Lewis v Cook

[2000] NSWSC 191

Reported Decision: (2000) 18 ACLC 490

New South Wales

Supreme Court

CITATION:	Lewis v Cook [2000] NSWSC 191
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 1437/99
HEARING DATE(S):	10 March 2000
JUDGMENT DATE:	21 March 2000
PARTIES :	Alan Edward Lewis as liquidator of Doran Constructions Pty Ltd (P) Barry Cook as liquidator of Doran Constructions (Australia) Pty Ltd (D)
JUDGMENT OF:	Austin J

COUNSEL :	P Braham (P) A S Martin SC (D)
SOLICITORS:	J J Woodward & Co (P) Christopher C Freeman & Co (D)
CATCHWORDS:	CONTRACT - release of debt - whether 'waiver' applies where there is no valuable consideration - CORPORATIONS - winding up - voidable transactions - 'uncommercial transaction' - meaning - EQUITY - estoppel - where representors and representees are the same persons in different capacities
LEGISLATION CITED:	Corporations Law ss 588FB, 588FC, 588FE, 588FF
CASES CITED:	Commissioner of Stamp Duties v Bone [1977] AC 511 Commonwealth v Verwayen (1990) 170 CLR 394 Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 Foakes v Beer (1884) 9 App Cas 605 Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 Johnson v Zerbst, (1938) 304 US 458 (1938), at 464 McDonald v Hanselmann (1998) 28 ACSR 49 Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651 Re Ward; Official Trustee v Dabnas Pty Ltd (1984) 3 FCR 112 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Tosich Construction Pty Ltd (in liq) v Tosich (Federal Court of Australia (Burchett, Foster & North JJ.), unreported, 22 September 1997) Waltons Stores (Interstate) Ltd v Maher (1998) 164 CLR 387 Wilson v McIntosh [1894] AC 129
DECISION:	Declarations and orders as sought by plaintiff

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 21 MARCH 2000

1437/99 - ALAN EDWARD LEWIS AS LIQUIDATOR OF DORAN CONSTRUCTIONS PTY LTD V BARRY COOK AS LIQUIDATOR OF DORAN CONSTRUCTIONS (AUSTRALIA) PTY LTD

JUDGMENT

1   HIS HONOUR: This is a case about Doran Constructions Pty Ltd (‘DC’) and Doran Constructions (Australia) Pty Ltd, (‘DCA’), two companies in the Doran group. DC was at all relevant times wholly owned by DCA. The shareholders of DCA were various companies bearing the ‘Doran’ name, though the ownership of the DCA shareholders is not in evidence. The directors of both DC and DCA were at all relevant times Paul, Peter, John and Michael Doran.

2   On 1 November 1994 the directors of DC approved a loan of $ 4,100,000 to DCA. The purpose of the loan was said to be to enable DCA to discharge part of an amount lent by Doran Holdings Pty Ltd to DCA. It was said that Doran Holdings Pty Ltd required the payment ‘to enable it to rationalise inter-group and intra-group lending and avoid any problems which might arise in the payment of interest’. The loan appeared as a non-current asset in the annual balance sheets of DC in subsequent years, and as a non-current liability in the annual balance sheets of DCA, although by the time of the balance sheets of the two companies for 30 June 1997 the amount of the loan had been reduced to $ 2,502,684. The unaudited financial statements for the two companies for the year ending 30 June 1997, prepared by the companies' external accountants Price Waterhouse, became available to the directors in October 1997.

3   The directors of DC met on 28 November 1997. The business of the meeting related to various intra-group loan transactions, and also (according to the minutes of the meeting, which give no fuller explanation) the following item of business:
‘Consider a request from Doran Constructions (Australia) Pty Ltd to forgive [sic] the loan owing by it. The balance of the loan is considered to be approximately $ 2,552,361.’

4   The minutes record that the directors resolved ‘to forgive [sic] the loan account owing by Doran Constructions (Australia) Pty Ltd of approximately $ 2,552,361.’

