Lifestyle Earls Court Pty Ltd (in liq) v Mentone Mansions Pty Ltd
[2006] VSC 2
•3 February 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 6664 of 2003
| LIFESTYLE EARLS COURT PTY LTD (IN LIQUIDATION) | First Plaintiff |
| LIFESTYLE KENSINGTON PLACE PTY LTD (IN LIQUIDATION) | Second Plaintiff |
| CLYDE PETER WHITE (as Liquidator of Lifestyle Earls Court Pty Ltd (in liq) & Lifestyle Kensington Place Pty Ltd (in liq)) | Third Plaintiff |
| V | |
| MENTONE MANSIONS PTY LTD | Defendant |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15-18 August 2005 | |
DATE OF JUDGMENT: | 3 February 2006 | |
CASE MAY BE CITED AS: | Lifestyle Earls Court Pty Ltd (in liq) & ors v Mentone Mansions Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 2 | |
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CORPORATIONS – alleged uncommercial transactions – identification of whole transaction – ss.588FB, 588FC, 588FE, 588FF and 588FG of the Corporations Act 2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr G T Bigmore QC | Mills Oakley Lawyers |
| For the Defendant | Mr N J O’Bryan SC Mr J R Dixon | Aitken Walker & Strachan |
HIS HONOUR:
Introduction
By originating process dated 11 July 2003 the plaintiffs seek orders in respect of alleged voidable transactions under ss.588FE and 588FF of the Corporations Act 2001 (Cth) (“the Act”). The application is made by two companies in liquidation and their liquidator. The first plaintiff is Lifestyle Earls Court Pty Ltd (in liquidation) (“Earls Court”) and the second plaintiff is Lifestyle Kensington Place Pty Ltd (in liquidation) (“Kensington Place”). The third plaintiff, Clyde Peter White (“Mr White”), is the liquidator of the two plaintiff companies. The defendant is Mentone Mansions Pty Ltd (“Mentone”).
Two alleged transactions are referred to in the originating process. The first transaction is the sale on 30 March 2000 by Earls Court to Mentone of a property situated at 19 Earls Court, Wantirna South (“the Earls Court property”).[1] The second transaction is the sale on 30 March 2000 by Kensington Place to Mentone of a property situated at 20 Kensington Place, Wantirna South (“the Kensington Place property”).[2]
[1]Certificate of Title Vol 10382 Fol 155.
[2]Certificate of Title Vol 10408 Fol 923.
The plaintiffs seek declarations that the two transactions are voidable under s.588FE(3) of the Act, which relates to a transaction that is both “insolvent” and “uncommercial”. In essence, for a transaction to be an insolvent transaction it must be entered into by the company at a time when the company is insolvent or the company must become insolvent because of the company entering into the transaction.[3] As regards uncommercial transactions, s.588FB of the Act provides as follows:
[3]See s.588FC of the Act.
“(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.”
Further, the plaintiffs seek orders that Mentone pay an amount that fairly represents all of the benefits that the defendant received because of the two transactions.[4]
[4]See s.588FF(1)(c) of the Act.
The plaintiffs’ amended statement of claim dated 30 November 2004 alleges that Earls Court sold the Earls Court property to Mentone for the sum of $473,017.23 at a time when the market value of the Earls Court property was at least $870,000, and that Kensington Place sold the Kensington Place property to Mentone for the sum of $336,153 at a time when the market value of the Kensington Place property was at least $500,000. The pleading further alleges that each of the plaintiff companies was insolvent on 30 March 2000, when the transactions were entered into, and continued to be insolvent. It is alleged that the transactions were subsequently varied[5] and that settlement took place on 29 June 2000.
[5]The pleading goes on to allege that the Earls Court sale contract was varied on or about 20 April 2000 and the purchase price was thereby increased to $474,317.23 and that the Kensington Place sale contract was varied on or about the same date and the purchase price was thereby decreased to $323,144.79.
The amended statement of claim contains many pages of particulars in relation to the allegation that the transactions were uncommercial but only some of the matters there particularised were the subject of evidence or relied upon at trial and it is unnecessary to make any separate reference to these particulars.
The defendant Mentone denied all of the central allegations made by the plaintiffs. As far as the alleged transactions themselves were concerned, their existence was not denied but Mentone sought to put them in the context of a wider transaction which, it was contended, was the real transaction and under which Mentone derived no unreasonable benefits.
