Merrag Pty Ltd (in liq) v Khoury

[2009] NSWSC 915

CITATION:	Merrag Pty Ltd (in liq) & Anor v Khoury & Anor [2009] NSWSC 915
HEARING DATE(S):	25 and 26 August 2009
JUDGMENT DATE :	8 September 2009
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Transaction held to be an unfair preference, uncommercial transaction and unreasonable director-related transaction.
CATCHWORDS:	CORPORATIONS – INSOLVENCY – UNFAIR PREFERENCE – UNCOMMERCIAL TRANSACTION – UNREASONABLE DIRECTOR-RELATED TRANSACTION – Whether written contract for sale of property to director a sham – whether oral contract for sale made with director whereby purchase price would be offset by director’s loan account with company – whether company insolvent at time of alleged oral contract – whether company insolvent at time of transfer of property to director – whether contract or later transfer to director in consideration of release of loan account constituted unfair preference, uncommercial transaction or unreasonable director-related transaction.
LEGISLATION CITED:	- Conveyancing Act 1919 (NSW) – s.23C - Corporations Act 2001 (Cth) – s.95A, s.180, s.181, s.182, s.588FA, s.588FB, s.588FC, s.588FDA, s.588FE, s.588FF
CATEGORY:	Principal judgment
CASES CITED:	- Aldridge Pty Ltd, G&M, v Walsh (2001) 203 CLR 662 - Aldridge Pty Ltd, G&M, v Walsh [1999] 3 VR 601 - Carydis v Merrag Pty Ltd [2007] NSWSC 1220 - Khoury v Khouri (2006) 66 NSWLR 241 - Maddison v Alderson (1883) 8 App Cas 467 - Regent v Millett (1976) 133 CLR 679 - Sempill v Logan (1868) 7 SCR(NSW) 391 - Sempill v Vindin (1868) 7 SCR(NSW) 361 - Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
PARTIES:	Merrag Pty Ltd (In liq) (First Plaintiff) Peter Paul Krejci (Second Plaintiff) Michael Khoury (First Defendant) Susie Khoury (Second Defendant)
FILE NUMBER(S):	SC 4184/08
COUNSEL:	C.M. Harris SC (Plaintiffs) R.R.I Harper SC, M. Pesman (Defendants)
SOLICITORS:	Colin Biggers & Paisley (Plaintiffs) John Carmody & Co (Defendants)

PALMER J.

4184/08 Merrag Pty Ltd (in liq) & Anor v Khoury & Anor

JUDGMENT
8 September, 2009

Introduction

1 The First Plaintiff (“Merrag”) was incorporated in September 2003 for the purpose of acquiring and developing a site at Dee Why as commercial premises and residential apartments. Construction of the development commenced in late 2003 and was completed in late 2005. The development was not profitable and on 30 October 2007 the Second Plaintiff was appointed as voluntary administrator of Merrag. The company was wound up on 28 November 2007 and the Second Plaintiff was appointed Liquidator.

2 The First Defendant, Mr Michael Khoury, was at all times a director and shareholder of Merrag. The other two directors and shareholders were his brothers, Rodney and George Khoury. During the course of the project, George resigned as a director and transferred his share to Rodney. The Second Defendant, Mrs Susie Khoury, is the wife of Michael Khoury. She was never a director or shareholder of Merrag.

3 By Memorandum of Transfer dated 9 October 2007, signed by Michael Khoury as a director of Merrag, Merrag transferred to Michael Khoury an apartment in the Dee Why development, Unit 28, for a stated consideration of $490,000. Mr Khoury was subsequently registered as the sole proprietor of the unit.

4 On 25 October 2007, Mr Khoury paid to Merrag the sum of $250,000 on account of the purchase price. The Liquidator says that the market value of Unit 28 as at October 2007 was $525,000. He does not concede that any amount has been paid by Mr Khoury in respect of the transfer of the unit to him other than the sum of $250,000 paid on 25 October.

5 In these proceedings, Merrag and the Liquidator sue Mr and Mrs Khoury on a number of causes of action, some pleaded in the Originating Process and Amended Points of Claim, some pleaded by their Reply to the Amended Defences.

6 In the Originating Process and the Amended Points of Claim two causes of action are pleaded. First, the Plaintiffs sue Mr and Mrs Khoury for a contract debt said to be owing under a contract for sale of Unit 28 dated 13 September 2004 whereunder Merrag agreed to sell Unit 28 to them for a price of $614,800. The Plaintiffs say that only $250,000 was paid in consideration of the transfer which was registered in October 2007, so that Mr and Mrs Khoury remain indebted to Merrag in the sum of $364,800.

7 Second, Merrag sues Mr Khoury for breach of his fiduciary duties as a director of Merrag under the general law, and for breach of his duties as a director under s 180, s 181 and s 182 of the Corporations Act 2001 (Cth) (“CA”). The breach alleged is failure on the part of Mr Khoury, as a director of Merrag, to require payment to Merrag by himself and Mrs Khoury of the balance of the purchase price of $364,800 due under the contract for sale dated 13 September 2004 at the time that he executed the Memorandum of Transfer to himself and procured registration of the transfer. This cause of action, as framed, depends upon a finding that there was a binding contract for sale of Unit 28 for $614,800.

8 By their Amended Defences, Mr and Mrs Khoury deny that any contract for sale of Unit 28 came into existence on 13 September 2004. They say that the contract for sale dated 13 September 2004 was not signed by either of them and was only the first page of a draft. Further, Mr Khoury’s evidence is to the effect that the document dated 13 September 2004 was, in effect, a sham. It was never intended to be a binding contract and only the first page was brought into existence for the purpose of persuading Merrag’s financier, WestBank, that a sufficient number of sales of apartments in the development had been achieved to support provision of the construction loan which Merrag was seeking.

9 Further, by his Amended Defence, Mr Khoury says that “the consideration for [the transfer of the unit to him] has been paid”. The Amended Defence does not plead or particularise the consideration said to have been paid but, as emerges from Mr Khoury’s affidavit evidence, he says that the consideration was $250,000, paid on 25 October 2007, and the release by him of a debt owing by Merrag to him pursuant to a running loan account.

10 By their Reply, the Plaintiffs plead that if there was no contract for sale of Unit 28 dated 13 September 2004:

– the transfer of the unit to Mr Khoury was an “uncommercial transaction” within the meaning of CA s 588FB because Mr Khoury had paid only $250,000 and the unit had a market value at that time of $525,000;

– alternatively, transfer of the unit in consideration of the payment of $250,000 together with a release of Merrag’s debt to Mr Khoury had the effect of giving Mr Khoury an “unfair preference” within the meaning of CA s 588FA because at the time of the transfer Merrag was insolvent and the transfer had the effect of repaying the company’s debt to Mr Khoury in full, in preference to other unsecured creditors, who will receive little, if any, dividend in the liquidation;

– alternatively, the transfer of the unit was an “unreasonable director-related transaction” within the meaning of CA s 588FDA because of the circumstances already referred to.

