Michael Gregory Jones as Liquidator of SBH Australia Pty Limited (In Liq) v Joseph Cummins

[2018] NSWSC 606

Supreme Court

New South Wales

Medium Neutral Citation:	Michael Gregory Jones as Liquidator of SBH Australia Pty Limited (In Liq) & Anor v Joseph Cummins [2018] NSWSC 606
Hearing dates:	17, 18 April 2018
Decision date:	09 May 2018
Jurisdiction:	Equity
Before:	White J
Decision:	(1)   Give judgment for the defendant on the plaintiffs’ statement of claim. (2)   Order that the plaintiffs pay the defendant’s costs. (3)   Order that the cross-claim be dismissed. (4)   Order as between the cross-claimant and the first and second cross-defendants the costs of the cross-claim be costs in the proceedings between the plaintiffs and the defendant. (5)   No order as to costs as between the cross-claimant and the third cross-defendant.
Catchwords:	CORPORATIONS – winding up – insolvency – set-off – Corporations Act 2001 (Cth) s 553C – where question as to quantum of debt owed to company - where discrepancies between MYOB records and financial statements – Corporations Act s 1305 - whether former director could set-off alleged debt – where director intended to take assignment of debt owed by company to a related company but agreement for assignment made between related company and co-director - where debt arose through constructive trust creating an equitable interest at the time of commencement of winding up – whether equitable interest short of equitable ownership could be set-off CIVIL PROCEDURE – Pleadings – whether s 553C(2) was required to be pleaded – Uniform Civil Procedure Rules, r 14.14(2)(b) – leave to amend not sought
Legislation Cited:	Bankruptcy Act 1806 (UK), s 3 Bankruptcy Act 1966 (Cth), s 86 Conveyancing Act 1919 (NSW), s 12 Corporations Act 2001 (Cth), ss 513A(e), 553C Uniform Civil Procedure Rules, r 14.14(2)(b)
Cases Cited:	Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 Chan v Cresdon Pty Ltd (1989) 168 CLR 242 Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639 Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85 Forster v Wilson (1843) 12 M & W 204; 152 ER 1165 Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10 Grant v Edwards [1986] Ch 638 Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112 Green v Green (1989) 17 NSWLR 343 Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 Hiley v People’s Prudential Assurance Co Limited (1938) 60 CLR 468 Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319 JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd (2007) 64 ACSR 633 Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1984) 155 CLR 288 Legione v Hateley (1983) 152 CLR 406 Lloyds Bank plc v Rosset [1991] 1 AC 107 Maharaj v Chand [1986] AC 898 Mathieson’s Trustee v Burrup, Mathieson & Co [1927] 1 Ch 562 Muschinski v Dodds (1985) 160 CLR 583 Ogilvie v Adams [1981] VR 1041 Parsons v McBain (2001) 109 FCR 120; [2001] FCA 376 Secretary, Department of Social Security v Agnew (2000) 96 FCR 357 at 363; [2000] FCA 59 Shropshire Union Railways & Canal Company v The Queen (1875) LR 7 HL 496 Southern Cross Construction Limited (in liq) v Southern Cross Club Limited [1973] 1 NZLR 708 Stern v McArthur (1988) 165 CLR 489 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Young v Queensland Trustees Limited (1956) 99 CLR 560
Texts Cited:	Derham on the Law of Set-off (4th ed, 2010, Oxford University Press)
Category:	Principal judgment
Parties:	Michael Gregory Jones as Liquidator for SBH Australia Pty Limited (In Liquidation) (1st Plaintiff/1st Cross-Defendant) SBH Australia Pty Limited (In Liquidation) (2nd Plaintiff/2nd Cross-Defendant) Joseph Cummins (Defendant/Cross-Claimant) Ivan Cummins (3rd Cross-Defendant)
Representation:	Counsel: L T Fermanis (1st and 2nd Plaintiff/1st and 2nd Cross-Defendant) D Parish (1st Defendant/Cross-Claimant) M Lim (3rd Cross-Defendant)   Solicitors: Holman Webb Lawyers (1st and 2nd Plaintiff/1st and 2nd Cross-Defendant) Aubrey Brown Partners (1st Defendant/Cross-Claimant) Frank Law (3rd Cross-Defendant)
File Number(s):	2015/348512

Judgment

1. HIS HONOUR:   The first plaintiff, Mr Michael Jones, was appointed as liquidator of the second plaintiff, SBH Australia Pty Ltd (In Liq) (“SBH”) on 3 October 2014. In these proceedings both Mr Jones and SBH seek to recover from the defendant, Mr Joseph Cummins, a debt of $1,076,817.39 plus interest. At all relevant times Mr Joseph Cummins was a director and shareholder of SBH. The alleged debt is said to be the balance of a loan account of Joseph Cummins with SBH.

2. The proper plaintiff is SBH. As liquidator and therefore agent of SBH, Mr Jones can cause SBH to bring the proceeding to recover a debt claimed to be owed to it. It is not arguable that a debt is owed by Joseph Cummins to Mr Jones in his capacity of liquidator of SBH. The joinder of Mr Jones as plaintiff is relevant to questions of costs, but the claim is one between SBH on the one hand and Joseph Cummins on the other.

3. Joseph Cummins admits that he had a loan account with SBH, but does not admit the quantum of the debt claimed. At relevant times Joseph Cummins and his son Ivan Cummins were the shareholders and one or both of them were directors of a group of companies. The first such company was Glengrant Civil Pty Ltd (“Glengrant”) that was incorporated on 15 February 1999. Joseph and Ivan Cummins were shareholders and directors of that company. It provided services as an excavator in the construction industry.

4. In 2003 Joseph and Ivan Cummins acquired the shares in a company called EcoCivil Pty Ltd (“EcoCivil”) that carried on business in the construction industry. A third company, EcoCivil Australia Pte Ltd was said by Joseph Cummins to have been incorporated in 2004 to tender for works in Singapore. It may never have existed. SBH was incorporated on 21 June 2007. It acquired a franchise to operate as a shoring box hire company. This involved the deployment of trench support technology used in the laying of pipelines.

5. On 12 November 2010 EcoCivil entered into a creditor’s voluntary winding-up. Liquidators from a firm known as Worrells Solvency and Forensic Accountants were appointed. Receivers were appointed to SBH on 11 November 2010, but they retired on 21 January 2011. On 25 September 2014 Mr Woodgate of Woodgate & Co was appointed as official liquidator of Glengrant. On 3 October 2014 Mr Jones was appointed as liquidator of SBH. Ivan Cummins had initiated winding-up proceedings of SBH.

6. It is admitted on the pleadings that at the time liquidators were appointed to EcoCivil, SBH owed EcoCivil $2,939,000.

7. On 9 August 2013 Joseph and Ivan Cummins made an offer to the liquidators of EcoCivil to purchase the debt owed by SBH to EcoCivil for $293,000. This was an offer of ten cents in the dollar. At the same time, as directors of the trustee of a trust called the Cummins Unit Trust, they offered to buy for $28,354 a debt of $283,544 owed by them personally to EcoCivil.

8. On 3 September 2013 at a meeting of creditors of EcoCivil resolutions were passed to accept the offers. The largest creditor, the Australian Taxation Office, voted against the proposal, but the chairman announced that he was using a casting vote pursuant to subregulation 5.6.21(4) of the Corporations Regulations by voting in favour.

9. By an undated deed called a Deed of Assignment of Debt made between EcoCivil and Ivan Cummins, EcoCivil agreed to assign to Ivan Cummins all of its title and interest in the debt of $2,939,000 owed to EcoCivil by SBH in consideration of a payment of $293,900. The deed provided that settlement was to take place on 30 November 2013. The assignment was conditional on payment.

10. On 3 December 2013 Joseph Cummins countersigned a withdrawal authority addressed to the National Australia Bank authorising payment of two sums including the sum of $322,254 from an account of Glengrant with the National Australia Bank to an account of Worrells for EcoCivil. $322,254 is the sum of the two amounts of $293,900 and $28,354 payable for the assignment of the two debts owed to EcoCivil by SBH and by Ivan and Joseph.

11. Joseph Cummins deposed that:

“100   On or about 3 December 2013, I received a telephone call from NAB bank asking me to countersign the transfer of Glengrant money for the purchase of the SBH Debt and Unit Trust Debt.