5   It will be noted that the minutes record the amount of the debt as $ 2,552,361, whereas DCA's balance sheet for 30 June 1997 shows the debt as $ 2,502,685. The balance sheet shows a separate debt of $49,676 owing by DCA to Doran Holdings Pty Ltd. I infer that after the balance date transactions occurred by which DC replaced Doran Holdings Pty Ltd as the creditor for the latter amount, so that by 28 November 1997 the whole of DCA's non-current liabilities were owed to DC.

6 The evidence includes a form of declaration of solvency (Form 520 under s 494 of the Corporations Law) signed by each of the four directors of DCA. The form includes a statement of assets and liabilities according to which the company's only asset was cash of $21 and there were no liabilities. The directors signed the form on 5 December 1997, but according to the form the statement of assets and liabilities was made as at 27 November 1997. In my view that date was a mistake, and the directors made the statement of assets and liabilities as at a time after the purported forgiveness of the debt but no later than 5 December 1997.

7   An extraordinary meeting of the shareholders of DCA was held on 9 December 1997. It was attended by the four directors of the company, who held proxies from the shareholders. The meeting resolved, inter alia, that the company be wound up voluntarily and that the present defendant, Barry Raymond Cook, be appointed to act as liquidator. In light of the declaration of solvency, the liquidation was to proceed as a members' voluntary winding up.

8   On 24 December 1997 special resolutions were passed for DC to be wound up voluntarily and for the present plaintiff, Alan Edward Lewis, to be appointed liquidator. The liquidation proceeded as a creditors' voluntary winding up.

9   On 14 May 1998 the plaintiff as liquidator of DC signed a proof of debt, which may not have been lodged with the defendant until December 1998, in respect of loans in the sum of $ 2,552,361. The proof of debt referred to the minutes of the meetings of 1 November 1994 and 28 November 1997, and impliedly claimed that the purported forgiveness of the debt by the directors of DC on 28 November 1997 was ineffective.

10   The defendant responded on 5 February 1999, saying that the plaintiff's claim had been wholly disallowed, on the ground that
‘the transaction(s) involving the forgiveness of the debt of $ 2,552,361 previously owed by DCA to Doran Constructions Pty Ltd, was/were not insolvent/uncommercial transaction(s) under the Corporations Law.’

11 In the present proceedings, the plaintiff as liquidator of DC seeks either a declaration that the debt of $ 2,552,361 was not discharged by the resolution of the directors of DC on 28 November 1997 or otherwise, or a declaration that the discharge of the debt was a voidable transaction under s 588FE(3) or (4) of the Corporations Law. Although the summons refers to both subsection (3) and subsection (4), counsel for the plaintiff put the case solely in terms of subsection (3) at the hearing.

12 The summons also seeks an order under s 1321 of the Corporations Law, setting aside the defendant's decision as liquidator of DCA to reject the plaintiff's proof of debt. Section 1321 permits a person aggrieved by (inter alia) a decision of a liquidator of a company to appeal to the Court, which may reverse or modify the decision. However, at the hearing the plaintiff chose to seek relief under s 588FF(1)(h) rather than under s 1321. Sub-paragraph 588FF(1)(h) permits the Court, where it is satisfied that a transaction of a company is voidable because of s 588FE, to make an order declaring that the agreement constituting that transaction was void at and after the time when it was made or a specified later date. The plaintiff seeks an order that the purported forgiveness of the debt on 28 November 1997 was either void ab initio, or avoided prior to lodgment of the proof of debt.

13 The plaintiff relies on two propositions: first, that the purported forgiveness of the debt was not effective to discharge it; and secondly, that the discharge, if it was effective, was an insolvent and uncommercial transaction, voidable under the Corporations Law as at 14 May 1998 when the proof of debt was signed.

14   As to the plaintiff's first proposition, the defendant says that DC and its liquidator are estopped from asserting that DCA now owes the debt. In the alternative, the defendant says that, by the resolution of its directors on 28 November 1997, DC waived its right to recover the debt. As to the plaintiff's second proposition, the defendant contends that the transaction was not an uncommercial transaction, having regard to what a reasonable person would have done in the company's circumstances and to the state of knowledge of the company's directors. The defendant says that, to the knowledge of DC's directors, DC suffered no detriment by forgiving the debt, because the debt was really worthless, and that DC obtained no benefit from the transaction.