11 Although there is no pleading in response to the Reply, Mr Khoury, in his affidavit evidence and in his submissions, says that the transfer of the unit is not an uncommercial transaction, an unfair preference or an unreasonable director-related transaction because:

– it was effected in accordance with a concluded oral contract for sale between Merrag and himself made in about March or April or August 2006 whereby Merrag agreed to sell Unit 28 to him for $440,000, payment for which would be made by offsetting the amount owing to him under his loan account with the company and the balance would be paid in cash;

– Merrag was not insolvent at the time that this contract was made;

– Mr Khoury has fully performed the contract and has provided the whole of the consideration payable.

12 Again, although there is no pleading to this effect, the Plaintiffs say in response:

– there was no oral contract for sale of Unit 28 made in March or April or August 2006, as Mr Khoury alleges;

– even if there were discussions in the terms which Mr Khoury alleges, no contract could have come into existence because no price, or mechanism for working out a price, had been agreed;

– even if there was an oral contract in the terms alleged by Mr Khoury and even if the price was certain, or could be rendered certain, the contract was unenforceable under the Statute of Frauds;

– in any event, Merrag was insolvent in March, April or August 2006 so that, if there was an enforceable contract for sale in the terms alleged, then the contract was an unfair preference and an uncommercial transaction and therefore an insolvent transaction; it was also an unreasonable director-related transaction;

– if there was an enforceable oral contract but Merrag was not insolvent in March, April or August 2006, the contract was nevertheless an unreasonable director-related transaction.

The basis for this last contention has not been developed in submissions so that I will not explore it further.

The issues

13 The following is a summary of the issues prepared by the Defendants’ Counsel, Mr Harper SC and Mr Pesman. Mr Harris SC, who appears for the Plaintiffs, did not dissent from it.

“ The alleged 2004 contract

1. Did an enforceable contract for sale between the first plaintiff and the defendants in respect of lot 28 come into existence on or about 13 September 2004?

2. If yes:–


(i) is the first plaintiff entitled to damages from the defendants;

(ii) alternatively, is the first defendant alone liable to pay the plaintiffs compensation for breach of duty;

(iii) are the defendants, or the first defendant, entitled to a set-off in respect of their loan account with the first plaintiff against such damages or compensation either in equity or by reason of s 553C of the Corporations Act?


3. If yes, what is the value of the off-set.

The alleged 2006 contract

4. Was there an oral agreement between the first defendant and Rodney Khoury (on behalf of Merrag) in or about March/April 2006 containing terms including:


(i) the first defendant would buy lot 28 from Merrag for $440,000;

(ii) the first defendant would be entitled to off-set against that figure the balance of any loans repayable by the first plaintiff to him (and any profit attributable to his shares in the first plaintiff on completion of the development).


5. Alternatively, was there an oral agreement containing those terms in or about August 2006.

6. Was the oral agreement enforceable by reason of acts of part performance after August 2006?

7. What was the balance of the first defendant’s loan account as at the end of August 2006?

8. Was the transfer executed in October 2007 in performance of one of those alleged contracts?

Corporations Act

9. In respect of the plaintiffs’ case under the Corporations Act:

(i) what is the ‘transaction’ (or transactions) for the purposes of the plaintiffs’ Corporations Act claims, the possibilities being:

i. an agreement in March/April 2006;

ii. an agreement in August 2006;

iii. the transfer on 9 October 2007; and

iv. the payment of $250,000 on 25 October 2007.
(ii) Was any such transaction:

i. an ‘uncommercial transaction’ for the purposes of section 588FB;

ii. an ‘unfair preference’ in relation to the loan account off-set for the purposes of section 588FA; or

iii. an ‘unreasonable director-related transaction’ for the purposes of s 588FF(1)(c).


10. By what date was the first defendant aware that Merrag was (or might reasonably be suspected to be) insolvent?

11. Is the first defendant entitled to the benefit of section 553C.”

Credit and reliability of evidence

14 For the sake of convenience, and without intending disrespect, I will refer to the directors of Merrag, all of whom have the same surname, by their first names.

15 The main protagonists in the litigation are the directors of Merrag (Michael, Rodney and George Khoury), the company’s accountant (Mr John Lewis), the company’s solicitor (Ms Mary Khoury) and the Second Defendant (Mrs Susie Khoury). Most of the discussions giving rise to the alleged agreements upon which Michael relies occurred between Michael, Rodney and George, or between one or other of them and Mr Lewis and Mary Khoury. Rodney, George, Mr Lewis and Mary Khoury were not called by either side. Michael says that his relationship with his brothers is extremely hostile, which may provide some explanation for his failure to call them. However, he does not say that his relationship with Mr Lewis or Mary Khoury is hostile. Both of them could have corroborated Michael’s evidence in significant respects

16 The evidence given by Michael as to conversations between himself, Rodney and George said to result in an oral contract for sale of Unit 28 is not contradicted by any witness; neither is his account of his discussions with Mr Lewis or Mary Khoury.

17 There is no contemporaneous record of any discussion between any of the relevant parties leading to the oral contract for the sale of Unit 28 which Michael says he made with Merrag in March or April or August 2006. There is no contemporaneous document evidencing or referring to that contract or any of its terms. The state of Michael’s loan account with Merrag was always in contention but there is no contemporaneous record of any agreement reached between Michael and Merrag as to what amount was owing to Michael as at March or April or August 2006 or at any time thereafter. There is no contemporaneous documentary evidence that Michael ever acknowledged that he had released or foregone whatever debt was owing to him by the company.

18 Nevertheless, there is direct evidence from Michael of conversations between him and his brothers which are said to constitute the oral contract for sale of Unit 28. The absence of denial of those conversations by Rodney and George does not, however, relieve me of the necessity to be satisfied on the balance of probabilities and in the light of all of the available evidence that the conversations occurred in the terms alleged, and that an oral contract for sale of Unit 28 was made.

19 Mr Harper concedes that he bears the onus of proving the existence of the oral contract for sale. This must be so because, but for the existence of the oral contract, the Liquidator would inevitably succeed in proving that the transfer of the unit in October 2007 was an unreasonable director-related transaction by proving merely that the Memorandum of Transfer was registered in the name of Michael, that Michael paid $250,000 at about the time of the transfer, and that Unit 28 had at that time a market value of $525,000. Those facts are not in dispute so that Michael’s defence is one of “confession and avoidance” – he says that the existence of the binding oral contract for sale made in 2006 alters the legal consequences of the uncontested facts relied upon by the Liquidator.

20 Because discharge of Michael’s onus of proof as to the existence and terms of the oral contract depends so much on his own uncorroborated evidence, it is important to assess the accuracy and reliability of Michael as a witness. If I cannot be satisfied on the balance of probabilities and in the light of all available evidence that Michael’s account of events is reliable, then I must conclude that he has failed to discharge the burden of proof which he bears.

