidator will be at liberty to apply to amend the statement of claim to plead the presumption. In either instance, the liquidator has a choice whether or not he will rely on the presumption. If the presumption is available the liquidator is not compelled to rely on it. In other words, the determination of the question whether a transaction is voidable because of s 588FE will be determined on the issues raised in the pleadings. If the liquidator believes that the preferred course is to prove insolvency and not rely on what has been proved in an earlier action, there is no bar to the liquidator adopting that course.
[25] That conclusion might be tested in this way. Assume that, notwithstanding the fact that insolvency had been proved in an earlier action, a liquidator does not rely on the presumption, proves insolvency, and judgment is given setting aside the transaction as voidable. It would be absurd to conclude that the judgment was capable of being held to be invalid by reason of the fact that the liquidator had chosen not to rely on the presumption. In other words, the use of the word “must” in s 588E(8) has the consequence that, if the liquidator elects to rely on a presumption where it is available, effect must be given to that election. However, if the liquidator elects not to rely on an available presumption, the proceedings are not invalidated: cf Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [93]. I do not think that this conclusion is affected by the fact that the presumptions to which s 588E(8) refers are available also for the benefit of defendants. If the liquidator elects to prove insolvency, it is open to the defendant who wishes to do so to admit that fact. So far as s 588E(8) creates a presumption in respect of defences which have been proved, there is no reason why a defendant cannot elect to rely on the presumption.
[26] The liquidators are at liberty either to waive the benefit of s 588E(8) or to plead a claim grounded on s 588FF in such a way that they will seek to establish insolvency by proof of facts and not rely on the presumption in s 588E(8).
Although these observations go more to the choice open to a liquidator as to the manner in which insolvency may be proved, they nevertheless provide some assistance in reaching a conclusion that s 588E needs to be expressly pleaded or – at the very least – either reliance upon the presumption must be expressly pleaded or the facts giving rise to an entitlement to rely upon the presumption must be expressly pleaded.
Moreover, in the present proceeding, Counsel on behalf of the Defendants quite properly outlined such procedural steps as would have been pursued had reliance upon s 588E been foreshadowed prior to the hearing. No prior notice had been given of any intention to rely upon s 588E prior to the opening of the case. No application was made to seek leave to amend the Amended Statement of Claim to expressly plead reliance upon s 588E nor does the proposed Further Amended Statement of Claim seek to expressly plead the presumption contained therein.
It is thus concluded that reliance cannot be placed by the Plaintiff liquidator upon the presumption otherwise provided for in s 588E.
Insolvency – The Facts?
Separate from any reliance upon s 588E, Counsel on behalf of the Plaintiff liquidator contended that insolvency had, in any event, otherwise been established.
The evidence relied upon by the Plaintiff to prove insolvency was less than satisfactorily presented. Such evidence as there was, not surprisingly, emerged from the affidavit of the Plaintiff liquidator and his oral evidence.
When called upon to identify the evidence relied upon to prove insolvency, the Plaintiff liquidator identified a number of sources of evidence.
First, reliance was curiously placed upon the following paragraph in the Plaintiff liquidator’s affidavit:
[21] As at the date of my appointment as administrator of Techno Build, the Aghili Group comprised nine (9) companies and individuals with gross assets as advised by Mr Amrollah Aghili of approximately $48 million, secured creditors in the order of $34 million and third party ordinary, unsecured creditors of about $8.5 million. Of this debt, approximately $7 million is owed by Techno Build while the balance of approximately $1.5 million is owed by Frontier.
On any reading of this paragraph, insolvency is not established. Indeed, the paragraph would seem to establish a surplus of assets over liabilities.
This evidence of Mr Mahabat is accepted. It is accepted that as at August 2005 he “was not aware in any way … whether … Frontier was insolvent” but that he was “happy with the financial position of Frontier” and communicated this to Mr Kargarian.