Was the debt effectively forgiven on 28 November 1997?


15   DC purported to forgive the debt solely by means of the directors' resolution of 28 November 1997. No deed or other written instrument was executed, apart from the minute of the resolution which was signed by Paul Doran as chairman. The defendant concedes that the resolution to forgive the debt was not supported by valuable consideration.

16   The plaintiff submits that a debt can only be released and extinguished by an agreement for valuable consideration or an instrument of release under seal: Commissioner of Stamp Duties v Bone [1977] AC 511, 519; Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723, 739, discussing Foakes v Beer (1884) 9 App Cas 605.

17   That proposition is not entirely beyond argument, since there are cases which suggest that equity may recognise the voluntary release of a legal right by writing not under seal, or even orally: Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1992), para [3502]. However, the bulk of authority favours the view that, in the absence of valuable consideration, equity will not consider a legal right to be released unless it has been released at law, as the learned authors point out.

18   In my view the plaintiff's submission is correct. The purported forgiveness of the debt was ineffective, there being neither valuable consideration nor a deed. The defendant does not challenge the plaintiff's proposition of law, or its application in this manner. Instead, the defendant relies upon estoppel and waiver, to which I now turn.

Estoppel


19 The defendant submits that the minutes of the meeting of directors of DC held on 28 November 1997 constituted a representation by DC to DCA that it had resolved to forgive the loan account of $ 2,552,361 owing by DCA to it. The defendant says that DCA relied on this representation by treating the debt as no longer owing in its financial statements, and that DC knew or intended that DCA would do so. Subsequently DCA expired, in the sense that it went into members' voluntary winding up pursuant to a declaration of solvency by its directors, made in reliance upon a statement of affairs which treated the debt as forgiven. If the debt had been owing, then DCA would have been insolvent and could not proceed with a members' voluntary winding up, in view of s 496 of the Corporations Law. The defendant says that DCA no longer has any money available to pay the debt or any part of it, and that it is unconscionable for DC to assert now that DCA owes it the debt.

20   There is no dispute between the parties about the ingredients of estoppel, which were explained by the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher (1998) 164 CLR 387, esp at 404 (Mason CJ and Wilson J) and 428-9 (Brennan J), and in Commonwealth v Verwayen (1990) 170 CLR 394, esp at 444-6 (Deane J).

21   The defendant places special reliance on the decision of Wilcox J in Re Ward; Official Trustee v Dabnas Pty Ltd (1984) 3 FCR 112, esp at 122. In that case, property was settled upon trust for members of the family of Mr Ward. Mr Ward lent money to the trustee to permit it to buy a home in which he and his family then lived. Later Mr Ward wrote to the trustee purporting to make an unconditional ‘gift’ to the trustee of part of the debt which it owed him. The question was whether the ‘gift’ was a voidable settlement under s 120 of the Bankruptcy Act 1966 (Cth), and that depended upon whether the purported gift was effective in law.

22   Wilcox J treated the transaction as an assignment of part of a debt and held it to be valid as such, but he also considered whether the transaction would be effective as a forgiveness or release pro tanto of the debt. He held that by writing to the trustee Mr Ward had represented that he would not exercise his legal right to recover the part of the debt which was the subject of the purported gift. The trustee subsequently applied this sum in its accounts so as to cause it to become an asset of the trust no longer available for payment to Mr Ward. In those circumstances, he found that Mr Ward was estopped from departing from his representation.

23   In my opinion there is no estoppel in the present case. It would be artificial to apply the doctrine of estoppel where all relevant steps have been taken by a single group of individuals, purporting to act in various capacities. The same four members of the Doran family made the resolution to forgive the debt (as the directors of DC), and the declaration of solvency and statement of affairs (as the directors of DCA), and the resolution to place DCA into voluntary winding up (as proxyholders for the members DCA).