21 I am unable to accept Michael’s evidence as generally accurate and reliable, for the following reasons.

22 Michael admitted to participating in deceptive practices in order to obtain finance for development projects. He was shown the contract upon which the Liquidator relies, being the first page of a contract for sale of Unit 28 dated 13 September 2004 upon which were placed the corporate seal of Merrag and two signatures, apparently those of directors of Merrag. Michael then gave this evidence:

“Q. Can you suggest how this document came into existence with the company seal on it?
A. Your Honour, what normally happens is, as we have done in the past, we draw up these contracts and we then tally that to see how close we can get to the bank's prerequisites and to answer your question, no I don't, I don't know how.

Q. Are you saying that it's your practice, it was your practice as a director of this company and other companies of which you were a director …
A. Yes.

Q. … when you are doing a development, seeking to obtain development finance …
A. Yes.

Q. … that in order to persuade the bank to lend you, that is the company, development finance or construction finance, you would or companies you controlled, apparently entered into contracts for purchase of units in the development for certain prices simply producing the front page of the document for production to the bank, is that right?
A. That's right.

Q. With no intention ever that the contracts would be actually carried through and performed?
A. Absolutely, absolutely no intention.

Q. And in order to make it appear to the bank that they were genuine contracts, genuine presales, is that right?
A. Well yes, that's right.

Q. Which was not in fact true, is that right?
A. Well, the … well that's right, it's not true, but we always had … we had discussions with BankWest and we told them that these are the properties we were going to keep anyway at the end of the project and they were to be treated as a sale, if worst came to worst.

Q. In other words, if you couldn't sell on to somebody else, you might buy them yourselves, is that right?
A. Well, it was a distribution of the profit. That's all that was at the end of the job which is what we have done many times before.

HARRIS
Q. When you showed BankWest the contract that is at page 3 …

HIS HONOUR: Sorry, before we go on, Mr Harris.

Q. The last answer you gave was it was a distribution of profit at the end of the job. Do you remember saying that?
A. Yes.

Q. Does that mean that if everything went well and you made a profit, the company made a profit out of the development …
A. Yes.

Q. … that profit would be paid to the shareholders of the company in the form of a transfer of these units for no additional consideration?
A. That's right.

Q. And so the contract’s price and the sum was really completely irrelevant in those circumstances?
A. That's right, yes. These documents were never ever meant to go further. Once we decided that we could never reach the presales, the whole exercise was terminated.”

I regard this evidence as showing a tendency on Michael’s part to assert an untruth if it suits his purpose.

23 Michael tended to colour his evidence according to the point he was trying to make. For example, he wished to emphasise that he knew little or nothing about Merrag’s financial affairs from 2004 onwards because he had violent disagreements with his brothers and he was excluded from management. He gave this evidence:

“Q. Is it the case that these disagreements really started in late 2003 or 2004?
A. Early 2004 things got heated.

Q. I gather that they were quite violent disagreements?
A. Yes.

Q. Physically violent?
A. Yes.

…

Q. What I'm trying to get is just a bit of time sequence. You started to have these violent disagreements with Rodney and George late 2003 or beginning of 2004?
A. 2004.

Q. 2004?
A. Yeah.

Q. They were violent and heated disagreements?
A. Yes, yes.

Q. Sometimes involving physical violence, is that right?
A. Yes.

Q. Was it the case that from early 2004 you just could not bring yourself to talk to your brothers, either of them?
A. We weren't talking.

Q. At all?
A. At all.

Q. About anything?
A. And John was sending us letters, you know, acknowledging that, yeah.

Q. The situation between you was so hostile you just couldn't bring yourself to talk to them and they didn't talk to you, is that right?
A. It was a drain, absolute drain, getting nothing out of them.

Q. Nothing at all?
A. Nothing at all. Even to this day the warranty work on that building, okay, I'm still bearing the cost of it. I'm ringing up, it's useless. I've asked them to go back and do their duties. They won't do it.

Q. So far as you could see, it would be absolutely pointless to discuss with either one of them any sensible resolution of your problems?
A. Not unless I wanted trouble.

Q. Not unless?
A. I wanted trouble, physical trouble.

Q. So you didn't even try?
A. I didn't try, no.

Q. Thank you. And that has continued basically from the beginning of 2004 until the present time?
A. It is still happening now.”

24 Notwithstanding this evidence – to the effect that he had no communication at all with his brothers from 2004 onwards – Michael gave evidence in his affidavit of discussions with his brothers from March to July 2006 in which he was negotiating to extract himself from the Dee Why project on terms which would enable his brothers to use the unsold units in the project as security for a project of their own. He recounted two specific conversations. The first was with Rodney and George in March or April in which he stipulated that he would buy Unit 28 for $440,000, he would be released from his guarantee supporting Merrag’s borrowing from its bank, his loan account with Merrag would be applied to the purchase price of Unit 28, and he was still to retain his right to one-third of the profits of the Dee Why project. According to Michael, his brothers accepted the proposal without any demur, subject to the bank’s approval. The second conversation was with Rodney in July 2006 in which Rodney confirmed that the bank accepted Michael’s proposal and that Rodney and George also agreed to it.

25 The very existence of these conversations, not to mention the apparently cordial terms in which the parties expressed themselves, is in stark contrast to the evidence given by Michael in cross examination as to the state of his relations with his brothers from 2004 onwards.

26 Mr Harris confronted Michael with this inconsistency at T61.3-T62.43. After some prevarication and discernable discomfiture, Michael conceded that he was able to talk to Rodney as and when it was necessary to do so.

27 Another illustration of the unreliability of Michael’s evidence is that he was prepared to assert that something had definitely happened when, in fact, he had no recollection of it. He asserted in strong terms that he had told Mr Lewis at a meeting in January 2007 that Unit 28 was not for sale because it was reserved for him: T55.11-.16, T56.15-.23. A few minutes later he conceded, again displaying some discomfiture, that he could not remember whether he had told Mr Lewis at the January meeting that Unit 28 was not for sale; he conceded that it was possible that he had not told Mr Lewis at all: T57.6-.12.

28 A further example of the unreliability of Michael’s evidence is his endeavour to show that Merrag either was not insolvent in July 2006 or, if it was, that he was honestly unaware of it. Mr Lewis had written to him on 30 June 2006 warning of the serious risk of Merrag’s insolvency. However, Michael asserted that at a meeting with Mr Lewis which he attended with Mrs Khoury in early July 2006, Mr Lewis had told him that if Merrag was “successful in the court case, it will make a profit. If, however, it is not successful, it will still break even on the project”.

29 The “court case” referred to is a case in which the vendors of the Dee Why property to Merrag sued to enforce contracts for the purchase of certain units in the project. The judgment in the case, Carydis v Merrag Pty Ltd ([2007] NSWSC 1220) shows clearly in correspondence which is reproduced therein that no court case had been commenced by July 2006, that the vendors had reached a settlement of their dispute with Merrag by 2 July 2006 and that completion of the sales of the units to the vendors had been fixed for 23 August 2006. Disputes did not break out again between the parties until October or November 2006 and the “court case” was not commenced until the filing of a Statement of Claim by the vendors in May 2007.