Based upon what Mr Mahabat was saying, neither Mr nor Mrs Kargarian had “reasonable grounds for suspecting” that Frontier Architects “was insolvent at that time or would become insolvent”. Mr Kargarian stated in his affidavit as follows:
[85] On or about 26 August 2005 Max provided to me financial statements of Frontier for 2002, 2003, 2004 and 2005 relating [to] Frontier that he had received from Roland. From this document I understood that Frontier did not owe anybody any money …
Due to language difficulties, there was some uncertainty as to the evidence being given by Mr Kargarian on this issue during his cross-examination. Counsel for the Plaintiff liquidator referred to the financial information that had been provided and to the fact that Mr Kargarian had “delegated [to Mr Mahabat] to read those documents”. But there was uncertainty as to whether Mr Kargarian read that information for himself or simply relied upon what Mr Mahabat told him. That uncertainty may be left to one side as Counsel for the Plaintiff liquidator then pursued the following cross-examination:
MR HEATH: All right. But at some point in time, Mr Kargarian, at some point in time the deal or the proposed deal changed from shares – you understand shares? Well, at least at this time, you now understood shares?
THE WITNESS: Yes.
MR HEATH: Yes? And to getting the properties directly?
THE WITNESS: Yes.
MR HEATH: Okay. So something changed. That’s right, isn’t it?
THE WITNESS: Yes.
MR HEATH: Okay. It changed because Mr Mahabat was not happy – sorry, I withdraw that. Mr Mahabat told you he was not happy with the information that he had got from Roland.
THE WITNESS: Mr Mahabat didn’t tell me that he’s not happy with the document that was - - -
MR HEATH: He did not tell you or he did tell you that he was not happy?
THE WITNESS: No, he didn’t tell me that he’s not happy with the financial that he received.
MR HEATH: That’s not true, Mr Kargarian, is it?
THE WITNESS: Yes, it is true.
MR HEATH: He told you that he was not happy and when he told you that he was not happy, you were not satisfied. That’s right, isn’t it, Mr Kargarian?
THE WITNESS: No.
Although an assessment of Mr Kargarian’s credibility was not an easy task, the submission on behalf of the Plaintiff liquidator that the evidence given by Mr Kargarian at paragraph [85] of his affidavit was “manifestly not true” is rejected.
It is further concluded that “a reasonable person … would have had no such grounds for suspecting” that Frontier Architects was insolvent. A “reasonable person” for these purposes is “a reasonable business person”: Dean-Willcocks at [11]; Burness at [53]. Although the request for “clarification” and the failure to respond may well have provided a reason for concern on the part of the Defendants, a reasonable business person would also have had available to him the financial statements provided on 26 August 2005 and the balance sheet of Frontier Architects as at June 2005 disclosing the “total equity” as $199,186.79.
The final conclusion in respect to s 588FG(2) is that Mr and Mrs Kargarian provided “valuable consideration” for the purchase of the remaining 7 properties in the amount of $1.27 million.
The Techno Build Property — An Overview
The second of the two proceedings now before the Court concerns Techno Build Developments Pty Ltd. Mr Aghili was appointed a director of this company in December 1994.
Mr Kazar was appointed liquidator of the company in September 2007 pursuant to a creditors’ voluntary winding up.
The facts concerning this proceeding commenced in August 2002 when Mrs Kargarian purchased a block of vacant land in Nicholls in the Australian Capital Territory for $160,000.
During 2004 and 2005 Techno Build built a residential house on the Nicholls property. In doing so it incurred liabilities, including costs for materials and labour.
Initially, Mrs Kargarian maintained that she did not want Mr Aghili to build a house on the land. But her position later changed such that she did not oppose the house being built provided it was “free”. Thus, in July 2004 Mrs Kargarian in her affidavit gave the following account of a conversation between herself and her husband:
Rohy: “I have just spoken to Roland and he has told me that he is building a house on your Nicholls Land.” Ruby: “Why is he doing that? We told Roland that we don’t want him to build a house on my land” Rohy: “I know he said that, but he is doing it for free because of all the money that we have given him.” She also gave an account of a further conversation in August 2004:
Rohy: “I have visited the Nicholls Land. The house that Roland is building for you is half done.” Ruby: “OK, if it is free then it is alright.”