The amended defence of Mentone dated 19 December 2003, pleads that Earls Court and Kensington Place, together with Lifestyle Sovereign Place Pty Ltd, a company now also in liquidation, (“Sovereign Place”), were all wholly-owned subsidiaries of LPI Holdings Pty Ltd (in liquidation) (“LPI”, formerly Lifestyle Property Investments Pty Ltd). The defence further alleges that there was a single 54 lot development of a parcel of land in Wantirna South (“the Wantirna development”) and that the Earls Court property, the Kensington Place property and property owned by Sovereign Place (“the Sovereign Place property”) all formed part of the land in the Wantirna development and that land was subject to existing single subdivision and development town planning permits for 54 lots issued by the Knox City Council on 8 October 1998. Of the 54 lots involved, the Earls Court property comprised 16 lots, the Kensington Place property comprised 10 lots and the Sovereign Place property comprised 28 lots. These facts were not in dispute. The defence goes on to refer to the history of transactions relating to this land.
The defence further alleges that if, which is denied, Mentone received any relevant benefit from the two transactions, Mentone received that benefit in good faith and had no reasonable grounds for suspecting that Earls Court or Kensington Place was insolvent or would become insolvent as a result of the transactions.
Background facts
Earls Court and Kensington Place were both incorporated on 9 December 1998. At all relevant times their sole director and secretary was Jon Melville McKenney (“McKenney”), and their sole shareholder was LPI.
By deed of trust made 11 January 1999 executed by Earls Court as trustee and by McKenney as a person intending to invest the sum of $10 in 10 ordinary units, the Lifestyle Earls Court Unit Trust (“the Earls Court Trust”) was established. The deed was expressed to be made between Earls Court and the “several persons who have executed or hereafter execute this Deed or sign an application for units … containing an agreement with the Trustee whereby any such applicant … agrees to be bound by the provisions of this Deed.” The deed defined “Authorised Investments” as meaning real or personal property of any kind whatsoever but expressly included land and “Development Partnership and /or Development Agreement with [LPI] or a similar business or partnership”. The Trust Fund was defined to mean the sum of $10 initially paid to the Trustee (by McKenney) and “further cash accepted by the Trustee under the Trusts of this Deed” and all investments representing the same, the proceeds of any borrowing and any net income which is not distributed (and so forth). The Deed went on to provide for the creation of and applications for units of $1 each and dealt with the powers and duties of the trustee.
Clause 7 of the Trust Deed provided that the Trustee should manage the Trust Fund and the investments comprised therein and any business for the time being carried on by the Trustee and that the Trustee should:
“(c)deposit all receipts from the management, development and operation of the Trust Fund into a separate bank account and shall pay all current expenses and outgoings with respect to the Trust Fund …
(d) (i)keep or cause to be kept proper books of account of all sums of money received and expended by or on behalf of the Trust Fund and the matters in respect of which such receipt and expenditure takes place and … shall keep or cause to be kept such accounting and other records … as will sufficiently explain the transactions and financial position of the said business and enable true and fair profit and loss accounts and balance sheets … to be prepared…”
Various investors were procured by McKenney or his companies and they executed unit holders agreements. For example, one of the investors entered a typical unit holders agreement with Earls Court dated 22 January 1999. The unit holders agreement referred in its definitions to an “Agreement” which was defined as “the Development Agreement between the Trust and [LPI] a copy of which is annexed to this Unit Holders Agreement.” No Development Agreement was annexed but some such document existed[6]. The parties to the unit holders agreement “acknowledged” therein that a total of 822,680 units in the Earls Court Trust had been issued and that no further units would be issued. In cl.5 of the unit holders agreement, the parties agreed that a distribution to the “Trustee/Proprietor pursuant to Clause 12.4(iii) of the [Development Agreement] will, in turn, be distributed by the Trustee to the Unit Holder in proportion to its holding of [units]” and that simultaneously with receiving such a distribution a unit holder would transfer all of his units to the Trustee.
[6]See exhibit “9”.
Investors also signed applications for units in the Earls Court Trust. The same investor signed a typical application dated 8 February 1999 whereby the investor applied for 38,000 units of $1. The application form bore the name of the Trust and the Trustee and an item reading:
“Unit Holders Profit $7,600 (20%)”[7]
[7]I note that there is no provision in the trust deed (or anywhere else) providing for a “profit” of 20% or any other percentage.
It would seem that identical or substantially identical unit holders’ agreements and applications for units were signed by investors in relation to a similarly constituted trust of which Kensington Place was the trustee. In support of the insolvency case, the plaintiffs advanced submissions that the unit holders were creditors in the subsequent liquidations. These submissions would seem to be incorrect but it is unnecessary to deal with this issue.