30 Accordingly, in early July 2006 and until October or November 2006, there was no “court case” between Merrag and the vendors and there was not even a continuing dispute. Accordingly, it is inherently improbable that in early July Mr Lewis could have made the statement attributed to him by Michael. When confronted with the chronology of the “court case” in cross examination, Mrs Khoury said that the discussion with Mr Lewis about the “court case” occurred at the time “when the court case was happening”: T102.4. She conceded that the statement by Mr Lewis about the “court case” could have been made after May 2007 and that her recollection of timing may not be accurate: T103.19. Michael, however, was not prepared to concede any inaccuracy in his evidence about the “court case” when confronted with its chronology: T43.1-.15-T46.39-.41.

31 It is sufficient at this point to say that I have come to the conclusion that I am unable to rely upon the evidence of Michael unless it is inherently probable in the light of all the circumstances or is corroborated by other reliable evidence.

Is there a contract for sale dated 13 September 2004

32 I am entirely satisfied that there was no contract for sale of Unit 28 made on 13 September 2004 for a price of $614,800. I may state my reasons briefly.

33 First, no copy of the contract bearing the signature of Mr and Mrs Khoury as purchasers has been found.

34 Second, no document containing the usual terms and conditions of a sale has been found, other than a first page bearing only an apparent execution by Merrag. A file note of Mary Khoury dated 19 May 2004 shows that she received instructions from Michael to prepare four contracts for the sale of units in the Dee Why project to the directors or their companies, but that she was to prepare only their front pages showing the purchasers and the prices.

35 Third, there is no evidence from the file of Mary Khoury or otherwise that the contract for sale was ever exchanged and the deposit of $30,740 paid.

36 Fourth, in a list of units in the project available for sale as at 23 January 2007 and in a letter to the Australian Taxation Office dated 8 October 2007, both prepared by Mr Lewis, Mr Lewis shows Unit 28 as on the market for sale. Mr Lewis, Merrag’s accountant, was deeply involved in its affairs because he was the most effective medium of communication between Michael and Rodney after George’s resignation as a director in mid-2006. If, in truth, Unit 28 had been sold to Mr and Mrs Khoury by a contract for sale dated 13 September 2004, it is inherently probable that Mr Lewis would have known about it.

37 In short, all of the surrounding circumstances strongly corroborate Michael’s evidence (at [22]) that the front page of the contract dated 13 September 2004 was a sham, never intended by any party to have effect, and that it was brought into existence for the purpose of persuading Merrag’s financier to advance development funds.

38 For these reasons, the Plaintiffs’ cause of action against Mr and Mrs Khoury for contract debt founded upon the 13 September 2004 contract fails. Likewise, the Plaintiffs must fail in their cause of action founded upon breach by Michael of his duty as a director to procure full performance of the 13 September 2004 contract by himself and Mrs Khoury prior to procuring registration of the title to the unit in his name.

Whether an oral agreement in 2006

39 I am not persuaded that there was a concluded agreement between Michael and Rodney on behalf of Merrag for the sale of Unit 28 to Michael made in March or April or August 2006. My reasons are as follows.

40 For the reasons I have given above, I am not able to rely upon the evidence of Michael as to what was said between himself and Rodney and George in March, April or August 2006. That evidence is uncorroborated by any direct evidence, whether from another witness or from contemporaneous records.

41 I do, however, accept the evidence of Michael and Mrs Khoury that in 2004, when the project was still in a very early stage of development, there were discussions between the brothers that each of the directors and their parents would retain one of the units in the development by way of distribution of the profits of the venture if, but only if, the development was profitable. This method of distributing the profits of the venture is not commercially unlikely. I accept also that each of those who were hoping to retain a unit in the project decided which unit they would like to retain, if possible, and that Mr and Mrs Khoury selected Unit 28. Michael’s evidence as to the retention of four units, one by each of the directors and one by the directors’ parents, is corroborated by a facsimile dated 7 April 2004 sent by Mr Lewis to the directors and attaching a calculation of GST payable on sales of all units in the development. Mr Lewis’ figures show that four of the units were to be retained rather than sold. I take these units to be those which the directors and their parents wished to retain by way of distribution of profits of the project and that those units included Unit 28.

42 However, certainly by mid-2006, the retention of units if the profits of the project permitted was nothing more than a common understanding amongst the directors. It was recognised that if the project was not profitable, or if all units had to be sold on the market if the project were to break even, then all units would be sold. Michael expressly conceded this to be the position: T84.17-.46.

43 The critical question is whether this common understanding was changed by the alleged oral contract made between Michael and his brothers in mid-2006. There is some circumstantial evidence in favour of the oral contract.

44 First, I accept the evidence of Michael that he negotiated with his brothers in mid-2006 for the release of Unit 28 from the Bank’s security over all assets of Merrag as a condition of his agreement that the remaining assets of Merrag could be used as collateral security for a development on an adjoining property which his brothers alone wished to undertake in a different corporate vehicle. That evidence is corroborated by the fact that the Bank’s security for development finance for the Dee Why project originally included Unit 28 and that in mid-July 2006 the Bank agreed to release Unit 28 from that security and also to release Michael from his guarantee of Merrag’s indebtedness.

45 Second, I accept Michael’s evidence that on or about 29 August 2006 he attended the Bank and received an executed Discharge of Mortgage over Unit 28 together with the Folio Identifier for the property. This evidence is corroborated by the fact that Michael was able, in October 2007, immediately to register the discharge of the mortgage and a transfer of the unit to himself.

46 Third, there is evidence in the form of rental agent’s records that rental from Unit 28 was paid to the account of Mr and Mrs Khoury from the beginning of September 2006.

47 These three circumstances support the assertion that there was a concluded agreement between Michael and Merrag made in or prior to late August 2006 that Michael would purchase Unit 28.

48 On the other hand, the following circumstances militate against the finding of the alleged oral contract.

49 First, there is no contemporaneous record evidencing the making of such a contract, or even indirectly referring to it. The absence of any such record is significant. As Bryson JA said in Khoury v Khouri (2006) 66 NSWLR 241, at [33]:

“It seems very remarkable and strange that the parties did not put their arrangements in writing …. No finding deals with the reasons why the agreement was not recorded in writing. It must be obvious to anyone with any business experience and to any adult who gave any thought to his or her own interests that an arrangement involving significant sums of money about something so important as ownership of a family home should be written down. There has been a law requiring dealings with land to be in writing if they are to be effective in England for well over three centuries, and in Australia for as long as there has been a legal system here, and what that law requires is no more than reasonable people would do if they considered their own interests.”

50 His Honour’s remarks, made in the context of a family arrangement about a residential property, apply with even greater force to a commercial transaction, even though with a family company, negotiated by very experienced businessmen with legal and accounting advice readily available to them.

