Re Eliana Construction and Developing Group Pty Ltd (in liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S CI 2017 01458

IN THE MATTER of Eliana Construction and Developing Group Pty Ltd (in liquidation) (ACN 132 817 362)

ANTHONY ROBERT CANT (in his capacity as liquidator of Eliana Construction and Developing Group Pty Ltd (in liquidation) (ACN 132 817 362)	First Plaintiff
ELIANA CONSTRUCTION AND DEVELOPING GROUP PTY LTD (in liquidation) (ACN 132 817 362)	Second Plaintiff
v
MAD BROTHERS EARTHMOVING PTY LTD (ACN 122 889 007)	Defendant

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JUDGE:	Efthim AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	29, 30 and 31 May 2018
DATE OF JUDGMENT:	1 November 2018
CASE MAY BE CITED AS:	Re Eliana Construction and Developing Group Pty Ltd (in liq)
MEDIUM NEUTRAL CITATION:	[2018] VSC 833

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CORPORATIONS – Voidable transactions – Unfair preferences – Good faith – Whether payment to creditor by related company a payment made by the debtor company – Whether debtor company a party to transaction between related company and debtor company’s creditor – ‘Transaction’ encompasses interrelated or composite dealings, including authorisation or ratification of third party payment – Whether creditor received payment in good faith – Rambaldi (Trustee) v Commissioner of Taxation [2017] FCAFC 217, Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567, Burness, In the matter of Denward Lane Pty Ltd (ACN 065 418 411) (In Liquidation) (1997) 147 ALR 281, Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281, Commissioner of Taxation v Kassem (2009) 259 ALR 339, Re Evolvebuilt Pty Ltd [2017] NSWSC 901, Hosking v Extend N Build Pty Ltd [2018] NSWCA 149, Ramsay v National Australia Bank Ltd [1989] VR 59 – Sections 9, 588FA, 588FE, 588FF and 588FG of the Corporations Act 2001 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the First Plaintiff	Mr C R Brown	White Cleland Pty Ltd
For the Defendant	Mr S V Palmer	Oakley Thompson & Co Pty Ltd

HIS HONOUR:

The first plaintiff, Anthony Robert Cant, is the liquidator of the second plaintiff, Eliana Construction and Development Group Pty Ltd (‘Eliana’). The plaintiffs seek a declaration that a payment of $220,000.00 received by the defendant, Mad Brothers Earthmoving Pty Ltd, is voidable pursuant to s 588FE(2) of the Corporations Act 2001 (Cth) (‘the Act’). They also seek an order pursuant to s 588FF of the Act that the defendant pay the plaintiffs the sum of $220,000.00.

Background

Eliana was formed in 2008 and its sole director at all times was Mr Magda Sowitha. It and other related companies carried out property development and building. Rock Development & Investments Pty Ltd (‘Rock Development’) is a related company of which Mr Sowitha was also the director and was the developer that engaged Eliana as the builder in several projects.

In November 2015, Eliana engaged the defendant to carry out earthmoving work at various sites. By March 2016, Eliana had incurred a debt of $236,952.31 with the defendant. On 23 March 2016, the defendant’s lawyers forwarded a letter of demand to Eliana demanding payment of $236,952.31. The letter stated that if the outstanding debt, together with interest and costs, was not paid by 29 March 2016 proceedings would be issued against the company and Mr Sowitha personally.

In April 2016, the defendant issued a statutory demand to Eliana in relation to the debt and Eliana did not seek to set aside the statutory demand, nor did it pay the debt. Mr Sowitha, in his witness statement, deposes that the statutory demand did not come to his attention until after the 21 days provided in the statutory demand had already elapsed.[1]
[1]Affidavit of Mr Sowitha sworn 15 March 201 at [13].

In June 2016, Eliana was served with a wind-up application by the Victorian WorkCover Authority. That application was dismissed after an agreement was made by Eliana with the WorkCover authority to pay its debts by instalments.

On 14 June 2016, the defendant issued a wind-up application against Eliana which was listed for hearing on 20 July 2016. The application was adjourned on three occasions. At the last adjournment, Gardiner AsJ adjourned the hearing to allow Eliana to produce audited accounts to demonstrate its solvency.