Mentone was incorporated on 9 June 1999 and its initial directors were Craig Baron Joel (“Joel”), Andrew James Seaburgh (ceased 23 September 2002) and Alan Mathew Heenan (“Heenan”) (ceased 19 June 2000). Mentone’s initial shareholders were Reljak Pty Ltd (“Reljak”)[8] and Ashfield Developments Pty Ltd (“Ashfield”). Reljak is a company associated with Joel and Ashfield is a company associated with Heenan.
[8]The sole current shareholder of Mentone is Reljak.
Joel had first met McKenney in about September 1998 when his family invested in a development project of McKenney’s in Hawthorn through a company called Lifestyle Hawthorn Pty Ltd and they were involved in some business dealings thereafter[9]. In May 1999 Joel had met Heenan and Mentone was incorporated for their joint business purposes. Unknown to Joel, Heenan also knew McKenney.
[9]See exhibits “A”, “B”, “C”, “D” and “E”.
In October 1999 McKenney approached Joel and asked Joel whether he could assist in arranging funding for a “Lifestyle project” comprising 27 apartments in Armadale and another Lifestyle project comprising 54 townhouses in Wantirna. McKenney told Joel that the Armadale project would be profitable but that the Wantirna project would not be profitable given the prices at which the townhouses had been pre-sold and the higher than anticipated construction costs. McKenney said that the combined projects would return a reasonable profit margin. Joel told McKenney that, while the Armadale project was of some interest, the Wantirna project was not.
In November 1999 Joel was approached by Heenan who told him that (on behalf of Ashfield) he had negotiated with McKenney to acquire the Wantirna project for a total sum of $2.7M, calculated on an average of $50,000 per lot and that he would acquire from LPI the shares in Earls Court, Kensington Place and Sovereign Place on the basis that all existing pre-sales to purchasers were cancelled. Heenan told Joel that he had a different strategy to that of Lifestyle, namely, to subdivide the land and to sell individual house and land packages in conjunction with Simmonds Homes Melbourne Pty Ltd (a home building company with which Heenan had had previous connections). Heenan persuaded Joel that his strategy would prove successful and that Joel should invest in the Wantirna development. Joel agreed with Heenan that Reljak would take a 50% interest in the Wantirna development.
Insofar as relevant (which I doubt), Joel was not aware of the existence of any trusts and at all times believed that Earls Court, Kensington Place and Sovereign Place were the beneficial owners of the land comprising the Wantirna development.
On 24 November 1999 LPI as vendor entered into three contracts (“the share sale contracts”) with Reljak and Ashfield, or nominee, as purchasers for the sale by LPI to the purchasers of the whole of the issued shares in each of Earls Court, Kensington Place and Sovereign Place for a total sum of $2.7M[10] payable by a small deposit and with a completion date of 21 February 2000.
[10]The price for the shares in Earls Court was $553,847; the price for the shares in Kensington Place was $346,153 and the price for the shares in Sovereign Place was $1,800,000.
Clause 4.2 of the share sale contracts provided that after payment of the deposit the purchaser would be entitled to enter the land for the purpose of undertaking works in accordance with any planning permit and to subdivide the land and to enter into contracts in the name of the vendor for the sale of lots on a plan or proposed plan of subdivision. Clause 4.6 provided, in effect, that in the event that completion did not occur due to the fault of the vendor, the vendor would bear the purchaser’s costs of improvements and subdivisional works on the land up to a maximum of $500,000.
The share sale contracts imposed various obligations upon the vendor to be performed on the completion date. An important obligation was to provide a discharge of relevant mortgages and charges over the assets of the companies the subject of the share sale. Another obligation was to provide evidence in a form acceptable to the purchaser that any contracts of sale and/or building contracts affecting the land or any part thereof entered into by the vendor prior to the date of the share sale contracts had been cancelled or to produce any such contract of sale or building contract affecting the land or any part thereof which was not cancelled and a bank cheque payable to the purchaser for the amount representing “the difference between the purchase price of each individual Contract of Sale and/or Building Contract and the sum of $225,000.”
The share sale contracts contained numerous warranties by the vendor companies including, apparently contrary to the fact, that the company was not a trustee of any trust and that the land was not held by the company as the trustee of any trust.
On or about 24 November 1999 the purchasers, or Mentone as their nominee, entered into possession of the land comprising the Wantirna development and commenced works thereon.
A letter to LPI dated 21 February 2000 from LPI’s solicitors (McDonald & Associates) informed LPI that the settlement of the share sale contracts was not proceeding that day. The solicitors noted that the purchasers believed that LPI may not have provided evidence that “all Contracts of Sale have been cancelled”.[11] The solicitors’ letter shows that the purchase price was to be applied at settlement so as to procure discharges of mortgages over the Earls Court, Kensington Place and Sovereign Place properties and also so as to procure discharges of registered charges affecting Sovereign Place and Kensington Place. The solicitors’ letter further shows that, at that date, after payment of principal and interest in respect of these securities and other items, there would have been balances payable to LPI.[12]
[11]See para [23] above as to pre-existing sales and building contracts.