24   The doctrine of estoppel is concerned with real reliance on the real representations of other people (or other conduct inducing reliance), in circumstances which make it unconscionable for the representor to resile. Equity's concern is with unconscientious conduct. Unconscientious conduct cannot be constructed artificially by employing the veil of incorporation. In the present case the doctrine of estoppel could be applied only by accepting the notion that four individuals might create an obligation which fixes upon their consciences in one capacity, by making a representation in that capacity which they themselves rely upon in other capacities.

25   In my view the law does not require me to apply such analysis, and to do so would be contrary to equitable principles. Re Ward is distinguishable on its facts, since in that case the purported gift by Mr Ward was for the benefit of persons other than himself, namely the members of his family who were the beneficiaries of the trust.

Waiver


26   The defendant submits that by passing the resolution of 28 November 1997, DC has committed an intentional act with knowledge of abandoning its right to recover any part of the debt from DCA, and has therefore waived its right of recovery. The defendant's submission relies on broad formulations of a general doctrine of waiver found in the judgments of Knox CJ, Isaacs and Starke JJ in Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 and Latham CJ in Grundt v Great Boulder Pty Gold MinesLtd (1937) 59 CLR 641.

27   In Craine's case the Court said (at 326) that waiver is an intentional act with knowledge. There is a similarly wide definition in United States law. In Johnson v Zerbst , (1938) 304 US 458 (1938), at 464, the United States Supreme Court defined waiver as ‘an intentional relinquishment ... of a known right or privilege’. Another wide formulation was given by Latham CJ in Grundt's case. His Honour said (at 658) that waiver involves the abandonment of a right by acting in a manner inconsistent with the continued existence of the right.

28   Formulated in this broad way, a general doctrine of waiver would encroach upon the operation of other legal principles (especially those relating to estoppel, election, and variation and release of contracts) unless some limitations were recognised. Presumably this is why Roscoe Pound once described ‘waiver’ as a ‘slippery word worn smooth with overuse’ (in his foreword to Ewart, Waiver Distributed (1919), cited by Toohey J in Commonwealth v Verwayen (1990) 170 CLR 394, 467).

29   By the time the High Court of Australia came to decide Verwayen's case, the doctrine of equitable estoppel had expanded so much that it might have been allowed to consume the doctrine of waiver which had been enunciated in Craine's case. Indeed, the adoption of a ‘subsuming’ principle was considered, though not implemented, by Toohey J (at 471). Instead, the High Court in Verwayen's case permitted principles of waiver to operate independently of the law of estoppel and election, but only in a very limited field.

30   Mason CJ (at 406-7) and Dawson J (at 451-3) (with whom Deane J agreed on this point (at 431)) took the view that most cases of ‘waiver’ were upon proper analysis cases about equitable estoppel or the doctrine of election. Mason CJ recognised (at 404) that statutory rights might be conferred in such a way that they can be abandoned unilaterally.

31   McHugh J took the view (at 491) that most of the cases purporting to apply a general doctrine of waiver are really cases of contract, estoppel or election. However, he identified some anomalous cases which stand outside the categories of election, contract and estoppel. He said (at 497) that these cases support the principle that
‘where the existence of a statutory right depends upon the fulfilment of a condition precedent, a person entitled to insist on the fulfilment of that condition may dispense with its compliance unless it is enacted for the benefit of the public, and that person will be held to have waived compliance with a condition if he or she knowingly takes or acquiesces in the taking of a subsequent step in the course of procedure laid down by the statute after the time for the other person to fulfil the condition has passed.’

32   Similarly, Brennan J (at 423) identified a limited doctrine of ‘waiver’ operating outside the realms of contract, election and estoppel, in cases where statutory rights are introduced solely for the benefit of one party.

33   Gaudron J identified a special principle flowing from Wilson v McIntosh [1894] AC 129, which deals with taking inconsistent positions rather than the assertion of inconsistent rights (and therefore is not an instance of election), and presumes the existence of detriment (and therefore is not an instance of estoppel).

34   Only Toohey J was prepared to allocate any significant scope to the concept of waiver. In his view waiver has a role to play (at 471) and is a notion of ‘respectable lineage’ (at 468). Quoting from the judgment of Mason J (as he then was) in Sargent v ASL Developments Ltd (1974) 131 CLR 634, 655, he identified two categories, namely cases where a person is precluded from asserting one legal right when he is entitled to alternative rights inconsistent with each other, and cases where a person is precluded from raising a particular defence to a claim against him. Toohey J saw the first category as a form of election, and suggested that the name ‘waiver’ is best reserved for the latter (at 472).