101   I signed the transfer thinking that the purpose of this was to settle debts across the companies and remove Ivan and my liability in accordance with Mr Jackman’s July 2013 Advice.

…   

104   At no time did I ever receive any call or information by Mr Jackman that I would not be purchasing the debt from SBH to Ecocivil. It was my understanding when I signed the NAB transfer in December 2013 that this was specifically for the purchase of the debt so that there would no longer be any personal liabilities between any of the companies. I would never have signed the NAB transfer had I known that the monies applied were going to buy the SBH debt for Ivan only.”

12. He deposed that he did not know that the deed of assignment existed at the time he signed the NAB transfer (para 105). He also deposed:

“106   I first realised that the purchase of the debt had not occurred in accordance with my understanding of it on or around 12 June 2015, when I received correspondence from the liquidator of Glengrant.”

13. By the letter of 5 June 2015 Mr Woodgate, the liquidator of Glengrant, advised Joseph Cummins that Ivan had executed a deed of assignment of debt on or around 30 November 2013 whereby he purchased the debt owed by SBH to EcoCivil and on the basis that the payment of $322,254 from Glengrant could be characterised as a loan to Ivan, that would result in an adjustment to his loan account, Mr Woodgate attached a copy of the deed. He noted that on 11 June 2015 Joseph Cummins had said that he was aware of and had authorised the payment of $322,254 to the liquidators of EcoCivil, but was not aware of the deed and its provisions.

14. In a later report Mr Woodgate recorded that Ivan’s loan account with Glengrant had been debited with the sum of $322,254. He said there had been extensive correspondence between his office and Joseph and Ivan regarding their loan accounts and that Joseph had advised that the sum of $322,254 should be split 50 per cent to his loan account and 50 per cent to Ivan’s loan account instead of being applied in full to Ivan’s loan account. Mr Woodgate recorded that Ivan disputed this and maintained that all of the $322,254 should be applied to his loan account. He said that he had been informed that this matter was the subject of legal proceedings. Mr Woodgate said that “Subject to the consent of the Supreme Court of New South Wales, the loan accounts will be distributed, in specie, to the shareholders.”

15. No evidence was adduced as to the outcome of other proceedings or whether there was any distribution to Ivan and Joseph as foreshadowed in Mr Woodgate’s letter.

16. Joseph joined Ivan as a cross-defendant to his cross-claim. Joseph pleaded that half of the consideration transferred upon the Glengrant payment on or about 3 December 2013 were Joseph’s director’s drawings. That allegation was not admitted by Ivan. Joseph pleaded that the assignment of the whole of the SBH debt to Ivan solely was in breach of the agreement between Joseph and Ivan. Joseph pleaded that he did not know of or consent to the deed of assignment and did not know of or consent to any variation of the agreement between them whereby Ivan would be assigned the whole of the SBH debt. He pleaded that Ivan held half of the SBH debt on trust for him.

17. In his defence to cross-claim Ivan pleaded that Joseph had reneged on the agreed arrangement and had “abrogated his right and opportunity to participate in purchase of the SBH debt”. No particulars of the alleged reneging were given.

18. The cross-claim between Joseph and Ivan was settled. They entered into a deed of settlement dated 12 April 2018. The deed defined the “settlement sum” as meaning the sum of $160,000 “inclusive of any costs and any sum that Ivan would or may have received as a distribution from the winding-up of Glengrant Civil Pty Ltd”. The deed defined “Half the SBH Debt” as meaning 50 per cent of the SBH debt, being $1,469,500 ($2,939,000 x 50 per cent). Clauses 2.1 and 2.2 of the deed provided:

“2.1.   Assignment of half the SBH Debt

In consideration of Joseph paying the Settlement Sum to Ivan at or prior to Settlement:

(a)   Ivan acknowledges without admission that Joseph was and is the beneficial assignee of Half the SBH Debt on and from the assignment of the SBH in about December 2013 and will consent to a declaration to that effect in the Proceedings in the form of the Consent Orders;

(b)   Ivan assigns to Joseph the legal ownership of Ivan’s right, title and interest in Half of the SBH Debt.

2.2   Risk

Title to and risk of Half of the SBH Debt will pass to Joseph upon Settlement.”

19. There were mutual releases. The orders to which Ivan agreed he would consent were as follows:

“1.   The Court declares that half of the debt owed by SBH (Australia) Pty Ltd (In Liquidation) to EcoCivil Pty Ltd (Deregistered) (defined in the First Cross-Claim as the SBH Debt) in the amount of $1,469,500 was assigned to the First Cross-Claimant/Defendant on or about 6 December 2013.

2.   The First Cross-Claim against the Third Cross-Defendant be otherwise dismissed with no order as to costs.

3.   The orders be entered forthwith.”

20. In accordance with the usual order for heaing the parties provided written submissions before the hearing started. It was unclear from the written submissions of Mr Fermanis, who appeared for the plaintiffs, whether or not the plaintiffs took issue with Joseph Cummins’ contention that half of the SBH debt was held by Ivan on trust for him. That claim was not admitted in the plaintiffs’ defence to cross-claim. Eventually, at the fourth time of asking, Mr Fermanis said that the liquidator did not accept that prior to the commencement of the winding-up of SBH, the debt assigned by EcoCivil to Ivan was held as to a 50 per cent share beneficially by Joseph. However, the liquidator did not adduce any evidence on that question. Although Ivan’s affidavits were included in the Court Book provided to me prior to the hearing, the affidavits were not read on the hearing. I put their contents aside in determining the issues between the plaintiffs and Joseph Cummins.

21. There is no evidence to support Ivan’s pleaded contention that Joseph reneged on his agreement with Ivan in relation to the purchase of the SBH debt.

22. I was informed that it was common ground that the sum of $160,000 provided for by the settlement deed was paid on Friday, 13 April 2018 and received on Monday 16 April 2018.

23. For reasons indicated during the course of the hearing, I said I was not prepared to make a declaration by consent. This was because it was unnecessary to do so to resolve the issues between SBH and Joseph Cummins and I knew that there was evidence that was material to the issue that the liquidator had chosen not to put before the Court. Mr Parish, who appeared for Joseph Cummins, did not ask for the declaration to be made. Mr Lim who appeared for Ivan said that his client consented to the declaration but he did not ask for it.

24. Joseph Cummins pleaded by way of defence to the statement of claim that:

“10   In answer to paragraph 10 of the statement of claim, the defendant says:

a.   He is the assignee of debt owed by the second plaintiff to EcoCivil Pty Ltd in the sum of $1,469,500.00 (the debt);

b.   He is entitled to rely on the debt as a full set off against the amount claimed by the plaintiffs for the reasons set out in the first cross claim; and therefore

c.   He denies he is indebted to first and second plaintiffs in the sum pleaded or at all.

…

13 In answer to the whole statement of claim, the defendant is entitled to mutual set-off by operation of s 553C of the Corporations Act 2001 for any amounts owed by the second plaintiff to the defendant by virtue of the allegations set out in the cross claim.”

25. In his cross-claim he pleaded:

“26 Joseph is entitled to a set-off under s 553C of the Corporations Act up to the extent it reduces or extinguishes the amount sought against him by the first and second cross defendants.”

26. SBH and Mr Jones filed a reply to the defence. In their reply they pleaded:

“2. In answer to the whole Defence, and in particular paragraphs 10 and 13, the First and Second Plaintiffs deny that the Defendant is a creditor of SBH or entitled to an equitable set-off or set-off pursuant to section 553C of the Corporations Act 2001 (Cth) or any set-off whatsoever in circumstances where:

a.   If SBH is indebted to Joseph as alleged by him at paragraphs 10 and 13 of the Defence or at all (which is denied), then there is no mutuality of dealings between the debt owed by Joseph as pleaded and particularised in the Statement of Claim and:

i.   Joseph and Ivan with respect to the Deed of Assignment (which is not admitted); and/or

ii.   Joseph being an equitable assignee of half the SBH Debt with the legal title vesting with Ivan (which is not admitted).

b.   If SBH is indebted to Joseph as alleged by him at paragraphs 10 and 13 of the Defence or at all (which is denied), the alleged transaction giving rise to that alleged indebtedness (which is denied) does not give rise to any conduct by SBH that would establish impeachment.

c.   There is no inextricable link between the alleged debt alleged by Joseph at paragraphs 10 and 13 of the Defence or at all (which is denied) said to be owed by SBH and the debt owed by Joseph to SBH as pleaded and particularised in the Statement of Claim.”