[12]In respect of Sovereign Place: $56,608.05; in respect of Kensington Place: $26,968.06; and in respect of Earls Court: $162,070.23.
In March 2000, as a result of negotiations by or on behalf of the parties, it was agreed that the share sale contracts would be replaced by three contracts of sale to Mentone of the land owned by the three companies. This change[13] was referred to by Joel, in a fax to McKenney dated 21 March 2000, in the following terms:
“As agreed, I am endeavouring to take care of your debt of approximately $32,000.00 to Taylors Surveyors on the basis that the amount payable is deducted from the combined proceeds of settlement of the properties held in the names of Lifestyle Sovereign Place Pty Ltd, Lifestyle Kensington Place Pty Ltd and Lifestyle Earls Court Pty Ltd.
Prior to finalising any arrangement with Taylors, and in order to confirm your ability to pay the Taylors account and up to $50,000.00 in costs relating to the Armadale project, I require precise details of the amounts which you are required to pay upon (or pursuant to) settlement in order to discharge your obligations to all parties who may have a claim against the settlement funds.
Those parties may include holders of registered or unregistered mortgages or caveats, and any of your development partners.
I confirm that we now intend to acquire the properties (and not the shares in the companies) and that the purchase price is to be reduced by $25,000.00 to reflect your agreed contribution to the additional interest payment charged by Jimmy Goh…”
[13]See too the documents comprising exhibits “8” and “H”.
By a contract of sale in writing dated 30 March 2000, Earls Court agreed to sell the Earls Court property to Mentone for the sum (as subsequently varied) of $474, 317.23 by a deposit of $1,000 and the balance payable on 26 June 2000. The solicitors for Earls Court were McDonald & Associates and the solicitors for Mentone were Aitken Walker & Strachan. There were special conditions attached to the contract. Special condition 1.1(d) defined “Collateral Contracts” to mean a contract of sale between Sovereign Place and Mentone in relation to the Sovereign Place property and a contract of sale between Kensington Place and Mentone in relation to the Kensington Place property.
Special condition 17 of the contract of sale relating to the Earls Court property provided:
“17. COLLATERAL CONTRACTS
This Contract is collateral to the Collateral Contracts and a breach of the Collateral Contracts will be deemed to be a breach of this Contract and a breach of this Contract will be deemed to be a breach of the Collateral Contracts. Neither party will be required to settle this Contract unless the Collateral Contracts are settled at or about the same time.”
A contract of sale in identical or substantially identical terms was entered into between Kensington Place and Mentone in relation to the Kensington Place property for the price (as subsequently varied) of $323,144.79.
Mentone says that it is of relevance that there was a further contract of sale in identical or substantially identical terms entered into between Sovereign Place and Mentone in relation to the Sovereign Place property[14] for a price of $1,800,000 payable by a deposit of $490,000 and a balance of $1,310,000 on 26 June 2000. That transaction is not the subject of a claim by the plaintiffs and Sovereign Place is not a party to the proceeding, but the contract of sale relates to land forming part of the Wantirna development.
[14]Certificate of Title Vol 10408 Fol 726.
The settlement of the three land sale contracts (or their amendments or replacements) occurred at the end of June 2000.[15]
[15]The contracts were completed on the following dates: Sovereign Place property – 26 June 2000; Earls Court property – 29 June 2000; Kensington Place property – 30 June 2000.
The companies involved in the Wantirna development were but three of the 54 companies in the group of companies operated by McKenney (“the Lifestyle Group”).
On 28 June 2000 Mr White was appointed liquidator of one of the companies in the Lifestyle Group (Lifestyle Property Group Pty Ltd) on the application of the Deputy Commissioner of Taxation. Subsequently Mr White was appointed liquidator of a further 6 companies in the Lifestyle Group on the application of ASIC – that occurred by order of Warren J (as she then was) on 13 July 2000. Included in that order were Earls Court,[16] Kensington Place[17] and Sovereign Place.
[16]By letter dated 3 July 2002, the liquidator reported to creditors of Earls Court that the company had no assets and “unsecured creditors” (principally unit holders) were “owed” at least $920,077.
[17]By letter dated 26 July 2002, the liquidator reported to creditors of Kensington Place that the company had no assets and “unsecured creditors” (principally unit holders) were “owed” at least $497,529.