51 Second, the common understanding of the directors up until the time of the alleged contract was that the directors would have the retained units in the development only if the project was profitable. Yet on 30 June 2006, Mr Lewis wrote to the directors, including Michael, in the following terms:

“ Solvency

12. I understand that there is a question mark about the profitability of the 11-13 Oaks Avenue enterprise; and hence the profitability and liquidity of Merrag Pty Ltd. In this regard:

a. I strongly urge you to make available all necessary information to allow this office to prepare Statements on the financial position of the company;

b. You are reminded of the obligation on Directors to ensure that a company does not trade while insolvent; and

c. It may be appropriate, once you have determined the financial position of Merrag Pty Ltd, to consider winding up the affairs of Merrag Pty Ltd.”

52 The problem of solvency had arisen in this way. By the contract for the purchase of the Dee Why property from the original vendors, Merrag had undertaken to pay GST on the sale. By the contracts whereby Merrag had sold, and was continuing to sell, units in the property to third parties, Merrag was liable to pay the GST on those sales. Merrag had already sold a number of such units to third parties in February, March and June 2006. By 30 June 2006 it had paid no GST at all.

53 Michael conceded (T58.23-T59.45) that all proceeds of sale of the units were to go to Merrag’s financier under its floating charge and that Merrag had no money to pay GST on the sales unless the directors advanced that money to Merrag. The directors, including Michael, made advances to the company from time to time for various purposes but none of them was ever willing, even up to the demise of the company in November 2007, to advance any money to pay the company’s GST liabilities. Those liabilities eventually accumulated to a total of $715,622.

54 Mr Lewis had been warning the directors of the problems of paying GST from early 2004. By facsimile dated 7 April 2004, which Mr Lewis had sent to Michael, Mr Lewis advised that his estimate of the GST payable on all sales in the development was $1,048,095. By a letter to Michael dated 30 June 2006, Mr Lewis advised that the GST payable by Merrag on the purchase of the land from the original vendors would be at least $186,000 and, quite possibly, more. He warned that there was no excuse for not reporting to the ATO the sales of the units which Merrag had been effecting and that penalties and interest would apply once the Business Activity Statements which Merrag had failed to lodge were ultimately lodged and assessed.

55 It was in the context of:

– Merrag being undoubtedly liable for substantial GST as at 30 June 2006;

– not having lodged any BAS statements up to that time and being liable for penalties and interest;

– there being no money to pay GST available from sales of units;

the directors being unwilling or unable to advance any money to Merrag to pay GST, interest or penalties;

– a serious question as to whether the project would be profitable,

that Mr Lewis warned the directors in his letter of 30 June 2006 that they faced the risk of insolvent trading and may have to consider placing Merrag in liquidation.

56 In the light of these circumstances, it is unlikely that there would have been any room left for the original understanding as to retention of units by the directors to be implemented. It is, therefore, inherently unlikely that in mid-2006, certainly after receipt of Mr Lewis’ letter of 30 June 2006, Rodney would have agreed to sell Unit 28 to Michael on terms that included part payment of the purchase price, not by cash but by reduction of Michael’s loan account. That would have done nothing to relieve the company’s liquidity shortage. It is also inherently unlikely that Rodney would have agreed to set off, in addition, against the purchase price an amount of up to $100,000 which Michael considered to be his share of the profits of the project, when the profitability of the project was already seriously in doubt and Mr Lewis was speaking of a winding up.

57 The third consideration militating against a finding of a concluded oral contract is that, clearly, Mr Lewis was never informed of it, either by Michael or by Rodney, although it was obviously essential that he should know. As I have noted above, by April 2004 Mr Lewis was aware that it was the intention of the directors to retain four units in the project by way of distribution of profits. However, in a spreadsheet “showing the asking prices for all lots which remain unsold at this time” sent to Michael on 23 January 2007, Mr Lewis listed Unit 28 as for sale at the price of $480,000. Mr Lewis had a meeting with Mr and Mrs Khoury a few days after these documents were received and read by them. If Mr and Mrs Khoury had pointed out to Mr Lewis at this time, and he had verified, that Unit 28 had already been sold to Michael for $440,000 pursuant to an agreement between Michael and Rodney made by August 2006, Mr Lewis would surely have ceased to show Unit 28 as “on the market”. Yet, in a letter to the ATO dated 8 October 2007 Mr Lewis advised “that [unit] 28 is on the market for $500,000”.

58 The sale prices of $480,000 or $500,000 for Unit 28 could have been given to Mr Lewis only by Rodney, as Michael concedes: T54.10-.36. The strong inference is, therefore, that Rodney never regarded Unit 28 as sold to Michael by a concluded agreement made in mid-2006. It is significant in this regard that Michael conceded that he did not tell Rodney at any time in 2007 that he himself, as a director of Merrag, intended to sign a Memorandum of Transfer of Unit 28 to himself and procure its registration: T72.36-T74.12. It is open to infer that Michael believed that Rodney, if forewarned, would have prevented registration of the transfer.

59 The fourth consideration against the finding of a concluded oral contract is that, even on Michael’s evidence, there was never agreement as to an essential term of the contract, namely, what was the amount of Michael’s loan account which was to be off-set against the purchase price of $440,000. There would have been no difficulty in this regard had there been agreement between Michael and Rodney as to how the amount outstanding to Michael in respect of his loan account was to be calculated, but there was no such agreement so that it was impossible to arrive at a figure to be off-set merely by a mathematical calculation to be carried out by Mr Lewis. Amongst other things, Michael asserted, and Rodney denied, that Michael’s loan account carried interest. It is inherently improbable that, in this state of disagreement, Rodney would have agreed to the terms of the proposal put forward by Michael in mid-2006 on the basis that his oral agreement to those terms at that time constituted an agreement for sale binding upon Merrag.

60 In the light of these considerations, the factors relied upon by Michael as supporting the finding of a concluded oral contract are equivocal. It is quite possible that, as a result of pressure exerted by Michael, Rodney agreed to request the Bank to exclude Unit 28 from its security in the, perhaps, shared hope that the Dee Why project would turn out to be profitable, the parties could eventually agree on the amount of Michael’s loan account, and Michael could retain his share of the profits in the form of Unit 28. It is possible that the Bank agreed to exclude Unit 28 because it was obtaining other collateral security from Rodney, George and their parents which made up for the absence of Unit 28.

61 It is possible that Rodney agreed to Michael retaining the Discharge of Mortgage and the Folio Identifier for Unit 28 in order to assuage Michael’s fears that the unit might later be pledged or sold behind his back, so that he would be deprived of the chance of retaining the unit if the project turned out to be profitable.

62 As to the receipt by Michael of rent from Unit 28, it is possible that Rodney agreed to Michael receiving it as compensation for the further advances which Michael was making to Merrag, or by way of drawings from Merrag. Michael said that all three directors made drawings against the company’s profits but he had drawn less than his brothers: paragraph 81 of Michael’s affidavit.