But later that month it emerged that Mr and Mrs Kargarian were aware that Mr Aghili was asking for payment. Later that month Mrs Kargarian thus had a further conversation with her husband to the following effect:
Rohy: “Roland is asking for $200,000 to finish the Nicholls House.” Ruby: “He said that he would not charge us for the house.” Rohy: “I know, but he needs the money to finish the house.” Ruby: “It looks like we have no choice; give him the money to finish the house.” Mr Kargarian maintained that he paid this $200,000 and a further $40,000 to Mr Aghili to complete the dwelling at Nicholls.
In March 2005 Techno Build made a demand for payment of $350,000 on Mr Kargarian. Thereafter, in December 2005 Techno Build issued a further invoice in respect to the construction of the residential house, being:
·a tax invoice for the supply of labour, materials and equipment for construction for $350,000; and
·a list of expenses, including a builder’s margin of 8%, totalling $402,252.25.
Thereafter there was relevantly the 2 August 2005 letter written by Mr Aghili’s solicitors. That letter referred to an “agreement” that $350,000 was to be paid “to Techno Build Developments Pty Ltd representing the building costs in relation to Block 2 Section 130 Nicholls”. The response from Mr Mahabat by way of facsimile on 3 August 2005 also referred to an agreement to pay Techno Build $350,000 “for the building costs” in relation to the Nicholls property, as did later communications.
In August 2007 the solicitors acting for Mr Kazar wrote to Mr and Mrs Kargarian referring to the invoice dated 12 December 2005 and seeking “information from you on the construction agreement for the Nicholls Residence …”.
Mrs Kargarian sold the property in February 2006 for $780,000.
The Techno Build Property — Voidable or a Quantum Meruit?
The Statement of Claim maintains that Mrs Kargarian as the sister of Mr Aghili is a “close associate” of Mr Aghili who was at all material times a director of Techno Build within the meaning of s 9 and for the purposes of s 588FDA(1)(b)(ii) of the Act.
The Statement of Claim further maintains that “the construction of the Nicholls House by Techno Build constituted an unreasonable director-related transaction within the meaning of Section 588FDA” and “is a voidable transaction within the meaning of Section 588FE(6A)”.
The Plaintiff liquidator claims an order pursuant to s 588FF(1) that Mrs Kargarian pay to Techno Build:
·a sum of $402,252.25; or
·an amount equal to the value of the construction of the “Nicholls House”, including a builders’ margin of 8%; or
·a sum that fairly represents some or all of the benefits that Mrs Kargarian has received because of the construction of the house.
Alternatively, a claim is made for quantum meruit.
In the present proceeding it is concluded that Mrs Kargarian is a “close associate” of Mr Aghili as a director of Techno Build.
The claim for relief in respect to the Techno Build proceeding does not depend upon proving that Techno Build was insolvent at any point of time. But it does depend upon establishing that there was:
·an unreasonable director-related transaction within the meaning of s 588FDA;
and
·a voidable transaction within the meaning of s 588FE(6A).
Both provisions require a plaintiff to identify the “transaction” relied upon.
The Transaction
Again, at the centre of the dispute between the parties is the correct identification of the “transaction” for the purposes of s 588FDA.
The Statement of Claim alleges that “the construction of the Nicholls House by Techno Build constituted an unreasonable director-related transaction …”.
It was understood that Counsel on behalf of the Plaintiff liquidator thereafter contended that the various payments made by Techno Build and the costs incurred by Techno Build in respect to the construction of the Nicholls house could be brought within s 588FDA(1) by reason of their being:
·a “disposition by”;
·a “payment made by”; and/or
·an “obligation incurred by”
Techno Build.