On 26 July 2000 ASIC commenced a proceeding (number 6232 of 2000) seeking winding up orders in respect of the remaining companies in the Lifestyle Group. ASIC also alleged that the Lifestyle Group was involved in the conduct of an unregistered managed investment scheme contrary to s.601ED of the Act and orders were sought pursuant to s.601EE of the Act for the winding up of the scheme. On 4 August 2000, winding up orders were made in that proceeding in respect of a further 36 companies in the Lifestyle Group.
On 7 August 2000, the remaining companies in the Lifestyle Group were wound up. On that date, orders were also made for the winding up of the scheme and Mr White was appointed liquidator of the scheme as well.[18]
[18]A copy of the order appears at pages 222-227 of the Court Book in this proceeding.
I note further that, on 26 July 2002, Warren J directed the liquidator to the effect that the winding up of the companies and of the scheme be conducted by him, as the scheme liquidator:
“(a)By paying to secured creditors from the proceeds of realisation of property over which such secured creditors held security, proper entitlement of such secured creditors pursuant to such security;
(b)By depositing the proceeds of realisation of assets, including proceeds of realisation after payment of secured creditors as referred to in (a) into a single bank account;
(c)By distributing assets of the winding up in accordance with the Corporations Act save that the creditors of the companies referred to in the schedule to this order and of the scheme (‘the scheme creditors’) be treated as though collectively they were creditors of one company.”[19]
[19]See Lockwood v White [2005] VSCA 30 at [10] per Winneke P.
I have, for completeness, mentioned the history of the winding up orders. However, on the first day of the trial, I refused the defendant leave to amend its defence to raise a point based upon the “pooling” aspects of the above orders for the reasons that I then stated. I considered that the proposed defence was not reasonably arguable and was without substance.[20]
[20]See transcript of argument, discussion and reasons at pages 1-26, esp at 25-26.
Valuation evidence
The plaintiffs relied upon the evidence of Barry John McLennan, an experienced valuer. Mr McLennan valued the properties as follows:[21]
[21]I include the relevant sale prices for ease of comparison. I also include figures for Mr McLennan’s valuation of the Sovereign Place property, produced during cross-examination.
Earls Court Kensington Place Sovereign Place 29/11/99 $732,000 $410,000 $1,130,000 30/3/00 (without works[22]) $740,129 $416,148 $1,145,000 Contract price 30/3/00 $473,017 $336,153 $1,800,000 30/6/00 $950,000 $530,000 $1,515,000 [22]The works were costed at: in respect of Earls Court, $129,871; in respect of Kensington Place, $83,852; in respect of Sovereign Place, $220,000.
The valuations mentioned the following. As at 29 November 1999, the properties were vacant allotments and proposed for townhouse development. As at 30 March 2000, there were site improvements including the commencement of construction of roads, drainage and pipes. As at 30 June 2000, the construction of roads, drainage and pipes was complete. The properties were close to the Knox City Shopping Centre and to educational facilities. The site areas were 4574 square metres (Earls Court), 2505 square metres (Kensington Place) and 7077 square metres (Sovereign Place).
In making his valuations, Mr McLennan referred, inter alia, to comparative sales evidence derived from the sales of a number of vacant residential allotments in Wantirna in the years 1999 to 2000, with varying site areas. Five sales were of sites with areas between 516 square metres and 739 square metres with sale prices attaining a price from $196 to $276 per square metre. One site of 2774 square metres attained a price of $155 per square metre and one site of 7900 square metres attained a price of $151.90 per square metre. Mr McLennan applied a rate, as at 30 March 2000, of $162 per square metre for the Earls Court property and $167 per square metre for the Kensington Place property and then added the value of the works at that date.
After having the benefit of information about sales and development costs, obtained and adopted from valuations provided by Mr Brian Dudakov, the defendant’s valuer, Mr McLennan produced further valuations using “residual land calculations” and adopting three scenarios for a combined “site”[23] valuation as at November 1999[24].
[23]i.e. covering all three properties in the Wantirna development.
[24]See exhibit “2”.
Mr McLennan’s three scenarios may be summarised as follows:
| Scenario 1 | Scenario 2 | Scenario 3 | |
| Estimated gross realisation (54 lots) | $12,241,449 | $11,966,400 | $11,685,006 |
| Value (after deducting approx selling and development costs) | $2,748,775 | $2,503,731 | $2,253,035 |
| Value per square metre | $194.18 | $176.60 | $159.16 |
| Value per unit site | $50,900 | $46,296 | $41,723 |
Mr McLennan said that, on a conservative approach, he preferred scenario 3 which gave a total value for the combined site of $2.25M, compared with his original combined site valuation (based on comparative sales) of $2.272M (as at November 1999). It should be noted that each of Mr McLennan’s scenarios are dependent upon his assessment of the sales forecast element of the estimated gross realisation amount.