35   Mason CJ said (at 404) that ‘an existing legal right is not destroyed by mere waiver, in the sense of an express or implied intimation that the person in whom the right is vested does not intend to enforce it’, and said that in such a case something in the nature of an election or an estoppel is required in the absence of consideration. As I read the judgments, none of the other judges in the Verwayen case disagreed with those propositions. A law of waiver survives Verwayen's case only in limited fields well outside the facts of the present case.

36   This is not a case where the directors of DC have made an election between two inconsistent rights, nor (for reasons already given) does any estoppel operate. There is no question here of abandonment of a defence to a claim, or abandonment of the benefit of a statutory right. This is simply a case where directors of a company have purported to forgive and release the bundle of rights comprising a debt owed to the company. In my view there is no scope for the application of any doctrine of waiver to such circumstances. The legal effect of the directors' resolution of 28 November 1997 is to be assessed by reference to the legal principles governing the release and forgiveness of debts, and for the reasons which I have already given the resolution was ineffective according to those principles.

37   It follows, in my view, that the plaintiff is entitled to succeed on his first proposition. However, I shall also deal with the plaintiff's second proposition and the defendant's response to it, in case there is any challenge to my conclusion on the plaintiff's first proposition.

Section 588FE(3)


38 Section 588FE(3) states that a transaction is voidable if it is both an insolvent transaction and an uncommercial transaction of the company, and it was entered into during the two years ending on the relation-back day. The word ‘transaction’ is defined in s 9 to include a release or waiver. The relation-back day was 24 December 1997 (s 513B(e)), and clearly the purported forgiveness of the debt by DC occurred during the two years before that day. The question is whether DC's purported forgiveness of the debt was an insolvent and uncommercial transaction of DC.

39 The expression ‘uncommercial transaction’ is defined in s 588FB(1), which states:
‘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
(g) any other relevant matter.’
40 According to s 588FC, a transaction of a company is an insolvent transaction of the company if, and only if, two conditions are satisfied. The first condition is that it is an unfair preference given by the company, or an uncommercial transaction of the company. The plaintiff does not contend that there has been any unfair preference. The second condition, as applied to the circumstances of the present case, raises the question whether the company was insolvent when the transaction was entered into, or became insolvent because of the transaction.

Insolvency


41   The second condition is satisfied on the facts. According to its financial statements for the year ended 30 June 1997, DC had no trading revenue and a negative cash flow of $524,596 for the year, if one disregards its receipt of proceeds of inter-company loans. It was probably dormant during the year ended 30 June 1997. By 28 November 1997 it had ceased to operate as a going concern in the construction industry, and it appears that there was no prospect of resuscitating it.

42   According to the directors' report as to affairs made on 16 December 1997, DC owed a total amount of $ 1,403,833 to its creditors, including a debt to Doran Holdings Pty Ltd of $ 1,078,479 repayable at call. Total cash at bank was $ 6,186 and the only other asset - apart from the debt of $ 2,552,361 owing by DCA - was a costs order, as yet unassessed, given a book value of $50,000 and an estimated realisable value of $40,000.

43   Figures given by Mr Levi, in a report to which I shall refer, are slightly different but consistent with the figures in the statement of affairs. I infer that DC's position immediately before forgiveness of the debt on 28 November 1997 was not materially different from the position described in the report as to affairs.

44   For reasons which I shall give, there was no prospect of DC recovering the whole or any substantial part of the DCA debt. Consequently DC's liabilities exceeded its assets by a substantial margin immediately prior to the purported forgiveness of the debt, and more pertinently, DC was not able to pay all its debts as and when they became due and payable. It was insolvent.