27. They pleaded the same matter in their defence to cross-claim.

28. Section 553C of the Corporations Act 2001 (Cth) provides:

“553C  Insolvent companies—mutual credit and set‑off

(1)     Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a)     an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b)   the sum due from the one party is to be set off against any sum due from the other party; and

(c)     only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

(2)     A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.”

29. SBH and Mr Jones did not plead that Joseph Cummins was not entitled to a set-off under the section by reason of subs 553C(2). They did not plead that at the time of the assignment Ivan (the assignee of the debt) or Joseph (the alleged beneficial owner of half of the assigned debt) had notice of the fact that SBH was insolvent.

30. The evidence that both Ivan and Joseph did have such notice was overwhelming. Mr Parish, who appeared for Joseph Cummins, properly conceded that on the evidence adduced at the hearing Joseph had notice at the time of the assignment that SBH was insolvent. However, that issue had not been raised on the pleadings.

31. In his written submissions dated 11 April 2018 (that is, six days before the hearing date) Mr Fermanis said:

“If the Plaintiffs are incorrect in regards to their position with respect to the availability of relief under section 553C(1), then subsection (2) may create an additional hurdle for Joseph.”

32. He referred to the decision of the Victorian Court of Appeal in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319 at [21] and [22] where the Court addressed what needs to be established to show that a person has notice of the fact that the company is insolvent.

32. In his written submissions in response that were also provided in advance of the hearing, Mr Parish said:

“15.   In response to the Plaintiffs’ outline of submissions:

…

c. The Plaintiffs raise but do not plead section 553C(2). They have an obligation to raise a specific defence that may take Joseph by surprise and no evidence has been led that responds: firstly, to whether SBH was in fact insolvent at the time of the assignment; and secondly, what factual matters Joseph knew of.”

34. In his opening submissions Mr Fermanis contended that Joseph Cummins would have to overcome s 553C(2) and submitted that it was not necessary for the plaintiffs to have pleaded s 553C(2) in reply to Joseph Cummins’ defence. The reason advanced by counsel was that s 553C(1) states that it is subject to subs (2) and Joseph Cummins could not invoke subs (1) without also having to address subs (2).

35. Mr Fermanis submitted that the plaintiffs could attack Joseph Cummins’ entitlement to rely upon the entirety of the section.

36. Rule 14.14(2)(b) of the Uniform Civil Procedure Rules relevantly provides:

“14.14   General rule as to matters to be pleaded specifically (cf SCR Part 15, rule 13; DCR Part 9, rule 9)

…

(2)     In a defence or subsequent pleading, a party must plead specifically any matter:

(a)    that, if not pleaded specifically, may take the opposite party by surprise, or

(b)     that the party alleges makes any … defence … not maintainable, or

(c)     that raises matters of fact not arising out of the preceding pleading.”

37. When the terms of the rule were drawn to Mr Fermanis’ attention he accepted that the rule applied and that he needed leave to amend. He sought that leave. There was no evidence in support of the application. Mr Fermanis accepted that if leave to amend were granted “it’s almost inevitable that an adjournment would be required”. The application was opposed. Mr Parish submitted that if the amendment were allowed his client would be prejudiced unless an adjournment were granted as there might be evidence that could be led to establish that SBH was not insolvent at the time of the assignment, notwithstanding what appears from the evidence proposed to be adduced. Mr Parish also submitted that if leave to amend were granted and the proceedings were adjourned with the usual consequence that the plaintiffs pay the costs thrown away by the adjournment, the liquidator should bear the costs without recourse to the assets of SBH.

38. The application for leave to amend was withdrawn.

39. Therefore the case must be decided on what I consider to be a most unsatisfactory basis. It is not open to the plaintiffs to rely upon s 553C(2), notwithstanding that on the evidence adduced it is clear, and was accepted by Mr Parish, that Joseph Cummins had notice at the time of the assignment of the debt that SBH was insolvent. Moreover, Joseph Cummins’ evidence as to the circumstances said to give rise to Ivan’s holding half of the SBH debt on a constructive trust for him is unchallenged and uncontradicted, notwithstanding that contradictory evidence was available. Joseph Cummins was not cross-examined on this issue. It is not profitable to speculate why the liquidator or his advisers took these forensic decisions.

40. Joseph Cummins did not dispute that he owed some amount on his loan account with SBH, but he disputed the amount claimed.

41. The issues are:

1.   the quantum of that debt;

2.   whether Ivan held the SBH debt on a constructive trust for Joseph as to a 50 per cent share of the debt;

3.   if so, whether that beneficial interest arose before the commencement of the winding-up of SBH (that being the relevant date for the purposes of s 553C); and

4. if so, whether pursuant to s 553C(1) Joseph Cummins can set off against the debt owed by him to SBH his beneficial interest in 50 per cent of the debt owed by SBH to Ivan.

Quantum of debt owed by Joseph Cummins to SBH

42. Mr Jones deposed that on his inspection of the MYOB records of SBH, Joseph Cummins maintained a director’s loan account that operated as a running account in the period from 1 July 2010 to 30 June 2012. He produced financial statements for SBH for the year ended 30 June 2012 that were unsigned by the directors, but compiled by an accountant, Ms Julie Johnston of Johnston Associates Pty Ltd. She signed the compilation report dated 7 March 2014 stating that:

“We have compiled the accompanying special purpose financial statements of SBH Australia Pty Ltd for the year ended 30 June 2012 on the basis of information provided by the directors.”

43. According to the financial statements as at 30 June 2012, SBH had net assets of $1,622,440. This was represented by total current assets of $2,655,190 and total current liabilities of $1,032,750. Of the total current assets of $2,655,190, $2,611,843 was said to be receivables that included loans to directors, being Joe Cummins ($1,076,817) and Ivan Cummins ($316,252). Mr Jones produced a MYOB account called “Joe Cummins Loan Account” from 9 December 2010 to 23 April 2012 that showed that in that period there had been debits to the loan account totalling $2,859,221.97 and credits totalling $1,863,767.92. The difference is $995,464.05. That record of Joseph Cummins’ loan account stopped at 23 April 2012. Mr Jones produced a document called “General Ledger (Summary)” for the period from 1 July 2012 to 27 February 2015. That stated that the balance of Joseph Cummins’ loan account as at 1 July 2012 was $1,020,600.66, which balance was unchanged.

44. The financial statements were prepared by Ms Johnston, but up until 30 April 2012 the books from which the financial statements were prepared were kept by a Ms Jane Burns. An accountant in the employ of the liquidator, a Mr Smith, wrote to Ms Johnston on 28 September 2015 and noted that there were variances between the MYOB file and the financial statements prepared by Ms Johnston in respect of the director loan accounts. In the case of Joseph Cummins’ account, Mr Smith noted that according to the MYOB statement of 30 June 2011 Joseph Cummins’ loan was $1,309,870.64, but according to the financial statement it was $1,376,965. As at 30 June 2012 the loan account according to the MYOB statement was $1,020,600.66, but according to the financial statement it was $1,076,817. He asked for Ms Johnstone’s assistance in confirming details of the variances and copies of any supporting documentation.