In cross-examination Mr McLennan agreed that smaller development sites tended to bring higher prices per square metre than larger ones.
As I have foreshadowed, the defendant relied upon expert valuation evidence from Mr Dudakov. In a thorough and well-reasoned written valuation, Mr Dudakov described the land and its location in some detail. He considered comparative sales, including the March 1999 purchase by the Lifestyle Group of the three properties in question. He also considered sales of units in the area (including subsequent sales in the Wantirna development itself) and he also undertook, as a check method, residual financial analyses (or “hypothetical development assessments”).
Mr Dudakov’s conclusions may be summarised, and compared with the contract prices and the valuations of Mr McLennan, in the following table:
| Earls Court | Kensington Place | Sovereign Place | Total | |
| Number of units | 16 | 10 | 28 | 54 |
| Sale price 3/99 | $776,000 | $485,000 | $1,260,000 | $2,521,000 |
| Valuation as at 3/00 (without works) | $655,000 | $420,000 | $1,060,000 | $2,135,000 |
| Contract price 30/3/00 | $473,017 | $336,153 | $1,800,000 | $2,609,170 |
| Mr McLennan’s valuation as at 3/00 (without works) | $740,129 | $416,148 | $1,145,000 | $2,301,277 |
Mr Dudakov, in his valuation opined that the sale prices both to the Lifestyle Group and then to Mentone were “above market and not supported by the market evidence”[25] and that:
“Accordingly, I have adopted a rate of $40,000 per unit or $2.160 million in total. I have rounded this figure to $2.2 million.
I am of the opinion that there was a minimal difference in value between November, 1999 and March, 2000, had works not been completed to the site by the purchaser.
I note in our calculations, described later in Sections 5.4 and 5.5 of the report, that my valuation for the overall site[26] in March 2000, totalled $2.26 million taking into account the purchaser works and $2.03 million ignoring such works.
The later analysis substantially confirms my direct comparison valuation, albeit both being at lowered assessed values. Therefore, in my opinion, the subsequent sale prices by Mentone Mansions of $2.7 million was in excess of the market value of the property at both November, 1999 and March, 2000.”
[25]I note that, even on Mr McLennan’s valuations, two of the properties without works at March 2000 were worth less than the Lifestyle Group paid for them in March 1999.
[26]The above table shows the total of Mr Dudakov’s valuations for the three sites as separate sites – he reduced his total valuation when valuing the “overall site”.
On the residual analysis approach, Mr Dudakov, in his oral evidence, said that he did not agree with Mr McLennan’s adopted gross realisation figure which was based upon unit sales at $1575 per square metre. Mr Dudakov said he could find no evidence to support that rate. The evidence supported an average price of $1500 per square metre, he said, and that was the principal and significant area of difference with Mr McLennan (the other was the resulting interest calculations).
In cross-examination, Mr Dudakov’s opinion, that the negotiated sale prices of the Wantirna development both in March 1999 and in November 1999 had been above market, was challenged in the light of some evidence about the upward movement of mean and medium prices for units in that area in the years 1999 and 2000. Mr Dudakov maintained his position based upon the comparative sales evidence.
I somewhat tend to the view that Mr Dudakov’s analysis is more persuasive but, in the end, I am simply not satisfied that Mr McLennan’s analysis should be preferred to that of Mr Dudakov. I therefore adopt Mr Dudakov’s valuations of the three properties as at March 2000. The result is that I find that:
(a)Mentone paid to Earls Court less than the full value of Earls Court property, the deficiency being the sum of $171,983 (or if the works are included: $246,983);
(b)Mentone paid to Kensington Place less than the full value of the Kensington Place property, the deficiency being the sum of $83,847 (or if the works are included: $133,847);
(c)Mentone paid to Sovereign Place more than the full value of the Sovereign Place property, the excess being the sum of $740,000 (or if the works are included: $620,000);
(d)Viewing the three contracts as one transaction Mentone in fact paid more than the value of the Wantirna development taken as a whole, the excess being the sum of $484,170 (or if the works are included: $234,170). I note that, on Mr McLennan’s valuations, Mentone paid more than the full value of the three properties to the extent of $307,893 (even if the works are included there is only a relatively minor deficiency of $125,830).
It can be seen that, on either analysis, the price of the Sovereign Place property was boosted well above its true value, doubtless in order to discharge the more substantial debts secured on the Sovereign Place property.
What was the “transaction” for the purposes of s.588FB?