‘Uncommercial Transaction’


45 Thus there is only one question remaining, namely whether the purported forgiveness of the debt falls within the definition of ‘uncommercial transaction’ in s 588FB(1). There are only a few reported cases on s 588FB(1), and not surprisingly they adopt a purposive interpretation as directed by s 109H. In Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535, the Full Federal Court referred to the Explanatory Memorandum to the Corporate Law Reform Bill 1992 (which introduced Part 5.7B). Paragraph 1044 of the Explanatory Memorandum speaks of transactions which result in ‘the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice’, and transactions where ‘the consideration is nominal or trivial or lacks ‘a commercial quality’’. The Full Court (at 548) said that the object of the section is to prevent a depletion of the assets of a company which is being wound up by certain ‘transactions at an under-value’ entered into within a specified time limit before the winding up. In McDonald v Hanselmann (1998) 28 ACSR 49, 53, Young J referred to the Demondrille case and the Explanatory Memorandum and concluded that the test, at any rate where there is a sale at an undervalue, is whether there was ‘a bargain of such magnitude that it could not be explained by normal commercial practice’.

46 The words ‘it may be expected that’ in s 588FB(1) do not qualify the reference to what a reasonable person would have done. The section was intended to emphasise the objective nature of the inquiry - not an inquiry into what the particular company might have done, but rather into whether a reasonable person would not have entered into the transaction. However, although the inquiry is objective, the Court must have regard to ‘the company's circumstances’ - which include the state of knowledge of the company when it enters into the transaction. Where the transaction is entered into or authorised by the board of directors, as here, the section requires an assessment of the state of knowledge of the directors: Tosich Construction Pty Ltd (in liq) v Tosich (Federal Court of Australia (Burchett, Foster & North JJ), unreported, 22 September 1997).
Was the forgiveness of the debt an uncommercial transaction?


47 The plaintiff submits that the release of a debt for no consideration is prima facie uncommercial, in the sense described in s 588FB, because a reasonable person would have declined to give such a release. The defendant contests the plaintiff's submission by relying on a report by Mr David Levi, a chartered accountant. His report, dated 19 August 1999, concluded that as at 28 November 1997 DCA did not have the financial ability to repay DC any part of the loan of $2,552,361 owing by it to DC. DCA held all of the issued shares in DC. Those shares were its only significant asset. Mr Levi expressed the view that the shares were unsaleable and of no value as at 28 November 1997, since DC had a deficiency of assets over liabilities.

48   The defendant says that on 28 November 1997 the directors of DC were aware of most of the information upon which Mr Levi relied in his report. He says that this knowledge (and the inferences to which it leads, as demonstrated by Mr Levi's conclusions) must be taken into account by the Court when it determines whether a reasonable person in the company's circumstances would not have entered into the transaction. Additionally, the defendant submits that it is evident from Mr Levi's report, and the material upon which he relies, that DC suffered no detriment by entering into the transaction, since DCA did not have the financial ability as at 28 November 1997 to repay any part of the debt. For the same reason, says the defendant, DCA obtained no benefit from the release.

49   The plaintiff challenges Mr Levi's opinion that the shares in DC were of no value. The plaintiff says Mr Levi failed to take into account some evidence available to him, which showed that DC had two assets of real or potential value. First, DC was entitled to the benefit of a costs order which was given an estimated realisable value of $40,000 in the directors' report as to affairs as at 16 December 1997. Secondly, Mr Levi was aware, says the plaintiff, that DC claimed to have contingent assets arising out of its litigation with the University of Newcastle and Beresfield Aluminium, which might possibly return an amount in the order of $3 million.

50   The plaintiff points out that Mr Levi's report (at paragraphs 28 and 32) took into account the report as to affairs by the directors of DC as at 16 December 1997, and a further report as to affairs of DC signed by Mr Hall on 18 March 1999, both of which referred to the contingent litigation assets. The first of the two reports identifies as contingent assets ‘University of Newcastle Litigation and GIO’ and ‘Beresfield Aluminium’, but assigns no value to those assets.