63 These possibilities could have been negatived by direct evidence from Rodney, George and, perhaps, from Mr Lewis. It is significant that Michael does not give any evidence at all as to any discussions with Rodney as to how the rent from Unit 28 came to be paid to him.

64 On the other hand, it is possible that Michael may have been telling the truth when he gave evidence that he had had no communication at all with Rodney and George from 2004 onwards (see [23] above). If that evidence is true – I cannot determine whether it is or not – then Michael may have come into possession of the muniments of title to Unit 28 and its rents as from 1 September 2006 by means other than an agreement with Rodney and George.

65 Ultimately, I am left with circumstances strongly contrary to a finding of a concluded oral contract for sale of Unit 28 to Michael, and other circumstances supporting such a finding which are equivocal and could have been explained away by evidence called by Michael. If I had felt able to rely with some confidence on Michael’s own evidence, that evidence may well have tipped the balance in his favour. For the reasons I have given, I do not feel able to rely upon it.

66 For these reasons, I am not persuaded that in March, April or August 2006 Michael and Rodney reached a concluded oral agreement for the sale of Unit 28, as Michael alleges.

Enforceability

67 The parties have made brief submissions as to whether the oral contract for sale of Unit 28, if it existed, would have been unenforceable for want of writing. Mr Harris relies upon s 23C of the Conveyancing Act and, presumably, also upon s 54A. Mr Harper says that the contract created an interest in land in favour of Michael and would have been enforceable because it had been partly performed.

68 In my opinion, the issue of enforceability is of no real significance. If the oral contract was made in 2006 and it is not otherwise voidable under CA Pt 5.7B, then performance of that contract in October 2007 would not be “uncommercial” or “unreasonable” merely because the contract was unenforceable for want of writing. A corporation cannot be criticised for honouring bargains which it intended to be contractually binding, even if the Statute of Frauds can be relied upon to avoid enforcement. However, in case I am wrong in this conclusion, I shall state my opinion as to enforceability.

69 For the purposes of this exercise, I must ignore all factual contra-indications and assume the existence of the oral contract in the following terms, as set out in paragraphs 71 and 77 of Michael’s affidavit:

– Merrag agrees to sell Unit 28 to Michael for $440,000;

– the purchase price is to be paid in part by offsetting Michael’s loan account with Merrag;

– the balance of the purchase price is to be paid by Michael in cash after all sales in the project are finalised and Michael’s loan account, including his share of the profits, is worked out.

70 Are the acts of part performance relied upon by Michael “unequivocally and in their own nature referable to some contract of the general nature of that alleged”: Regent v Millett (1976) 133 CLR 679, at 682-3; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, at 432.

71 The “general nature” of the oral contract is, of course, a contract for the sale of residential property. I am unable to find that that contract included either an express or necessarily implicit term that transfer of Unit 28 to Michael would occur, or that possession would be given, prior to the payment of the whole of the consideration by Michael. Accordingly, the contract must be taken as containing the usual provision, implied by law, that the purchaser is to have title and is entitled to possession of the property upon payment of the purchase price in full.

72 In the case of a contract for the sale of land the change of possession of the land from the vendor to the purchaser has been described as “the act of part performance par excellence”: Regent v Millett (ibid) at 683. In the same category are other acts akin to the taking of possession, such as receiving the rents and profits of the land: see e.g. Khoury v Khouri (supra) at [89] per Bryson JA.

73 In the present case, the Folio Identifier for Unit 28 came into the possession of Michael well before it was contemplated that the Dee Why project would be finalised, all units sold and the amount owed to Michael by Merrag, including his loan account and his share of profits, worked out by Mr Lewis. In other words, the muniments of title came into Michael’s possession well before completion of the sale according to the terms of the contract. Further, it is clear that Michael received the rents of the unit from 1 September 2006. A contract for sale does not usually provide that a purchaser is entitled to the rents of the property before completion and Michael does not allege that there was an express or necessarily implicit term in the oral contract to that effect.

74 The acts of part performance by Merrag relied upon by Michael cannot be said to be in performance of terms of the contract. Does this matter?

75 Close analysis of the facts and reasoning in Regent v Millett (supra) is instructive. By an oral agreement for the sale of land, it was agreed between the vendors and the purchasers that, in consideration of the purchasers paying off the whole of the vendors’ mortgage debt and interest and paying to the vendors the amount of their present equity in the property, the purchasers would be entitled to live in the property rent free and have it transferred to them when the mortgage was paid off. The purchasers went into possession and began paying off the vendors’ mortgage instalments. The purchasers carried out substantial renovations and repairs to the property. The vendors subsequently refused to transfer the property and, when the purchasers sued for specific performance, they pleaded the Statute of Frauds. The purchasers relied upon the following acts of part performance: first, the taking of possession; second, the effecting of repairs and renovations to the property; third, the making of mortgage repayments. The trial judge and the Court of Appeal held these acts to be sufficient part performance of the oral contract.

76 In the High Court, the vendors argued, first, that the acts of part performance must necessarily imply the existence of the particular contract and that the acts relied upon by the purchasers were equally consistent with a number of other explanations, because the vendors were the parents of one of the purchasers. The Court did not accept the vendors’ formulation of the applicable test.

77 At 683, Gibbs J, with whom all members of the Court agreed, held, in reliance on the speech of the Earl of Selborne in Maddison v Alderson (1883) 8 App Cas 467, at 483, that “it is enough that the acts are unequivocally and in their own nature referable to some contract of the general nature of that alleged” (emphasis added).

78 Second, the vendors submitted that the acts relied upon must have been done by the purchasers in the performance of the terms of the contract, i.e. under and by force of those terms; the purchasers did not take possession of the property in accordance with a contractual obligation to do so, so that possession would not be an act of part performance. Rejecting this submission, Gibbs J said at 683-4:

“The change of possession of land has been described as ‘the act of part performance par excellence’ – Williams: The Statute of Frauds, Section IV, p256. Of course, it may be proved that the taking of possession was referable to some other authority than the contract alleged. That was the situation in McBride v Sandland ((1918) 25 CLR at 84-85). However, in the present case the circumstances under which possession was given indicate contract, to echo the words in McBride v Sandland , and the possession was unequivocally referable to some such contract as that alleged. The taking of possession was pursuant to the contract. It is true that the contract did not require the respondents to take possession, but if it were necessary that the acts of part performance should have been done in compliance with a requirement of the contract, the utility of the equitable doctrine would be reduced to vanishing point, and many cases which have proceeded on the opposite view would have been wrongly decided . The Judicial Committee, in White v Neaylon ((1886) 11 App Cas 171) indeed appears to have held that the effecting of improvements on property which were neither required nor permitted by the contract may be acts of part performance; but however that may be, it is clear that if a vendor permits a purchaser to take the possession to which a contract of sale entitles him, the giving and taking of that possession will amount to part performance, notwithstanding that under the contract the purchaser was entitled rather than bound to take possession.”
(emphasis added)

79 In the present case, the giving to Michael of the muniments of title and the benefit of rental income from Unit 28 prior to completion of the contract was not done by Merrag “in compliance with a requirement of the contract”, but the circumstances in which these acts occurred “indicate contract”, to use the words of Gibbs J, because they would have had to be done by Merrag under the contract when, in due course, Michael tendered full payment of the purchase price. In my view, those acts are “unequivocally and in their own nature referable” to some contract between Michael and Merrag for the sale of Unit 28 to Michael.