The sole Defendant to this proceeding, Mrs Kargarian, maintains that the “transaction” is properly to be characterised as but a part of the transaction advanced on behalf of the Defendants in the Frontier Architects proceeding. Again, it is said that the building of the house was but the last step in a much larger transaction.
The lack of any attention to the manner in which moneys were advanced and for what purpose certainly points in the direction of those involved not giving any attention to the legal consequences of their conduct. Any analysis of the facts or any attempt to attach legal significance to conduct not engaged in with any consciousness of the legal consequences of such conduct is necessarily a very uncertain process.
Notwithstanding such difficulties, it is nevertheless concluded that the “transaction” for the purposes of s 588FDA is confined to the construction of the Nicholls house and the incurring of costs and liabilities in respect to that construction. Rejected is the alternative submission advanced on behalf of Mrs Kargarian that the “transaction” forms part of the same transaction that was in issue in the Frontier Architects proceeding.
Although the purchase of the land at Nicholls and the construction of the house upon that site by Techno Build occurred during much the same period of time as the other property development was proceeding, it is considered that the construction of the house on the Nicholls property was a matter separate and discrete from the “transaction” involved in the Frontier Architects proceeding. The fact that the same persons and entities were involved in both the construction of the Nicholls house and the other property development does not of itself dictate that the same characterisation of “transaction” need be applied to both proceedings.
The lack of documentation or agreements as may otherwise have been expected to accompany developments of either the 70 properties or the Nicholls property necessarily permits of uncertainty in such inferences as may be drawn from other facts. And some facts are more open to argument than others. But the conclusion that the construction of the dwelling on the Nicholls land forms a discrete “transaction” separate from the more general agreement to advance moneys in the development of the 70 properties is supported by such matters as:
·the fact that it was common ground that it was Mrs Kargarian who purchased the vacant block of land in Nicholls in August 2002 for the sum of $160,000;
·the fact that the construction of the dwelling on the Nicholls land was seemingly undertaken by Mr Aghili as a separate exercise, albeit perhaps in return for the financial assistance that Mrs Kargarian (as his sister) may have provided for the development of the 70 properties;
·the fact that the 5 March 2003 letter of agreement relating to the other 70 properties does not refer to the Nicholls property;
·the fact that invoices in respect of construction costs incurred separately identified the Nicholls property;
·the fact that in March 2005 Techno Build made a separate demand for $350,000 for the building costs of the property;
·the fact that in December 2005 Techno Build issued an invoice to Mrs Kargarian for the construction of the house on the Nicholls property; and
·the fact that the letter dated 26 September 2005 from Westpac to Mr and Mrs Kargarian setting out the terms and conditions of an offer of loan identifies as the purpose of the loan a sum of $1,270,000 “to repay existing debt in the name of Techno Build Developments Pty Ltd” and “$350,000 to repay Roland Aghili for construction costs of a property at Nicholls”.
To place reliance upon such matters is not considered to impermissibly seek to attribute a significance to events which those involved did not themselves contemplate.
It is thus concluded that the “transaction” for the purposes of s 588FDA is that as alleged by the Plaintiff liquidator.
An Unreasonable Director-Related Transaction?
It is further concluded that such costs and liabilities as were incurred by Techno Build in the construction of the house on the Nicholls property were “payment[s] made by” Techno Build within paragraph (d) of the definition of “transaction” and within the meaning of s 588FDA(1)(a)(i).
It is also concluded that such payments were also made “for the benefit” of a “close associate” within the meaning of s 588FDA(1)(b)(iii).
It is further concluded that a reasonable person in the company’s position would not have entered into the transaction within the meaning of s 588FDA(1)(c) having regard to:
·the absence of any commensurate benefit accruing to Techno Build at the outset when Mrs Kargarian thought that the house was to be built for “free”;
·the detriment to Techno Build, namely the costs incurred; and
·the benefit accruing to Mrs Kargarian, namely the construction of the house and an assumed increase in the value of the land.