51   The report by Mr Hall lists the following as contingent assets:
Beresfield Aluminium - Counter claim: gross asset $576,049 estimated to produce $576,046;
University of Newcastle - Counter claim: gross asset $2,584,150 estimated to produce $1,584,150;
University of Newcastle - Counter costs: gross asset $30,000 estimated to produce $30,000;
University of Newcastle - Bank Guarantee: gross asset $54,476 estimated to produce $54,476.
52   Mr Hall also refers to the following contingent liabilities:
Beresfield Aluminium – Nature of Liability: Claim - Gross Liability: Unknown;
University of Newcastle – Nature of Liability: Litigation - Gross Liability: Unknown.

Mr Levi assigned no value to these assets. The plaintiff says that this was contrary to the evidence that was considered by Mr Levi.


53   I find it difficult to assess Mr Levi's report. He was unable to give a satisfactory account in the witness box of the reasoning which he employed in deciding to assign no value to the contingent litigation assets, and he gave no adequate explanation for his conclusion that the costs order had no value. It appears that he was aware of the state of the litigation. He annexed copious material about it to his report. He summarised the state of the litigation in paragraphs 22 and 23 of his report.

54   From those summaries it appears that the liquidator of DC indicated that he would withdraw from the proceedings against the University of Newcastle after he was appointed on 24 December 1997. The proceedings were dismissed on 20 March 1998, although the University was given leave to proceed in a cross-claim against DC. On 13 May 1999 a referee found that the University had established its cross-claim and was entitled to damages of $ 1,777,038 against DC.

55   As to Beresfield Aluminium, an arbitrator had commenced hearing the dispute on 10 February 1997. He issued an interim award on 12 January 1998, in which he found that DC should pay Beresfield $442,839.80. The arbitrator issued his final award on 10 March 1998, finding that DC should pay Beresfield additional sums for interest and costs. On 22 January 1999 Doran Holdings Pty Ltd appointed Mr Hall as receiver and manager of DC, and shortly afterwards DC commenced proceedings against Beresfield to set aside the interim and final awards of the arbitrator. As at the date of Mr Levi's report those proceedings had not been heard.

56   Mr Levi's instructions were to express an opinion on whether DCA had the financial ability as at 28 November 1997 to repay any part of the debt to DC. As far as I can gather from his evidence, he endeavoured to make an assessment of the prospects of the litigation as at 28 November 1997 in light of the information available to the directors at that time, without the benefit of hindsight. But his report refers to the history of the litigation after 28 November 1997 and to the report of Mr Hall dated 12 March 1999. It was completely unclear from his evidence whether he attached any significance to these matters in reaching his conclusion. He offered no analysis in his report or in the witness box as to how he made his assessment of the litigation, nor any explanation of whether he regarded the costs order as having any significance.

57   Having regard to the weakness of Mr Levi's evidence, I have decided not to place weight on his conclusion that the shares of DC had absolutely no value on 28 November 1997.

58   The plaintiff's principal contention is that, even if Mr Levi's opinion as to value is accepted, a reasonable person in the position of DC would have been influenced by the following matters to decline to forgive the debt:
(a) the risk that the financial statements for the year ended 30 June 1997, based on unaudited information provided by the directors, might not be accurate;
(b) the possibility that the company might enjoy a windfall gain, or realise a contingent asset, allowing it to pay some part of the debt;
(c) the possibility that if the company was wound up in insolvency, a liquidator would pursue rights under Part 5.7B of the Corporations Law against directors or other parties to recover assets; and
(d) the inherent advantage that accrues to a creditor by participating in the proper administration of an insolvent company.
I shall consider each of these matters in turn.


59   In my opinion the mere fact that the financial statements were unaudited would not itself prevent a reasonable person in the company's circumstances from entering into the transaction, if it were necessary to rely on the accuracy of the financial statements in order to make a rational decision. It is common for corporate managers to use unaudited financial information as a basis for their decisions. In the present case the financial statements were prepared by a reputable external accountant, although obviously using untested information provided by management. However, if there were other reasons for caution, audited financial statements might provide a justification for overcoming that caution whereas unaudited financial statements would not do so.