Section 9 of the Act provides that, unless the contrary intention appears, “transaction”:
“in Part 5.7B, in relation to a body corporate … , 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 … [etc]”
As Barrett J said in Australian Kitchen Industries Pty Ltd v Albarran[27]:
“The relevant concept of “transaction” is, as the definition implies, very broad. Its breadth is illustrated by a number of cases in which a series of steps, over a period, involving several parties and not always contractual consequences, have been held to be a “transaction”. “Transaction” includes an arrangement giving rise to an estoppel under which one party may not resile from a position. And, as the definition itself makes clear (for example, by referring to a disposition of property), a “transaction” may be unilateral in character. These matters are made clear by the decision of the Full Federal Court in Re Emanuel (No. 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd and those of the Court of Appeal in Bartercard Ltd v Wily and Somerset Marine Inc v New Cap Reinsurance Corp (in liq).” [Citations omitted]
[27](2004) 51 ACSR 604 at [24].
In Re Emanuel (No. 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd[28], the Full Federal Court said:[29]
“…we do not see the language of s 9 (which exemplifies but does not define “transaction”) as precluding a finding of a transaction to which the debtor A is a party merely because that transaction itself is made up of a composite of dealings in not all of which A participates.
It is not necessary for the purpose of this appeal to determine in any exhaustive fashion when a composite of dealings can together be said to constitute a s 9 transaction notwithstanding that not all of its component parts considered in isolation could rightly be said individually to be transactions.
While s 9 does not define “transaction”, it does through the process of exemplification typify the forms of conduct or dealing engaged in by a company that will be characterised as a transaction for its purposes – “a conveyance … of property”, “an obligation incurred”, “a release or waiver”, etc. Common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself.
We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant “transaction” is the totality of the dealings through which the debtor procures the intended outcome, irrespective of whether one or more of the dealings in the sequence in question does not involve or require the participation of the debtor but does require that of a third party. The transaction, in other words, is the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt.
Such a conclusion is consonant with standard dictionary meanings given “transaction”. It finds some support in decisions on the Bankruptcy Act 1966 (Cth) provisions dealing with voidable transactions and, most notably, Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 ; [1952] ALR 315 which recognised that a discrete dealing (eg, the payment of money) may itself merely be part of an “entire” or “whole transaction”: ibid, 129. And, given the characteristics we have identified as being integral to the forms of “transaction” envisaged by s 9, it is consistent with the burden of the statutory “definition” itself.
We conclude, then, that a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt can in its totality be a transaction for the purposes of Pt 5.7B of the Corporations Law notwithstanding that the achievement of that end can only be realised through the participation of a third party in a particular dealing (or dealings) within the overall transaction, being a particular dealing (or dealings) to which the debtor is not or may not be a party.”
[28](1997) 24 ACSR 292 (Full Federal Court: O’Loughlin, Branson and Finn JJ)
[29](1997) 24 ACSR 292, 299-300.
It is also pertinent to have regard to what was said by Ormiston JA, in the context of preferences, in V.R. Dye & Co v Peninsula Hotels Pty Ltd:[30]
[30][1999] 3 VR 201, 214.
“In each case the court is obliged to look at the transactions between the parties in a manner which accords with the commercial realities. 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. That is but one aspect, but a principal aspect, of the running account cases which have realistically faced the way in which companies and other parties carry on business when close to insolvency. The general principle may be stated in the terms expressed by the High Court in Richardson at 132 per Dixon, Williams and Fullagar JJ.:
In considering whether the real effect of a payment was to work a preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference.
See also at 129, as to the need to look to the “entire” or “whole” transaction, cited with approval by Barwick C.J. in Queensland Bacon Pty. Ltd. v Rees (1966) 115 C.L.R. 266 at 283. The passage at 132 was recently cited with approval by the majority in Airservices (Dawson, Gaudron and McHugh JJ.) at 502, where they introduced it with these words:
As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose and context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.
After quoting the cited passage from Richardson, they continued:
If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.
(See also per Brennan C.J. at 491 and per Toohey J. at 516-18.) The only qualification I would seek to place on these passages, which is doubtless implicit, is that a precise evaluation of services and goods provided can never be made satisfactorily and, unless there be some dishonest attempt to overvalue particular goods or services, they ought for practical purposes to be taken as having been received at face value, that is, at the value at which the company agreed to acquire them. This process of analysis of each transaction was later described by the majority as the “doctrine of ultimate effect”: at 509.