80 Accordingly, if I had been satisfied that the oral contract for sale of Unit 28 had been made, I would have held that it was enforceable notwithstanding absence of writing.

Solvency

81 There are two points of time at which solvency of Merrag must be considered: the time of the alleged oral contract and the time of execution of the Memorandum of Transfer of Unit 28 on 9 October 2007. The first point of time is relevant only if I am wrong in failing to be satisfied that the alleged oral contract was made. The second point of time is relevant if I am correct.

82 First, it is necessary to ascertain when the oral contract was actually made, if it was made at all. In paragraph 71 of his affidavit, Michael says that he put a proposal to Rodney and George “in about March/April 2006”. Their response was that “we will need to go to BankWest to see if they will do this deal”. I do not take this response to be an acceptance of the proposal by Rodney and George, so that an agreement was concluded subject to a condition, namely, that the bank approved it. I take this discussion to result only in a statement by Rodney and George to the effect that they would see if the proposal was workable before stating their attitude to it.

83 In paragraph 78 Michael recounts a conversation with Rodney shortly after 18 July 2006 in which Rodney confirmed that the bank had agreed to Michael’s proposal. Michael says that Rodney himself then confirmed agreement with the proposal. Accordingly, I conclude that, if contrary to my finding, an oral agreement between Michael and Merrag was made, it was made on or about 18 July 2006.

84 I have no hesitation in concluding that as at 1 July 2006 – and probably by March 2006, if that is relevant – and at all times thereafter, Merrag was unable to pay all its debts as and when they became due and payable, so that it was insolvent: CA s 95A. I have set out in paragraphs [50]-[54] the circumstances resulting in non-payment by Merrag of its GST liabilities from March 2004 onwards. In brief, as the proceeds of sales of units in the project went directly to Merrag’s financier in reduction of secured borrowings, Merrag itself had no funds to pay the GST which became due on the sales of units which it was making, unless the directors advanced it the money to do so. By 30 June 2006, the whole project appeared likely to produce a loss, as Mr Lewis pointed out in his letter of that date to all directors. In a balance sheet prepared by Mr Lewis as at 30 June 2006, Merrag was shown as having a deficiency of assets over liabilities in excess of $2.2M. None of the directors was ever willing to advance money to Merrag to enable it to pay GST, either on past or future sales. It may be inferred that none of them wished to risk throwing good money after bad.

85 By 30 June 2006, six units in the project had been sold (Exhibit P1, p 67) but no BAS statements had been lodged with the ATO, much less had outstanding GST on those sales been paid by the company. Accordingly, I conclude that Merrag was as at 30 June 2006 and at all times thereafter unable to pay its debts to the ATO in respect of GST as and when those debts became payable. Merrag was, therefore, insolvent at the time of the alleged oral contract in July 2006 and at the time of execution of the Memorandum of Transfer of Unit 28 in October 2007.

Uncommercial transaction and unreasonable director-related transaction

86 If I am correct in holding that Michael has failed to prove a concluded oral contract for sale of the unit made in July 2006 a term of which was that Michael’s loan account with Merrag should be offset against the purchase price, then the only “transaction” in question is the transfer in October 2007 of Unit 28 to Michael for a payment of $250,000.

87 That transaction was, undoubtedly, an uncommercial transaction within s 588FB(1): Merrag received less than half the then current market value of the unit and Michael profited from the transaction to the extent of some $275,000 at a time when the company was insolvent. For those reasons, the transaction was also an unreasonable director-related transaction under s 588FDA(1).

88 I hold that the transfer of the unit to Michael in October 2007 was both an uncommercial transaction and an insolvent transaction within s 588FC(a).

89 I hold that the transaction was also an unreasonable director-related transaction within s 588FDA(1).

90 If, contrary to my finding, there was an oral contract for sale of the unit in 2006 so that the transfer and payment in October 2007 were made in performance of the contract, I would nevertheless hold that the contract was an uncommercial transaction. Analysed in terms of s 588FB(1), the contract was uncommercial because:

– it gave no benefit to Merrag as the company received, as the only real consideration, less than half of the market value of the unit when it could have received the whole of the market value by selling it to a third party at arm’s length;

– it caused detriment to Merrag in that the company was insolvent at the time and its interests were, in reality, the interests of its unsecured creditors as a whole;

– it had the result that Michael’s unsecured debt was paid in full at the expense of other unsecured creditors.

91 According to a calculation done by Michael’s Counsel in the course of submissions, if the unit had been sold on the market for $525,000 and Michael left to prove for his debt in the liquidation, unsecured creditors would have received about 13 cents in the dollar of their claims whereas, as a result of the sale and transfer of Unit 28 to Michael, they get nothing.

92 For the same reasons, the oral contract was an unreasonable director-related transaction.

93 I hold that, if there was an oral contract for sale of the unit made in 2006, that contract was both an uncommercial transaction and an insolvent transaction within s 588FC(a).

94 I hold that the transaction was also an unreasonable director-related transaction within s 588FDA(1).

Whether unfair preference

95 The issue of unfair preference does not arise if I am correct in holding that the only relevant transaction is the transfer of the unit and the payment of $250,000 in October 2007 and that that transaction was both an uncommercial transaction and an unreasonable director-related transaction. In case I am wrong in this conclusion, I shall set out my findings in relation to the question of unfair preference.

96 By 8 October 2007 Michael was acutely aware that Merrag was hopelessly insolvent and was doomed to liquidation. On that day, Mr Lewis sent him an e-mail attaching a copy of an e-mail sent to Rodney on 5 October which referred to a draft letter to the ATO offering to pay $100,000 on account of Merrag’s outstanding GST liabilities. The e-mail to Rodney was as follows:

“Rodney,

Attached is a draft letter to the ATO concerning the $100,000.

I have just received advice that should you pay the $100,000, then it is entirely possible that:

1. A liquidator may construe the payment as a preferential payment;

2. And in defending the action of the liquidator, the ATO may join the Directors in the action, with the view to recovering any losses.

I strongly recommend that you don’t make any payments which could be construed as preferential. Concerning the ATO, I recommend that:

1. We send off the letter; and

2. When pushed on the payment we simply advise that we have received advice that such a payment is precluded because of its preferential nature, and let the ATO run its course. (Hopefully, we can pre-empt their wind up procedures).”

97 The covering letter to Michael sent on 8 October was as follows:

“Hi Michael,

Susie spoke to me this morning concerning the transfer of Unit 28 out of Merrag.