45. Ms Johnston replied the following day and attached “workings on how the balances were derived”. The attached working, in so far as it related to Joseph Cummins’ loan account was as follows:

“SBH Australia Pty Ltd
Movements in Directors Loans for 2011 & 2012
Loan J Cummins	Notes
Opening Balance 01/07/2010	0.00
Movement as per MYOB file used for financials	1,310,060.64	2
Journal re amounts taken as dividends moved to loan account as not enough imputation credits Also to ensure that same amount shown for each shareholder as same class held.	66,904.36	1
Balance shown in Financials 30 June 2011	1,376,965.00
Opening Balance 1 July 2011	1,376,965.00
Movement as per MYOB file	-289,269.98
Journal re final wages paid to J burns as advised	-10,877.63
1,076,817.39

Notes

1. These amounts in original MYOB file were all classified as dividends paid Account code 9-8500

2. In relation to the variance of $190.00 in MYOB files unsure what this represents. It appears to have been transferred from one loan account to the other”

46. Mr Smith asked for further assistance saying that he was unable to reconcile the balances between the general ledger summary and the account history balance. He also asked whether Ms Johnston still had a copy of the MYOB data file used to prepare the financial statements in her possession, and if so to forward a copy to the office of Jones Partners. In reply, Ms Johnston stated:

“In relation to your query regarding the discrepancies between the reports that you have for the directors loans and those used by this firm to prepare the 2011 financials I am attaching the following:

1.   Copy of the MYOB file that we were given to prepare the 2011 financials;

2.   The figures appearing in the 2011 financials are in accordance with those transactions plus also the amounts transferred to the loan accounts due to the lack of franking credits that was available in relation to dividends; this was explained in my previous email

3.   Copies of reports taken from the file that was used by us to prepare the 2011 financials and compared to the reports supplied by you in your email, showing the variances (highlighted) and also that the first entry on I Cummins loan dated 1/2/2011 has changed;

4.   Note that there were no opening balances in the directors loans as at 30 June 2010. Therefore the transactions that occurred in the 2011 financial year were the first. However when I take the movement in each loan for the year ended 30 June 2011 this does not agree with the opening balance shown on General ledger Summary dated 1/7/11 to 31/7/2012;

5.   The 2012 financials show the loan balances starting with the closing balance as at 30 June 2011 (financials) and the movement as per the reports. There was only one adjustment to J Cummins loan account as I was informed that he had paid the final pay to J Burns on her termination.”

47. The attached MYOB file for the Joseph Cummins loan account showed numerous debits and credits from 4 July 2011 to 23 April 2012. The debits totalled $783,938.07 and the credits totalled $1,073,208.05. The net activity up to 23 April 2012 was a credit of $289,269.98 giving an ending balance of $1,020,600.66.

48. The following may be noted about these explanations. First, the amount of the debt shown in the financial statement for the year ended 30 June 2012 is derived from the MYOB files recording debits and credits up to 23 April 2012, subject to two adjustments identified in Ms Johnston’s working set out at [45] above plus an unexplained variance of $190.

49. Secondly, the debt was reduced by the figure of $10,877.63 to reflect a payment of final wages to Ms Burns made by Joseph Cummins that is not reflected in the MYOB account.

50. Thirdly, the loan debt was increased by $66,904.36 on the basis that originally that amount was taken as a dividend and so classified, but then moved to the loan account because there were not enough imputation credits (presumably, not enough imputation credits that Joseph Cummins could use to set off against the tax payable on the dividend). In final submissions Mr Fermanis said that the explanation provided by an accountant instructing him, presumably from the office of Jones Partners, was that:

“The $69,904.36 represents a dividend that was taken in relation to a dividend [sic] and was recorded in the MYOB account as a dividend. What subsequently happens is, it’s moved, it’s reclassified as … a debit against the loan account for the directors rather than as a dividend, because there weren’t enough imputation credits to classify them as a franked dividend.”

51. This is entirely consistent with Ms Johnston’s explanation. However, financial statements should provide a true and fair view of what the company’s financial affairs were, not a view of how an accountant or the directors might like them to have been. A shareholder is entitled to a dividend if it is declared. A dividend once declared creates a debt owed by the company to the shareholder. If the declared dividend were taken, it was income in the hands of Joseph Cummins that he would have been required to declare in his income tax return. Ms Johnston did not say that the dividend had not been declared. She said it had been taken. The dividend could not properly be reclassified after the event (apparently years after the event) as a drawing on the loan account. This adjustment made by Ms Johnston to the balance showed on the loan account should be reversed.

52. Mr Parish submitted that a credit should be allowed for payments made out of Joseph Cummins’ personal bank account on 30 April 2012. There were six such payments. Three payments were described as “Sbh Wages” in sums of $306.30, $1,201.54 and $9,369.79. Those figures add up to $10,877.63 which was the credit allowed in Ms Johnston’s workings in which the payments were described as payment of wages for Ms Burns. Of the three other sums, only one can be identified as being a payment made to SBH or on its behalf. That is a payment of $3,116. Joseph Cummins should be allowed a further credit for that sum. The $190 variance apparently existing between two sets of MYOB accounts has not been explained. The liquidator has not proved the higher figure. The result is that the debt established from the financial records of SBH is that recorded in the MYOB loan account ledger as at 23 April 2012, being $1,020,600.68 less $10,877.63 and less $3,116, a total of $1,006,607.05.

53. Joseph Cummins contended that further credits should be allowed. He said that between 2004 and 2009 he mortgaged a property he owned and paid the money raised into “the group of companies” for the money to be distributed wherever there was a current need. He said that a payment of $351,414.98 made by SBH to clear the balance owing on his mortgage that was treated as a debit to the loan account should not have been so recorded, but should have been recorded as a repayment of a loan or loans that he had made to the group of companies. He said that three further amounts of $2,565.69 made by SBH in January, February and March 2011 were debited to his loan account but should not have been as they were repayments of a loan that he had made to the group of companies.

54. There was no evidence that payments made by Joseph Cummins to other group companies were paid on behalf of SBH so as to give SBH any claim against another group company or to reduce any liability SBH had to another group company. Payments by Joseph Cummins of debts owed by other group companies would not reduce his debt to SBH. It would reduce any debt he owed to the other group company on whose behalf a payment was made or create a debt owed by that company to him. There was no evidence that any payment made by Joseph Cummins prior to 23 April 2012 on behalf of SBH was not properly recorded in the company’s records of the loan account. Ms Burns gave evidence as to how the loan account was kept and I accept that it was properly kept. Her evidence to the effect that the loan account was properly kept was not shaken.

55. Under s 1305 of the Corporations Act a book kept by SBH under a requirement of that Act is prima facie evidence of matters stated or recorded in the book. The MYOB loan account was a book kept by SBH in order to comply with the requirements of s 286 that a company keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited. It was common ground that the books were prima facie evidence of the debt owed by Joseph Cummins. Except to the extent indicated earlier in these reasons, the prima facie effect of the records has not been displaced.

56. The plaintiffs claim interest on the debt only from 28 October 2015. It was not disputed that the debt was repayable on demand. On 20 October 2015 Holman Webb, lawyers for the plaintiffs, demanded payment of a sum of $1,076,817.39 within seven days. Interest is only claimed from the expiry of that period. A cause of action for recovery of a present debt payable on demand arises on the making of the advance (Young v Queensland Trustees Limited (1956) 99 CLR 560 at 566; Ogilvie v Adams [1981] VR 1041). Nonetheless, interest is not sought from the dates on which the cause of action for the recovery of the debt arose but from the expiry of the period for compliance with the demand.

Beneficial ownership of the assigned debt

57. It is not in dispute that Joseph Cummins is presently beneficially entitled to 50 per cent of the assigned debt. For Joseph Cummins to be entitled to rely upon the statutory set-off under s 553C, he must establish that as at the commencement of the winding-up of SBH he had an interest in the debt owed by SBH to EcoCivil that was assigned to Ivan Cummins. It may be noted that Ivan did not become the legal owner of the debt prior to the commencement of the winding-up of SBH. No notice under s 12 of the Conveyancing Act 1919 (NSW) was given by Ivan to SBH. The directors of SBH were Ivan and Joseph and Joseph was unaware of the assignment to Ivan until June 2015. But the assignment to Ivan, being for valuable consideration that was paid, would be effective in equity to give Ivan a beneficial interest in the debt, being an interest amounting to equitable ownership, except to the extent that Ivan held his beneficial interest on trust for Joseph.

58. The question of whether Joseph had a beneficial interest in the debt owed by SBH to EcoCivil that entitles him to rely upon an automatic set-off under s 553C(1) is to be determined as at the commencement of the winding-up of SBH (Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85, 98-99 Mason J; Derham on the Law of Set-off (4th ed, 2010, Oxford University Press at [6.53]). That was the day on which the winding-up order was made (Corporations Act, s 513A(e)), namely 3 October 2014.