60   In my opinion, there was a possibility, on 28 November 1997, that DC's litigation against the University of Newcastle and Beresfield Aluminium might succeed. If the litigation produced a substantial judgment, the shares in DC would have a significant value and consequently DCA would have the prospect of realising that value and consequently repaying some part of its debt to DC. Given the subsequent history of the litigation up to the time of Mr Levi's report, it is unlikely that the possibility was any more than slight. It may not have been sufficient to be allocated any significant value. Nevertheless, the possibility of success would, in my opinion, have been taken into account by a reasonable person in DC's position in considering whether to forgive the debt. It has not been contended that forgiveness of the debt conferred any benefit on DC. Why would a reasonable person have thought it prudent to forgive the debt, there being no inducement to do so, given the slight possibility that the debtor might be able in future to repay part of the debt?

61   A reasonable person in DC's circumstances would not have confined his or her attention to the prospect of direct recovery of the debt. A reasonable person would also have taken into account that by forgiving the debt, DC would lose the opportunity to place DCA in insolvent liquidation, and would therefore lose the practical capacity to influence the administration of any subsequent winding up of DCA. The practical capacity to influence the administration of a liquidation is a matter of significance. In a members' voluntary winding up the members choose the company's liquidator. Where the winding up proceeds at the instance of one or more creditors, either by creditors' voluntary winding up or by Court-ordered winding up, the members and directors are deprived of the capacity to influence the selection of the liquidator, and their practical capacity to influence the administration of the liquidation is likely to be reduced substantially.

62   As to the plaintiff's fourth point, in Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, Doyle CJ said (at 659), admittedly in a different context:
‘The benefit to creditors, from these and other provisions, is a more general one than that identified by counsel for the appellant. It is the benefit of having the affairs of an insolvent company properly investigated and administered in an orderly fashion in terms of the provisions of the law. While most creditors no doubt hope for a benefit in the form of a dividend, the purpose of these provisions is wider than that.’

63   I am not persuaded that his Honour's observations can be transported to the present context. In the present case the directors' resolution, if it had been valid, would have destroyed the plaintiff's status as a creditor of DCA. That being so, it seems artificial to speak separately of the plaintiff being deprived of the benefit of proper administration of the winding up of DCA.

64   In summary, I accept that a reasonable person in the position of DC would have been influenced not to forgive the debt by the second and third of the four matters presented by the plaintiff, though not the first and fourth. But that conclusion is sufficient to persuade me that the purported forgiveness of the debt was an uncommercial transaction. Consequently the plaintiff succeeds on his second proposition.

Relief


65 The Court has a discretion under s 588FF(1) with respect to the most appropriate form of relief, once it concludes that the transaction is an uncommercial transaction: McDonald v Hanselmann (1998) 28 ACSR 49, 53 (Young J). The defendant submits, referring to s 588FF(1)(c), that since DCA received no benefit of any value, the Court should exercise its discretion against granting any relief to the plaintiff under s 588FF(1). It may be possible to say, rather artificially, that DCA as a corporate entity received no benefit from the forgiveness of the debt which it owed, if it were true that it had no financial ability to pay the debt. But it seems to me that the forgiveness of the debt conferred a benefit on the members and directors of DCA, since it left the way open for the members to resolve to put DCA into a members' voluntary winding up and to select the liquidator who would administer that process. In my opinion the members and directors should not have a benefit of that kind in the present circumstances, and consequently it is appropriate that relief be granted.

66 The plaintiff seeks an order under s 588FF(1)(h), declaring that the agreement constituting the transaction (that is, the resolution of the directors of DC on 28 November 1997 to forgive the debt) was void at the time when it was made, or at least by 14 May 1998, when the proof of debt was lodged. I have decided that it is appropriate to give that relief. Since, in my view, the resolution was ineffective at the time it was made because of the absence of a deed or valuable consideration, the appropriate relief is a declaration that the debt of $2,552,361 was not discharged by the resolution of the directors of DC on 28 November 1999 or otherwise, and an order under s 588(1)(h) that the agreement, constituted by that resolution, to forgive that debt was void at and after the time when the resolution was passed.

67   Since the plaintiff has succeeded, it is likely that I shall order that the defendant pay the plaintiff's costs of the proceedings. However, I shall hear submissions from the parties as to costs and the specific form of the orders which I have outlined.
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Last Modified: 09/25/2000