Attached for your information is an email to Rodney concerning a payment to the ATO and the subject of preferential payments. As discussed with Susie, in the light of the Court judgment, I consider that Merrag is insolvent; and further that:

1. Merrag should sell all stock with the view to paying as much of the GST obligation as possible; and

2. Any payments which are made (including the transfer of stock) to creditors, could be regarded as ‘preferential’ payments by any liquidator, and clawed back.

3. Any payments made (including the transfer of stock) to Directors could be seen as a breach of their responsibilities.

If you have any questions concerning this matter, please do not hesitate to contact me.”

98 Notwithstanding Mr Lewis’ unequivocal advice not to transfer Unit 28 into his name, Michael signed the Memorandum of Transfer as a director of Merrag on 9 October and procured its urgent lodgement for registration on 10 October. He paid Merrag $250,000 in consideration of the transfer on 25 October. Five days later Merrag was placed in voluntary administration.

99 The unchallenged evidence of the Liquidator’s valuer is that the market value of Unit 28 as at 9 October 2007 was $525,000.

100 According to Proofs of Debt lodged with the Liquidator, the debts of unsecured creditors of the company total $1,646,343. The Liquidator’s evidence is that Merrag has no assets available to pay its unsecured creditors.

101 Michael has not lodged a Proof of Debt in the liquidation. According to his calculations, which are not agreed by Merrag or the Liquidator, his loan account with Merrag as at the end of June 2006 was about $243,600. As at 9 October 2007 the amount would have been higher if interest had been payable and had continued to accrue. But, of course, Michael says that his loan account was expunged in July or August 2006 as part consideration for the sale to him of Unit 28.

102 In order to determine whether Michael has received an unfair preference as a result of the oral contract, I will assume that his calculation of his loan account at $243,600 as at the date of the alleged oral contract and as at the date of the Memorandum of Transfer is correct.

103 An unfair preference is defined by CA s 588FA(1) as follows:

“(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:


(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
…”

104 The effect of the oral contract as a preference must be ascertained as at the time it was made, not as at the time of the actual liquidation of Merrag. One must assume a notional liquidation of the debtor company immediately prior to the impugned transaction and compare what the creditor would have received in such a liquidation with what the creditor has received as a result of the transaction: G&M Aldridge Pty Ltd v Walsh (2001) 203 CLR 662; and in the Victorian Court of Appeal at [1999] 3 VR 601.

105 As at the time of the alleged oral contract, Merrag was insolvent, as I have found. It could not have paid Michael 100 cents in the dollar of the debt of $243,600 which it owed to him. Just how much Merrag could have paid to Michael and the other unsecured creditors is unclear but, as I have already mentioned, a balance sheet as at 30 June 2006 (which Michael received but cannot remember verifying) shows a deficiency in assets over liabilities of $2.2M. In any event, a transaction may constitute a preference in favour of one creditor even if other unsecured creditors would have received no dividend in the liquidation had the transaction not occurred: G&M Aldridge Pty Ltd v Walsh (supra) at [31].

106 Michael says that the making of the oral contract and its performance in October 2007 did not constitute an unfair preference. He says that he has given full consideration for the purchase of the unit because he has paid $250,000 in cash and the balance of the purchase price has been satisfied by his release and discharge of Merrag’s debt to him of $243,600.

107 I am unable to accept this submission. What Michael says has happened in this case as a result of the alleged oral contract for sale is no different in principle from the common case in which an unsecured creditor of an insolvent trader “purchases” trading stock from the trader to the value of the debt and then offsets the trader’s debt against the purchase price. It has long been established that such a “sale” has the effect of paying the creditor’s debt in full and of preferring that creditor to others.

108 For example, in Sempill v Vindin (1868) 7 SCR(NSW) 361 a trading company was insolvent and on the verge of liquidation. A creditor who was owed a substantial sum sent his employees to purchase trading stock from the company on credit. The creditor then offset against the purchase price of the stock the debt owed to him by the company. The transaction was held, on the basis of well established authority, to have given the creditor a preference over other creditors in that his debt had thereby been paid in full: see esp. per Faucett J at 386-387 and the authorities cited; see also Sempill v Logan (1868) 7 SCR(NSW) 391, at 394.

109 In this case, the variant from the common run of cases involving purchase by a creditor of trading stock of an insolvent trader is that at the time of the transaction Michael’s loan account was, on any view, much less than the value of Unit 28. If any semblance of a commercial transaction were to be retained, Michael would obviously have to pay Merrag the difference between what he said Merrag owed to him and the value of Unit 28. Thus, although Michael paid $250,000 to Merrag as consideration for the transfer, he received property valued at more than twice that amount, which had the effect of paying out his loan account in full. Clearly, he could not possibly have obtained payment in full of his loan account had Merrag gone into liquidation immediately prior to the transaction.

110 I hold that the oral contract for sale of Unit 28, if it existed, was an unfair preference within s 588FA(1).

Relief

111 I hold that the execution and registration of the Memorandum of Transfer in October 2007 was the only relevant transaction between the parties for the purposes of CA Pt 5.7B. I hold that that transaction is both an uncommercial transaction and an insolvent within s 588FC(a). It is voidable under s 588FE(2).

112 I hold that that transaction is also an unreasonable director-related transaction and is voidable under s 588FE (6A).

113 If the relevant transaction for the purposes of CA Pt 5.7B is the alleged contract for sale made in July 2006, I hold that that transaction is voidable as an unfair preference, an uncommercial transaction and an unreasonable director-related transaction.

114 If the Court finds a transaction is voidable under s 588FE, it is empowered by s 588FF(1) to make a variety of orders to meet the circumstances of the case. In my opinion, the appropriate relief is to place Merrag and Michael in the situation they would have been in had Michael wished to purchase Unit 28 after the appointment of the Liquidator. He would have had to pay the current market value, i.e. $525,000, and would have been left to prove for his loan account in the liquidation.

115 Michael has already paid $250,000 in consideration of the transfer of the unit. I propose to order, pursuant to s 588FF(1)(c) that Michael pay the balance of the purchase price which he would have had to pay the Liquidator on a sale after liquidation, i.e. $275,000, together with interest on that amount at Supreme Court rates from the date of the registration of the transfer, namely, 10 October 2007. I have chosen that date for the commencement of interest because Michael has had the benefit of the unit and of the unpaid balance of the purchase price from that date onwards. Michael will, of course, be entitled to prove in the liquidation for his loan account in whatever amount is ultimately admitted to proof by the Liquidator.

116 The orders which I propose to make are as follows:

i) dismiss the Plaintiffs’ Originating Process;

ii) order pursuant to Corporations Act s 588FF(1)(c) that the First Defendant pay to the First Plaintiff the sum of $275,000 together with interest thereon at Supreme Court rates calculated from 10 October 2007 until the time of payment.

117 The parties may wish to discuss the terms of the orders before they are finally made. I will stand the proceedings over for a short time to enable the Plaintiffs to bring in Short Minutes of Order. I will then hear any argument as to costs.

– oOo –