Having concluded that the “transaction” is as alleged by the Plaintiff liquidator, it is but a short step to make this further conclusion that the transaction is an “unreasonable director-related transaction”. It is concluded that the transaction is such an “unreasonable director-related transaction” and that the Plaintiff liquidator is entitled to relief under s 588FF.
The Costs Incurred by Techno Build and Payments Made
There was, however, considerable uncertainty as to what amounts of money had been paid by Techno Build in respect to the Nicholls dwelling and the costs that had been “incurred” by Techno Build in respect to the construction of that dwelling.
A question also arose as to whether a payment of $200,000 had been made by Rohy’s Painting in 2004 in respect to the costs incurred.
The range of attempts to quantify the costs that had been “incurred” by Techno Build included:
·$276,462.38 – being that sum identified in Particulars to the Statement of Claim as being “verifiable supplier invoices” excluding any builders’ margin costs and other possible costs that may not be subject to invoices;
·$350,000 – being the amount claimed in the demand made on 10 March 2005 for “building costs” and the invoice of 12 December 2005 for the “labour, material, tools and equipment”;
·$372,455.79 – being the total of the invoices annexed to the December 2005 demand (totalling $402,252.25 including 8% margin); and
·$279,804.83 – being a recalculation on the part of the Plaintiff of the $276,462.38 that was pleaded.
Other calculations were also performed on behalf of the parties. It suffices for present purposes to note that there was a lack of certainty as to the true amount of costs incurred.
Albeit with some misgiving, it is considered that the most reliable calculation is that set forth in the December 2005 demand, namely a sum of $350,000. This figure has some correlation with the invoices and is the sum separately agreed to be paid.
In respect to payments made to Mr Aghili, it is also concluded that the sum of $200,000 was paid on 3 September 2004 towards the costs of construction. It was common ground that a sum of $200,000 was paid on that date. Given the fact that the date of payment was after the completion of the construction of the other 70 properties, this sum was in all probability a payment towards the construction of the Nicholls property.
The Proposed Amended Defence?
The application in the Techno Build proceeding to amend the document described as the “Notice of grounds of Defence” as filed on 31 March 2010 was to amend the answer there provided to paragraph [19] of the Statement of Claim. This application was made by way of Notice of Motion filed on 9 September 2010.
Paragraph [19] alleged that a “reasonable person would not have entered into the transaction having regard to” the matters thereafter set forth. The existing “Notice of grounds of Defence” stated that the Defendant did “not plead to this paragraph as it makes no allegation against her”. The proposed amendment sought to deny the allegation made in paragraph [19].
Leave to make this amendment was, perhaps surprisingly, opposed by the Plaintiff liquidator. In opposing leave, Counsel for the Plaintiff liquidator placed reliance upon the following observations of Brereton J in Hill End Gold Ltd v First Tiffany Resource Corporation [2008] NSWSC 866:
The approach to withdrawal of admissions
[31] There is not significant dispute as to the applicable principles, which were expounded by Santow J (as he then was) in Drabsch v Switzerland General Insurance Co Ltd (NSWSC, 16 October 1996, unreported, BC9604909), as follows (at 7–8):
1.Where a party under no apparent disability makes a clear and distinct admission which is accepted by its opponent and acted upon, for reasons of policy and the due conduct of the business of the court, an application to withdraw the admission, especially at appeal, should not be freely granted; …
2.The question is one for the reviewing judge to consider in the context of each particular appeal, with the general guideline being that the person seeking on a review to withdraw a concession made should provide some good reason why the judge should disturb what was previously common ground or conceded; …,
3.Where a court is satisfied that admissions have been made after consideration and advice such as from the parties’ expert and after a full opportunity to consider its case and whether the admissions should be made, admissions so made with deliberateness and formality would ordinarily not be permitted to be withdrawn; …. Thus a court will not lend its approval to the withdrawal of admissions where, by analogy with the making of amendments, this is actuated by purely tactical reasons; …
4.It will usually be appropriate to grant leave to withdraw an admission where it is shown that the admission is contrary to the actual facts. Leave may also be appropriate where circumstances show that the admission was made inadvertently or without due consideration of material matters. Irrespective of whether the admission has or has not been formally made, leave may be refused if the other party has changed its position in reliance upon the admission; …
5.Following Cohen v Mc William and Anor (1995) 38 NSWLR 476, a court is not obliged to give decisive weight to court efficiency, such that a party who wishes to defend its claim is entitled to a hearing on the merits, with costs orders being available as a means of compensating the other party for any costs thereby unnecessarily incurred or not fairly visited on the other party.