59. For the reasons which follow I conclude that as at that date Ivan held half of the SBH debt on a constructive trust for Joseph that gave Joseph a beneficial interest in half the debt. The extent of that beneficial interest was commensurate with the equitable relief which would then have been available to Joseph. The equitable relief then available to Joseph would have been conditional upon his paying either directly, or by way of adjustment to his loan account with Glengrant if that were possible, his share of the consideration payable for the purchase of the debt. Whilst he had a beneficial interest in half of the debt, that interest did not amount to equitable ownership (Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639, 655 (Mason P).

60. Joseph Cummins has acquired equitable ownership of half of the debt by the terms of the settlement deed and payment of the consideration provided for by that deed. But that is too late for the purposes of a set-off under s 553C. Whether a beneficial interest falling short of equitable ownership, but which may mature into equitable ownership, is sufficient to establish a mutual credit, mutual debt or other mutual dealing within the meaning of s 553C(1) is dealt with below.

61. It was a Mr Scott Jackman who had the idea that Ivan and Joseph should buy from EcoCivil the debt owed to EcoCivil by SBH. He was retained in about the end of 2010 or the start of 2011. At that time Joseph’s relationship with Ivan had broken down and they were not speaking. Joseph accused Ivan of misappropriating moneys from the group companies. They met Mr Jackman separately. By the time Mr Jackman was engaged Glengrant’s business and assets had been sold. According to Joseph Cummins, this left Glengrant with a surplus of about $2.7 million. Joseph understood Mr Jackman to be acting on behalf of both him and Ivan. He assumed that if he gave Mr Jackman instructions and Mr Jackman did not tell him that Ivan disagreed, then Mr Jackman would have received instructions from Ivan to pursue the same course.

62. Mr Jackman operated a business under the name Solutions Financial Consultants. On 4 February 2013 he wrote to Mr Malanos, the liquidator of EcoCivil. He referred to correspondence and an advice to creditors sent by Worrells dated 18 December 2012. Those documents are not in evidence. In response to them Mr Jackman said that based upon EcoCivil’s MYOB accounts dated 3 December 2012 EcoCivil owed SBH $339,482.25, whereas Worrells had stated in its correspondence of 30 November 2012 that SBH owed EcoCivil $857,496.96. The variance was said to be the provision of funding by SBH to EcoCivil between July 2010 and 11 November 2010 and additional hire charges raised by SBH to EcoCivil for the period August to October 2010. Between February and July 2013 the position taken by Mr Jackman changed.

57. On 31 July 2013 Mr Jackman advised Joseph Cummins that :

“d)   Prior to handing the books of EC over to Worrells we identified the $3,000,000 investment in Eco Civil (Australia) Pte Ltd (‘ECA’) in the accounts as well as debt owed by ECA of $282,000. It was suspected at this time that the company ECA was never properly formed and indeed a major proportion of the $3,282,000 represented part purchase in shoring boxes, ultimately used by SBH. Given that this would result in monies owing from SBH to EC and that we anticipated a sale of SBH assets would deliver a surplus, it was decided to leave the accounts as they were, as it was considered that in the best case scenario, an investigation may not have uncovered the application of these funds.

Update from Worrells

As a consequence of Worrell’s almost finalising their liquidation investigation, they searched for ECA and believe that this company does not exist. Initially they sought to apply the $3,282,000 in net monies attributed to this company as a debt owing by the directors.

Upon recognition of this risk, I have put to them that this amount is actually a debt owed by SBH, on account for the monies being applied to purchase shoring boxes. They now seem willing to entertain this debt as amounts owing by SBH.”

64. On that basis Mr Jackman summarised what he said was the financial position of Glengrant and SBH according to the financial account:

Note	GG	SBH
Estimated loan to EC	-$2,939,235
Cash at bank	$4,874
Term deposit	($2,378,834 @ 5% for 2 years)	$2,622,664
GST & PAYG	From sale to Coates – not yet lodged	-$915,545
Company tax account	$33,470
Equipment	See Appendix D	$965,000	$500,000
Potential EC dividend	See notes above	$197,382
NET ASSETS EX DIRECTORS LOANS	$3,789,920	-$3,321,310
Loan account – I Cummins	See Appendix F for SBH drawings	$565,031
Loan account – J Cummins	$196,007	$1,277,437
NET ASSETS	$3,985,927	-$1,478,842

65. Mr Jackman proposed that an offer be made to buy related-party debts from Worrells for ten cents in the dollar. He said:

“3)   Worrells should accept $0.10 in the $1.00 for the settlement of this loan as there is no better method of seeking a higher level of funds for the creditors. Whilst $0.10 in the $1.00 may seem low, I believe Worrells could accept this level to ensure that the funds are returned to creditors ASAP.

2 [sic]   Whilst the debt owed by SBH only cost you $293,900 is still worth a theoretical $2,939,000 and this could be applied to wipe out your personal loans owing to SBH, leaving SBH insolvent with no assets and able to be wound up without funding the GST from the sale to Coates.”

66. On 5 August 2013 Mr Jackman wrote to Joseph Cummins. Amongst other things, he said that:

“… there is still amounts shown on account to eco-civil aust, which have been unable to be traced and also an expected GST liability I win [sic] by SBH from the sale to Coates which present material risk to you. Having met with Worrall’s in Sydney recently I lay foundation a tentative plan which I’ve detailed in the attached letter that I believe will eliminate these last two risks leaving only the assets of Glen grant and resolved for yourself and Ivan to work through. [sic]”

The attached letter was not identified but I infer that it was the letter dated 31 July 2013 referred to above.

Joseph replied:

“While I have read your report I do not agree with the figures regarding Ivan’s liabilities. By agreeing to settle with the liquidator @10 cents in the dollar I am in not under any circumstances agreeing that Ivan’s share share of loans to Eco civil is finalised. The extra monies that he took out of Eco Civil will be deducted from the final wash out of the dividends from SBH and Glengrant Civil. The companies Eco civil, Glengrant Civil SBH Eco Civil Australia. And I and J Cummins unit trust. Were and are all part of one another for the purpose of administration. All monies in loans or otherwise and the value of equipment held by both of us will be evaluated and the distribution of the remaining funds to reflect what each party is entitled to bearing in mind that Ivan and I had equal shares and all monies to be divided on a 50/50 basis. Again I must stress that the settlement with Worrels do not negate my claims against Ivan’s share of monies from. Eco Civil and will be reflected in the final washout of SBH and Glengrant. [sic]”]

67. By letter dated 9 August 2013 from Solutions Financial Consultants but in the names of Joe and Ivan Cummins, they offered to purchase the debt of $2,939,000 from the liquidator of EcoCivil for $293,900. (The letter described SBH as the creditor rather than the debtor. That was plainly a mistake.)

68. The meeting of creditors of EcoCivil was convened to be held on 2 September 2013. On 15 August 2013 Ms Burns, who was then working for Ivan, sent an email to Ms Johnston stating that Worrells was seeking reports on whether SBH had any assets so that they could advise the creditors. Ms Burns had possession of Ivan’s laptop that included MYOB accounts for SBH. She wrote to Ms Johnston stating that the MYOB file that Scott (that is, Mr Jackman) had was the one that Ms Burns sent to him when she left on 30 April 2012 and it showed that there were still assets in the file. Ms Johnston replied the next day attaching unsigned 2011 financial statements for SBH as requested and observing that “the financials are showing that the only asset held is a computer.” The financials attached were not in evidence. Curiously, SBH’s financial statements for the year ended 30 June 2012, which include comparable figures for the year ended 30 June 2011, which were compiled by Ms Johnston and dated 7 March 2014, did not include a debt of $2,939,000 owed by SBH to EcoCivil.

69. On 20 August 2013 Mr Jackman sent an email to Ms Johnston and to Ms Burns with copies to Joe and Ivan. He wrote:

“Looking at SBH Worrells have sought clarification around the balance sheet items in Ecocivil Pty Ltd that showed $3,000,000 in shares in Eco Civil (Australia) Pte Ltd and also the current loan to this entity for $281,521.

Given that no evidence of this entity exists they were to apply these amounts against the directors[‘] loan accounts, however we have demonstrated to them that these amounts were in fact used by SBH for the acquisition of shoring boxes.