I would see the logical consequence of these authorities as requiring that, for the purpose of characterising any impugned transaction and its effect for the purposes of the preference provisions, in each case the court should look at the “ultimate effect” of the “entire transaction” (Airservices at 505 and 509) before determining whether it has worked an unfair preference within the meaning of s. 588FA. Not only does that flow from the language of the court in Richardson, as adopted in Airservices, but also from the subsequent use and approval of those words by the Full Court of the Federal Court in Re Emanuel at A.L.R. 289; A.C.S.R. 300; A.C.L.C. 1105. Indeed it would not be appropriate, because of the rule laid down by the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd. (1993) 177 C.L.R. 485, to depart from any interpretation of s. 588FA (and the related provisions), reached by that court and necessary to its reasoning. Nevertheless, apart from indicating a general approach to the interpretation of the new provisions largely consistent with that given to the former provisions, Re Emanuel by its own terms stands for relatively limited propositions of law. Thus, where that court accepted that the definition of “transaction” effected some widening of the nature of transactions which may be struck down as voidable or unfair preferences, it confined its conclusion expressly to dealings which had the effect of extinguishing a debt. So one may agree that the s. 9 definition “through the process of exemplification [typifies] the forms of conduct or dealing engaged in by a company that will be characterised as a transaction” and that “[c]ommon to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself”: at 288. Nevertheless the Federal Court immediately qualified this by saying (ibid):
We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant “transaction” is the totality of the dealings through which the debtor procures the intended outcome … [Emphasis added.]”
In my opinion, the “transaction” in the present case, to which each of Earls Court and Kensington Place was a party was as a matter of commercial reality a transaction between Mentone and all three companies (Earls Court, Kensington Place and Sovereign Place). The transaction was constituted by all three contracts for sale of the properties comprising the Wantirna development. As the history of the events shows, the three contracts were entered into as one transaction and, indeed, were expressly interdependent by virtue of special condition 17 in each contract. It would be artificial, as the plaintiffs seek to do, to treat the contract between Mentone and Earls Court and the contract between Mentone and Kensington Place as separate and independent transactions of the respective Lifestyle companies for the purposes of 588FB of the Act.
If that conclusion is correct, the plaintiffs’ claim fails. Mentone paid, as I find, more than the true value of the three properties and it cannot be contended, nor was it contended, that a transaction so constituted was uncommercial.
Were the transactions, even as defined by the plaintiffs, “uncommercial”?
If, contrary to my conclusion, the two contracts between Mentone and Earls Court and Kensington Place respectively were separate transactions for the purposes of s.588FB of the Act, were each of such transactions “uncommercial”[31] within the meaning of that provision?
[31]See Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535, 546-548; Lewis v Cook [2000] NSWSC 191 at [45]—[46] per Austin J; Peter Pan Management Pty Ltd (in liq) v Capital Finance Corporation(Australia) Pty Ltd [2001] VSC 227, [38]-[45].
In my opinion, in the circumstances of this case, the two transactions even on this approach were not uncommercial. I am not satisfied that a reasonable person in each of the company’s circumstances would not have entered into the transaction.
The two companies formed part of an unregistered managed investment scheme comprising 54 companies. A benefit[32] to each of the two companies in entering the transactions was that its secured debts were discharged. A further benefit was that the secured debt of another company involved in the scheme (Sovereign Place) was also discharged. To the extent that Earls Court and Kensington Place received inadequate consideration, the secured creditors of the Group as a whole received a matching and corresponding payment. The scheme creditors as a whole were not disadvantaged – this approach, in the peculiar circumstances of this case, is confirmed having regard to the rationale for and the making of the subsequent “pooling” order.
[32]See s.588FB(1)(a) of the Act.
Furthermore, Mentone received no unreasonable or unfair benefit, when one takes into account the payment made by it to Sovereign Place under the third contract.
Conclusions
For the foregoing reasons, the plaintiffs’ claims fail.
Furthermore, on the assumption (and without so deciding) that Earls Court and Kensington Place were insolvent at the time of, or made insolvent by, the relevant transactions, I am satisfied that Mentone, which provided valuable consideration thereunder[33], became a party to the transactions in good faith[34] and at a time when Mentone had no reasonable grounds for suspecting[35] that either of the two companies was or would become insolvent. In that regard, Joel deposed in an affidavit sworn 2 July 2004 and I accept, after hearing him cross-examined, that he did not suspect that either of Earls Court or Kensington Place was insolvent or that either might become insolvent as a consequence of the sale of the shares or of the sale of the properties. I am further satisfied that a reasonable person in Mentone’s circumstances[36] would have had no such grounds for so suspecting.
[33]See s.588FG(2)(c)
[34]See s.588FG(2)(a) of the Act.
[35]See s.588FG(2)(b)(i) of the Act
[36]See s.588FG(2)(b)(ii) of the Act.
The originating process is dismissed with costs (including reserved costs).
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