Whether an amendment which seeks to withdraw a statement that a defendant does “not plead” to an allegation in order to substitute a denial of the allegation may truly be characterised as the “withdrawal of an admission” may be left to one side. For present purposes, it is sufficient to note that the Plaintiff liquidator accepted that he did not wish to call any further evidence or to conduct any further cross-examination in the event that leave to amend was granted. No forensic prejudice was claimed in the event that leave was granted.
In such circumstances it is considered that leave to amend should be granted. But it matters not. The Plaintiff has made out a claim to relief.
The Quantum Meruit Claim
A conclusion that the Plaintiff liquidator is entitled to relief pursuant to s 588FF in respect to the Nicholls property by reason of the transaction being an “unreasonable director-related transaction” makes it unnecessary to resolve the alternative claim relied upon by the Plaintiff.
The alternative claim, being the quantum meruit claim or the claim in restitution, was formulated in the Statement of Claim simply as follows:
Claim for Quantum Meruit
23.Further and in the alternative, Ruby Kargarian willingly accepted the benefit of the construction of the Nicholls House by Techno Build.
24. Ruby Kargarian:
(a) knew that Techno Build was bearing the costs and liabilities for the construction of the Nicholls House;
(b) failed to take a reasonable opportunity to reject or stop Techno Build’s construction of the Nicholls House or the bearing of the costs and liabilities of such construction; and
(c) has received a benefit of Techno Build’s construction to the detriment of Techno Build.
25.The Liquidator claims against Ruby Kargarian a sum on a quantum meruit basis in respect of the unpaid costs borne by Techno Build for constructing the Nicholls House and Techno Build’s builder’s margin.
In the alternative to such relief as was claimed pursuant to s 588FF, the following was also claimed:
… an order that the Defendant pay to the Company a sum on a quantum meruit basis in respect of the unpaid costs borne by the Company for constructing the residential house located on the land known as Nicholls Section 130 Block 2 in the Australian Capital Territory and the Company’s builder’s margin.
Given the conclusion in respect to s 588FF, any question as to whether the company itself should also have been a party to the proceeding may be left to one side. The quantum meruit claim should still be briefly addressed on its merits.
In respect to this claim in quantum meruit, it may be accepted that:
·Mrs Kargarian purchased the vacant block of land in 2002 for $160,000;
·a house was built on that vacant block of land, the costs thereby incurred being found to be $350,000;
·Mrs Kargarian agreed to sell the property in 2005 for $780,000 and transferred it in 2006.
It is also accepted that there was no contract entered into between either Mr Aghili or Techno Build, on the one hand, and either Mr or Mrs Kargarian on the other.