With this taken it means SBH owes Ecocivil Pty Ltd almost $3,000,000 net and I intend to provide the statement of affairs for SBH to mirror this (note I will not provide the balance sheet as prepared by you, but instead use this as a basis of providing a statement of affairs with the adjustment noted above).

Given this transaction I believe that plant and equipment in SBH will be understated and as such the profit on sale of plant and equipment can reduce demonstrably. We will need to have you complete the entries in SBH that mirror those adjustments out of Ecocivil as being expenses and equipment purchase in SBH.

I also note in the accounts that you sent that the following loan accounts appear owing to SBH:

1. Joe Cummins      $1,376,965

2. Ivan Cummins      $315,828

3. Eco Civil Pty Ltd   $762,585    (we need to consolidate this with the debtor and creditor amounts as well as the Eco Civil (Australia) Pte Ltd amounts noted above

4. Bulimba Civil Pty Ltd   $307,044   these need to move onto Ivan’s personal loan account

5. Glengrant Civil Pty Ltd   $930,263   I need to understand these transactions, however suspect that they will need to be split evenly onto Joe and Ivan’s loan accounts.

These adjustments are necessary as with an additional $3,281,521 owing by it, SBH is obviously insolvent and need to be wound up.

The deal I have put to Worrels involves Joe and Ivan buying the debt owed by SBH to Eco Civil for $0.10 in the $1.00 and if it is successful will see SBH then owe them the approx.. $1,500,000 each which will wipe out their individual loan accounts and mean that we can liquidate SBH with minimal risk.”

70. I have set out this correspondence in detail as it throws an interesting light on how the insolvency laws are applied in practice.

71. The potential flaw in Mr Jackman’s proposal was that if Ivan and Joseph had notice that SBH was insolvent at the time of the assignment, they would not be entitled to set off the assigned debt against debts they owed SBH by reason of s 553C(2) (Southern Cross Construction Limited (in liq) v Southern Cross Club Limited [1973] 1 NZLR 708 at 713; Derham on the Law of Set-off at [6.99]). In the events that have happened this objection was not pleaded as an answer to Joseph’s claim to a set-off.

72. On 2 September 2013 the meeting of creditors resolved “that the debt owed to the company by SBH Australia Pty Ltd in the sum of $2,939,235 be compromised and the offer to settle the amount in the sum of $293,900 be accepted”. The resolution was passed on Mr Malanos’ exercising a casting vote. It was opposed by the largest creditor, the Australian Taxation Office.

73. Joseph and Ivan did not communicate with each other directly. But they both agreed to Mr Jackman’s proposal that together they purchase what was ultimately accepted to be a debt owed by SBH to EcoCivil. The agreement between Joseph and Ivan to take an equal assignment of the debt said to have been owed by SBH to EcoCivil can be inferred (Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [71]-[81]). As noted above, the existence of that debt was admitted by the plaintiffs in their defence to cross-claim.

74. In the absence of any evidence of any excuse for Ivan to purchase the debt wholly in his own name, it must be inferred that not only was there a tacit agreement between Joseph and Ivan that both men would take the assignment of the debt, it should also be inferred that Ivan understood that when Joseph signed the authority for the transfer of the purchase price of the debt from Glengrant to EcoCivil he did so in the expectation that he would be entitled to 50 per cent of the debt. I can draw that inference more readily because the plaintiffs, who might have been expected to call Ivan, did not do so.

75. I do not infer that at the time the assignment was taken Ivan and Joseph had a common intention that Joseph would acquire a 50 per cent beneficial interest in the assigned debt. The fact that the deed of assignment that pre-dated the transfer of funds named only Ivan as the assignee of the debt indicates that Ivan intended that he alone would have a beneficial interest in the debt. However, the absence of a common intention does not preclude the imposition of a constructive trust, or more accurately, the recognition that the circumstances give rise to a constructive trust (Secretary, Department of Social Security v Agnew (2000) 96 FCR 357 at 363; [2000] FCA 59 at [12]). The ultimate basis for the recognition of a constructive trust is that it would be unconscionable for the holder of the legal title to the property in question (or in this case, the equitable owner of the property in question) to assert that he holds it free of any beneficial interest in the claimant. Although “unconscionability” is the underlying basis upon which equity will intervene, it is not a sufficient description of the principles upon which equity does so (Muschinski v Dodds (1985) 160 CLR 583 at 615-616).

76. One recognised class of case in which equity will intervene is where the parties have agreed that the claimant should have an interest in the property acquired by the other and has acted to his or her detriment on the basis of that agreement (Grant v Edwards [1986] Ch 638; Green v Green (1989) 17 NSWLR 343; Maharaj v Chand [1986] AC 898 at 907; Lloyds Bank plc v Rosset [1991] 1 AC 107 at 129). Another basis is that expounded by Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428, namely:

“Silence will support an equitable estoppel only if it would be inequitable thereafter to assert a legal relationship different from the one which, to the knowledge of the silent party, the other party assumed or expected: see Ramsden v Dyson, at 140–1; Svenson v Payne (1945) 71 CLR 531 at 542–3; Willmott v Barber (1880) 15 Ch D 96, at 105–6. What would make it inequitable to depart from such an assumption or expectation? Knowledge that the assumption or expectation could be fulfilled only by a transfer of the property of the person who stays silent, or by a diminution of his rights or an increase in his obligations. A person who knows or intends that the other should conduct his affairs on such an assumption or expectation has two options: to warn the other that he denies the correctness of the assumption or expectation when he knows that the other may suffer detriment by so conducting his affairs should the assumption or expectation go unfulfilled, or to act so as to avoid any detriment which the other may suffer in reliance on the assumption or expectation. It is unconscionable to refrain from making the denial and then to leave the other to bear whatever detriment is occasioned by non-fulfilment of the assumption or expectation.”

77. Here, Ivan knew that Joseph assumed that he was, or expected that he would be, entitled to half of the benefit of the assigned debt. He knew that Joseph could suffer detriment by conducting his affairs on that assumption or expectation. Yet, Ivan remained silent. I infer that he believed, in accordance with Mr Jackman’s advice, that he and Joseph would not be liable to repay their loan accounts with SBH if they took an assignment of the debt. That is, I infer that Ivan’s understanding was that Joseph would have an answer to a claim for recovery of the debt owed on his loan account with SBH if he took an assignment of half of the SBH debt. I accept Mr Parish’s submission that Joseph did two things to his detriment, namely agreeing to the payment of money out of Glengrant that he thought was to be used to purchase for his benefit almost $1.5 million of the debt and, secondly, that he took no other steps to ensure that the debt was effectively transferred to him because he thought that the debt had been effectively transferred.

78. These grounds are sufficient to give rise to a constructive trust that bound Ivan to hold his interest in the assigned debt for the benefit of Joseph as to a one-half share.

79. The trust arose in December 2013 when the acts and omissions that constituted detrimental reliance occurred (Secretary, Department of Social Security v Agnew at [18]-[19]; Parsons v McBain (2001) 109 FCR 120; [2001] FCA 376 at [9]-[13]). In Parsons v McBain the Full Court of the Federal Court noted that the equitable interest arising under a constructive trust may be defeated, or may be made to defer to later claims, by conduct which would “operate and enure to forfeit and to take away the pre-existing equitable title” (Shropshire Union Railways & Canal Company v The Queen (1875) LR 7 HL 496 at 506). No evidence of such conduct was adduced. It is unnecessary to speculate what the position would have been if, for example, Joseph had agreed to a distribution of Glengrant’s assets on the basis that only Ivan’s loan account would be debited with the payment made by Glengrant for the assignment of the debt. It appears from the report of the liquidator of Glengrant referred to at [14] above that that was a scenario the liquidator contemplated might occur. If it did occur the liquidator could be expected to have adduced evidence of it. He did not.

80. It follows that at the commencement of the winding-up of SBH Joseph Cummins had an equitable interest in the assigned debt. It does not follow that that interest was an interest in the nature of equitable ownership. As Brennan J said in Waltons Stores (Interstate) Ltd v Maher (at 419), the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct. Prima facie that will require the party estopped (Ivan) being precluded from denying the assumption adopted by the other party (Joseph) and being required to give effect to that assumption (Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10). But equity would only do so on terms that Joseph pay half the consideration for the assignment either directly or by an equal debiting of his loan account with Glengrant. That Joseph had insisted to Mr Jackman that there be an ultimate accounting for both Ivan’s and his debits and credits with all of the group companies as if they were a single entity is not inconsistent with this, nor inconsistent with the recognition of a constructive trust. Mr Fermanis did not contend otherwise.

