Kazar v Kargarian

Case [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 2009
Judge: 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…

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Kazar v Kargarian [2010] FCA 1381
Case
[2010] FCA 1381
Decision Date

CaseChat Overview and Summary

In the case of Kazar v Kargarian, the primary dispute involves the claims brought by a liquidator against the defendants concerning transactions involving two companies, Techno Build and Frontier Architects. The liquidator sought to establish that certain transactions were voidable under the Corporations Act 2001 and to recover associated funds. The Federal Court of Australia was tasked with determining the validity of these claims and the appropriate legal remedies.

The central legal issues before the court included whether the presumptions under section 588E of the Corporations Act applied to the transactions in question and if the defendants had reasonable grounds to suspect the insolvency of the companies involved. Additionally, the court had to decide whether the liquidator was the correct party to seek relief and whether the claims against the defendants were substantiated by the evidence presented.

In its reasoning, the court found that the liquidator's reliance on the presumption of insolvency under section 588E was misplaced as the evidence did not support the claim that the companies were insolvent at the relevant times. The court also assessed the credibility of the defendants' testimony and concluded that they did not have reasonable grounds to suspect the insolvency of the companies. Consequently, the claims against the defendants for voidable transactions and unfair preferences were dismissed. However, the court did find that the liquidator's claim against Techno Build for a sum of $150,000 was valid, as it was based on a separate factual basis.

The court ordered that the defendants were entitled to their costs in relation to the Frontier Architects proceeding, while the liquidator was to pay 75% of the defendants' costs in the Techno Build proceeding. The court also directed the parties to prepare Short Minutes of Orders to reflect the decisions made and scheduled a final hearing to address any remaining issues.

Orders

Orders of the court

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Background

Background to the litigation

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.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

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 20091.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 20091.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.

Ratio Decidendi

Legal Principle Established

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