In considering a claim in restitution it is of importance at the outset to recognise that “the bare fact of conferral of [a] benefit or provision of [a] service does not suffice to establish an entitlement to recovery”: Lumbers v W Cook Builders Pty Ltd [2008] HCA 27, 232 CLR 635 at 663 per Gummow, Hayne, Crennan and Kiefel JJ. Their Honours then referred to Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 and continued:
In Pavey & Matthews, a majority of this Court held that the right to recover on a quantum meruit does not depend on the existence of an implied contract but on a claim to restitution or one based on unjust enrichment. The concept of unjust enrichment was described by Deane J in Pavey & Matthews as constituting:
“a unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case.” [footnotes omitted]
Their Honours said that a:
… point to be noted is that unjust enrichment was identified as a legal concept unifying “a variety of distinct categories of case”. It was not identified as a principle which can be taken as a sufficient premise for direct application in particular cases. Rather, as Deane J emphasised in Pavey & Matthews, it is necessary to proceed by “the ordinary processes of legal reasoning” and by reference to existing categories of cases in which an obligation to pay compensation has been imposed. “To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate”. On the contrary, what the recognition of the unifying concept does is to assist “in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case” … [footnotes omitted]
Given the position adopted by Mrs Kargarian at the outset that she did not want a house to be built on her property by Techno Build and in the absence of any contract or agreement at the outset as between Techno Build and Mrs Kargarian, it may have been difficult for the claim in quantum meruit or restitution to have succeeded. But that which is considered sufficient to found the claim is the demand that was made for payment of $350,000 and the acceptance on the part of both Mr and Mrs Kargarian that this amount was to be paid. By so doing it is considered that Mrs Kargarian did not only accept what may previously have been thought to be a gift or an un-requested benefit but that she at this stage accepted both the benefit that had been conferred and that $350,000 should be paid for that benefit. For her to keep the benefit that the construction of the dwelling added to the value of the property as a whole, without an obligation to account for the value of the benefit claimed, it is considered would be unjust.
Had it been necessary to resolve this alternative claim, it would thus have been concluded that Mrs Kargarian would have been liable to Techno Build in restitution in the sum of $350,000 less the amount that has been paid of $200,000. Whether the Plaintiff was the correct party to seek such relief, however, may be open to question.
CONCLUSIONS
It is concluded that the claim for relief advanced by the Plaintiff liquidator in the Frontier Architects proceeding fails. The Defendants should have their costs in respect to this proceeding.
It is concluded that the claim for relief advanced by the Plaintiff liquidator in the Techno Build proceeding succeeds, but only to the extent of $150,000 – being the $350,000 less the payment of $200,000. The Plaintiff liquidator, it is considered, should have his costs of this proceeding.
Although both proceedings were heard together and a consequent difficulty arises in discretely allocating such time as was taken in both the hearing of evidence and submissions, it was the fact that the Techno Build proceeding occupied far less time than the Frontier Architect proceeding.
In such circumstances, it is presently considered that only one order should be made for costs being the costs of the joint hearing and that an appropriate order would be that the Plaintiff liquidator should pay the Defendants 75% of their costs.
Some orders may now be made which address procedural issues. But the parties are to prepare Short Minutes of Orders which give effect to the balance of these reasons. If there is an absence of agreement as to the manner in which costs should be ordered, the parties should file such submissions as they see fit in advance of orders being finally made.
ORDERS
The Orders of the Court are:
In ACD 51 of 2009
1.Leave to file a Further Amended Originating Process and a Further Amended Statement of Claim is refused.
2.The parties are to prepare Short Minutes of Orders to give effect to these reasons within 7 days.
3.The proceeding is listed at 9.30 am on 17 December 2010 in Sydney with a view to then making final orders disposing of this proceeding.
In ACD 52 of 2009
1.Leave is granted to file an Amended Defence forthwith amending the answer to paragraph [19] of the Statement of Claim.
2.The parties are to prepare Short Minutes of Orders to give effect to these reasons within 7 days.
3.The proceeding is listed at 9.30 am on 17 December 2010 in Sydney with a view to then making final orders disposing of this proceeding.
I certify that the preceding one hundred and seventy-five (175) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Flick. Associate:
Dated: 10 December 2010
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