81. The position of Joseph is analogous to that of a purchaser under a contract capable of specific performance who has not yet paid the purchase price. Although it has been said that the vendor under such a contract holds the property on trust for the purchaser, the interest of the purchaser is not the interest of an equitable owner. Rather, the purchaser’s equitable interest is commensurate with the extent to which equitable remedies are available to protect his or her contractual rights (Legione v Hateley (1983) 152 CLR 406 at 446; KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1984) 155 CLR 288 at 300; Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 191–192; Stern v McArthur (1988) 165 CLR 489 at 522–523; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252–3).

Mutual set-off under s 553C(1)

82. The issue is whether Joseph’s equitable interest, as I have described it, in the assigned debt is automatically set off under s 553C(1) against the debt owed by him on his loan account with SBH as a mutual credit or mutual debt within the meaning of s 553C.

83. Mr Fermanis submitted that this was not the only question. He contended that notwithstanding that the plaintiffs had not pleaded s 553C(2) it was open to the plaintiffs to rely upon the fact that according to the evidence adduced in the case, at the time of the assignment, Joseph had notice that SBH was insolvent at the time of the assignment. In Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 the High Court said (at 618-619):

“It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson (1843) 12 M and W 191, at 204 [152 ER 1165, at 1171], ‘to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate’. Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having one hundred cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the ‘mutual credits’ and ‘mutual debts’, and later ‘mutual dealings’, provisions were introduced into bankruptcy legislation (see, e.g., In re Daintrey; Ex parte Mant [1900] 1 QB 546, at 572-573; Day and Dent EConstructions Pty Ltd v North Australian Properties Pty Ltd E(1982) 150 CLR 85, at 95). To the extent necessary to achieve that legislative purpose of ‘substantial justice’ to the parties, it is established by authority that a provision such as s86 of the Act should be given ‘the widest possible scope’ (see, e.g., per Mason J, Day and Dent Constructions, at 108, quoting Lord Esher MR in Eberle's Hotels and Restaurant Company v Jonas (1887) 18 QBD 459, at 465).

On the other hand, ‘substantial justice’ requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness (see, e.g., Day and Dent Constructions, at 95). Thus, it is established by the cases that set-off under a provision such as s86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond (see, e.g., In re City Life Assurance Co [1926] Ch. 191, at 216-217; Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468, at 497). In so far as manipulation of or set-off by a debtor of the bankrupt to avoid payment to the trustee is concerned, s86(2) provides protection in a case where the relevant steps have been taken before bankruptcy but after notice of an available act of bankruptcy.” (Emphasis added.)

84. Mr Fermanis submitted that in the passage underlined above the High Court was saying that irrespective of s 553C(2), if after notice of an act of bankruptcy a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness, then the debt and credit are not genuinely mutual as a matter of substance, and therefore subs (1) of s 86 of the Bankruptcy Act 1966 (Cth) (the equivalent of subs (1) of s 553C of the Corporations Act) is not satisfied.

85. Mr Parish submitted that in the passage quoted above the High Court was describing the effect of the whole of s 86 including subs (2) and it is by virtue of subs (2) of s 86 and subs (2) of s 553C of the Corporations Act that a debtor of a bankrupt or insolvent company cannot successfully reduce or extinguish his liability to the bankrupt or company by buying up debts of the bankrupt or the company at a discount after having notice of, in the case of a company, insolvency.

86. I agree with Mr Parish’s submission. If it were otherwise, there would be no need for subs (2) of s 553C or s 86. Section 553C and s 86 have a long history. The progenitor of what became subs (2) of s 86 and subs (2) of s 553C was first contained in the UK Bankruptcy Act of 1806 (46 George III C135). Prior to that enactment, the statute of (1732) 5 Geo II, c30) provided:

“XXVIII And be it further enacted by the Authority aforesaid. That where it shall appear to the said Commissioners or the major Part of them, that there has been mutual Credit given by the Bankrupt and any other Person, or mutual Debts between the Bankrupt and any other Person, at any time before such person became Bankrupt … and one Debt may be set against the other.” (emphasis added)

87. The preamble to the 1806 Act stated:

“WHEREAS great Inconveniences and Injustice have been occasioned by reason of the fair and honest Dealings and Transactions of and with Traders being defeated by secret Acts of Bankruptcy in Cases not already provided for, or not sufficiently provided for by Law. …That in all Cases of Commissions of Bankrupt hereafter to be issued, all Conveyances by, all Payments by and to, and all Contracts and other Dealings and Transactions by and with, any Bankrupt bon fide made or entered into more than Two Calendar Months before the Date of such Commission, shall, notwithstanding any prior Act of Bankruptcy committed by such Bankrupt, be good and effectual to all Intents and Purposes whatsoever, in like Manner as if no such prior Act of Bankruptcy had been committed, provided the Person or Persons so dealing with such Bankrupt had not at the Time of such Conveyance, Payment, Contract, Dealing or Transaction, any Notice of any prior Act of Bankruptcy by such Bankrupt committed, or that he was insolvent, or had stopped Payment …” (emphasis added)

88. The 1806 Act provided that:

“III. … in all Cases in which, under Commissions of Bankrupt hereafter to be issued, it shall appear that there has been mutual Credit given by the Bankrupt and any other Person, or mutual Debts between the Bankrupt and any other Person, one Debt or Demand may be set off against another, notwithstanding any prior Act of Bankruptcy committed by such Bankrupt before the Credit was given to, or the Debt was contracted by such Bankrupt, in like Manner as if no such prior Act of Bankruptcy had been committed, provided such Credit was given to the Bankrupt Two Calendar Months before the Date and suing forth of such Commission, and provided the Person claiming the Benefit of such Set-off had not at the Time of giving such Credit any Notice of any prior Act of Bankruptcy by such Bankrupt committed, or that he was insolvent or had stopped Payment: Provided always, that the issuing of a Commission of Bankrupt against such Bankrupt, although such Commission shall afterwards be superseded, or the striking of a Docket for the Purpose of issuing a Commission against such Bankrupt, whether any Commission shall have actually issued thereupon or not, shall be deemed Notice of a prior Act of Bankruptcy for the Purposes of this Act, if it shall appear that an Act of Bankruptcy had been actually committed at the Time of issuing such Commission or striking such Docket.” (emphasis added)

89. Section 3 of the 1806 Bankruptcy Act was the progenitor of what is now subs (2) of s 553C of the Corporations Act. In Derham on the Law of Set-off at [6.39] the learned author described the effect of the 1806 Act as follows:

“6.39 It was a feature of the early legislation that there could only be a set-off if the mutual debts or mutual credit existed ‘at any time such person became bankrupt’, by which was meant when an act of bankruptcy was committed. In 1806 the legislation was amended so as to offer some protection in the event that the person giving credit to the bankrupt was not aware of the commission of an act of bankruptcy. Subject to two qualifications, s. 3 of the statute (1806) 46 Geo III, c. 135 allowed one debt or demand to be set against another notwithstanding that a prior act of bankruptcy had been committed by the bankrupt before credit was given to or a debt contracted by the bankrupt. The qualifications were that the section only applied when the credit was given to the bankrupt at least two calendar months before the date of the commission, and the person claiming the set-off must not have had notice of an act of bankruptcy committed by the bankrupt at the time of giving credit or notice that he or she was insolvent or had stopped payment.”

90. The 1806 amendment was introduced because the earlier statute providing for a set-off where there had been mutual credits and mutual debts between the bankrupt and the person with whom the bankrupt was dealing was insufficient to deal with the case where the person giving credit to the bankrupt had notice, or did not have notice, of a prior act of bankruptcy or of insolvency.

91. If, as Mr Fermanis submitted, questions of notice were subsumed in the notion of mutual credit and mutual debit, there would have been no need for legislative change.

92. Mr Fermanis submitted that Joseph Cummins could not take the benefit of subs (1) of s 553C which is expressed to be subject to subs (2) and then ignore subs (2). But this depended upon what was put in issue. In this case, that depends upon the pleadings. When he sought leave to amend Mr Fermanis accepted (as he was bound to do) that the rules required that the plaintiffs plead s 553C(2) if it were to be relied upon in answer to Joseph Cummins’ defence.

93. In his written submissions Mr Fermanis’ only point in relation to s 553C was that:

“41.   The right of an equitable assignee of a chose in action being one against the assignor rather than the debtor, the equitable assignee cannot exercise a contractual right against the debtor.

…

43.    There must be a relationship of mutual dealings between the debtor and the creditor. The dealings must be such that they are capable of giving rise to, and subsequently do give rise to mutual claims at the time of the winding up of SBH. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set-off.

44.   If Joseph is the equitable assignee as alleged by him, he cannot be said to be the debtor. Having regard to the above, it is impossible to see how there can be a level of mutuality between the alleged creditor, EcoCivil, and the alleged debtor, SBH in regards to Joseph’s debt arising from the director loan. It follows that it is more likely that the offset (if any) under section 553C would – but for subsection (2) – be between EcoCivil and SBH. It would also follow that relief under section 553C is unavailable to Ivan lest he make such a claim.”

94. In other words the plaintiffs contended that there could not be mutuality between a debtor of the company whose debt the company could enforce at law and the same person who had only an equitable interest in the debt owed by the company. That argument is untenable. In Gye v McIntyre the High Court said (at 623):

“In the context of s86, the word ‘mutual’ conveys the notion of reciprocity rather than that of correspondence. It does not mean ‘identical’ or ‘the same’. So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered (see, e.g., Hiley, at 497). The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.”

95. As Mr Parish submitted, Gye v McIntyre holds that the focus of mutuality in credits, debits or dealings of the parties is the parties’ equitable or beneficial interests and not the legal interest.

96. In Hiley v People’s Prudential Assurance Co Limited (1938) 60 CLR 468 Dixon J said (at 497):

“In the second place, the equitable or beneficial interest of the parties in the mutual debts, credits or dealings must be considered, and not merely the dry legal right. A set-off will be allowed between a debt owing by C to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C. Correspondingly, a set-off will be refused between a debt owing by B to a liquidating company and a debt owing by it to B, if B as creditor holds the chose in action as bare trustee for C — cf. Bailey v Finch, (1871) LR 7 QB 34; Bailey v Johnson, (1871) LR 6 Ex 279 and LR 7 Ex 263; Ex parte Morier, (1879) 12 Ch D 491 at p 496; Mathieson's Trustee v Burrup, Mathieson and Co .,[1927] 1 Ch 562 at pp 568–9.”

97. In Hiley, Dixon J referred to a set-off of debts by a beneficial owner of the debt where the debt is held by the creditor of the company in liquidation as bare trustee for “C” who owes a debt to the company. This is not a case of a bare trust. Dixon J did not say that it was only where debts were held on a bare trust that the beneficial owner of a debt could rely on the statutory set-off.

98. The High Court in Gye v McIntyre spoke more widely of the focus being on the party’s equitable or beneficial interest. I was not referred to any case which has considered whether an equitable interest falling short of equitable ownership would be sufficient to give rise to a mutual set-off under s 553C(1). But in Gye v McIntyre the High Court said (at 623):

“There will, for the purposes of s86, be mutual dealings at the date of the sequestration order if there existed at that date ‘dealings’ which involved the bankrupt and the other party and which were capable of giving rise to, and subsequently did give rise to, ‘mutual’ claims between them in the sense in which the word ‘mutual’ is used in s86.”

99. The first requirement of mutuality stated in Gye v McIntyre quoted at [94] above is that the credits, the debts, the claims or the other dealings be between the same persons. That does not mean that an assignee of a debt owed by the company in liquidation cannot rely on the statutory set-off because the debt was contracted between the company and his assignor (Forster v Wilson (1843) 12 M & W 204; 152 ER 1165 at 204-205; 1167, 1171; Mathieson’s Trustee v Burrup, Mathieson & Co [1927] 1 Ch 562; Hiley at 497).

100. To achieve the legislative purpose of substantial justice to the parties, provisions such as s 553C should be given the widest possible scope so as to reflect Parliament’s intention (Gye v McIntyre at 619; Day & Dent Constructions v North Australian Properties Pty Ltd at 108).

101. In Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd, Mason J, who gave the leading judgment, said (at 104):

“It is enough that the transaction would naturally, or in the ordinary course of business, end in a debt as, for example, when property is delivered with authority to sell it and apply the proceeds in reduction of a liability or for some other purpose. It is sufficient if the sale takes place after liquidation and before the account is taken to ground the right to a set-off. The right is not defeated by the possibility at the date of liquidation that there may be no sale. It is not necessary that the transaction must of necessity result in a debt.

Moreover, Dixon J in Hiley recognized that the more recent authorities extended the principle to contingent liabilities as well as to fixed or absolute liabilities. He rightly regarded Lee & Chapman's Case(1885) 30 Ch D 216 as an instance of the application of the principle to ‘future obligations’ (60 CLR at 498). And he said (at 500) that the decision in Barrett ‘justifies if it does not require, this conclusion’. Reference should also be made to Re National Benefit Assurance Co [1924] 2 Ch 339 and Sovereign Life Assurance Co v Dodd [1892] 1 QB 405 where future debts under insurance policies maturing on the happening of a future event were the subject of a set-off. In the second of the two cases, Charles J said (at 411–12) that it was sufficient if at the commencement of the winding-up there was a contract ‘which would probably result — and has in fact resulted — in a debt due to him’, that is, the defendant bankrupt by the plaintiff company then being wound up. And in Re West Australian Lighterage, Stevedoring and Transport Co Ltd; Ex parte Bank of New South Wales (1903) 5 WALR 132 at 137, the Full Court of the Supreme Court of Western Australia held that if a liability exists at the date of commencement of the bankruptcy it is not necessary that the amount should be immediately payable on that date, it ‘is sufficient if the account can be taken when the set-off arises’.”

102. Therefore, if a contingent debt is established (through an equitable interest or otherwise), which may mature into a pecuniary demand (even if maturity is dependent upon a future event or the prospect of a future event), the debt may be capable of set-off (Hiley, Dixon J at 497; JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd (2007) 64 ACSR 633 [18]-[19]). This principle has been “endorsed by high, and for the most part, consistent authority” (Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112 at [52]-[68]).

103. Joseph Cummins’ equitable interest in the assigned debt would mature into equitable ownership of half the debt on his providing the consideration to Ivan that he was required to provide. He did provide that consideration, but only shortly before the hearing. But as at the commencement of the liquidation of SBH he had an equitable interest in the debt that would mature into equitable ownership of the debt on his providing that consideration to Ivan. In my view his equitable interest in the debt was analogous to that of a contingent creditor.

104. The plaintiffs pleaded and submitted that the debts would not be set off against each other in equity. This may be so. The issue does not arise. Joseph did not rely on equitable set-off.

105. For these reasons I conclude that Joseph is entitled to the set-off that he claims and that the plaintiffs’ claim must be dismissed. As the set-off arose automatically and does not depend on the making of an order, the cross-claim can be dismissed.

106. It will be apparent from these reasons that I reach this conclusion with considerable disquiet. It may be that if the plaintiffs had pleaded reliance on s 553C(2) other evidence might have been called by Joseph to establish that SBH was not insolvent at the time the assignment was taken, although how that might be consistently with the existence of the admitted debt of which Ivan took the assignment is not apparent. But the case must be decided on the issues as they were pleaded and the plaintiffs elected not to plead s 553C(2). They also did not challenge or contradict Joseph’s evidence that I have found established that Ivan held half of the assigned debt on trust for Joseph, although there was evidence available to challenge that conclusion. What the result would have been had that evidence been adduced is unknown.

107. For these reasons I make the following orders:

1. Give judgment for the defendant on the plaintiffs’ statement of claim.

2. Order that the plaintiffs pay the defendant’s costs.

3. Order that the cross-claim be dismissed.

4. Order as between the cross-claimant and the first and second cross-defendants the costs of the cross-claim be costs in the proceedings between the plaintiffs and the defendant.

5. No order as to costs as between the cross-claimant and the third cross-defendant.

Decision last updated: 09 May 2018