On the day before the return date of the winding-up application, Eliana and the defendant settled the proceeding whereby Eliana agreed to pay $220,000.00 to the defendant in full discharge of the debt. A settlement agreement was entered into between the parties. The debt was paid by Nationwide Credit Pty Ltd (‘NWC’). NWC’s facility was with Rock Development because Rock Development’s properties were provided as security for a loan from NWC.

Eliana had ceased trading and suspended its workforce in August 2016. Mr Sowitha placed the company into voluntary administration on 11 October 2016. At a creditors’ meeting on 3 November 2016, the creditors voted to place the company into liquidation and Mr Cant was appointed as the liquidator.

The legislation

The relevant provisions of the Act which relate to this proceeding are:

Section 9 transaction
“transaction”, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a)a conveyance, transfer or other disposition by the body of property of the body; and
(b)a security interest granted by the body in its property (including a security interest in the body’s PPSA retention of title property); and
(c)a guarantee given by the body; and
(d)a payment made by the body; and
(e)an obligation incurred by the body; and
(f)a release or waiver by the body; and
(g)a loan to the body;

and includes such a transaction that has been completed or given effect to, or that has terminated.
Section 588FA(1)(a) and (b)
Unfair preferences
(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;

Section 588FE(2A)
Voidable transactions
(2A) The transaction is voidable if:
(a) the transaction is:
(i)an uncommercial transaction of the company; or
(ii)an unfair preference given by the company to a creditor of the company; or
(iii)an unfair loan to the company; or
(iv)an unreasonable director-related transaction of the company; and

(b)the company was under administration immediately before:
(i)the company resolved by special resolution that it be wound up voluntarily; or
(ii)the Court ordered that the company be wound up; and

(c)the transaction was entered into, or an act was done for the purpose of giving effect to it, during the period beginning at the start of the relation-back day and ending:
(i)when the company made the special resolution that it be wound up voluntarily; or
(ii)when the Court made the order that the company be wound up; and

(d)the transaction, or the act done for the purpose of giving effect to it, was not entered into, or done, on behalf of the company by, or under the authority of, the administrator of the company.

Section 588FG(2)
Transaction not voidable as against certain persons
…
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a)the person became a party to the transaction in good faith; and
(b)at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

Here there is no dispute between the parties that there was:

-a transaction pursuant to the definition of the Act;
-that Eliana was insolvent at the time of the payment;
-that the defendant (if the payment was received from Eliana) received more than it would have in the liquidation of Eliana; and
-the defendant provided valuable consideration in relation to the debt (for the purposes of s 588FG(2)(c) of the Act).

The payment

The onus is on the plaintiffs to establish that the payment came from Eliana.

The major issue for determination is whether the payment of the $220,000.00 was made by Eliana. In the further amended statement of claim the plaintiffs plead that the payment was made by Eliana as follows:

In the period 11 April 2016 to 11 October 2016 the Company made a payment to the Defendant in the sum of $220,000.00 (“the Payment”)
PARTICULARS

On or about 16 September 2016, the Company authorised an associated entity of the Company, Rock Development and Investments Pty Ltd (“Rock”) to make the Payment to the Defendant and Rock made the Payment for and on behalf of the Company.
At the time of the Payment, Rock was a debtor of the Company.[2]

[2]Further Amended Statement of Claim dated 12 December 2017 at [5].

The plaintiff provided further and better particulars of the amended statement of claim as follows:

(a)“The payment of $220,000 (the Payment) was made by Rock Development and Investments Pty Ltd (Rock) to the Defendant on or about 15 September 2016.
(b)The authority is inferred by the fact that the sole director and shareholder of Rock at the time of the payment, Magdy Sowitha, was also the sole director and shareholder of the Second Plaintiff (the Company) at the time of payment.”

In relation to the payment, Mr Sowitha has deposed that:

I had some time earlier applied for finance from the company Nationwide Credit Pty Ltd (NWC) who I regarded as a lender of the last resort because its interest rate was 36% per annum. NWC’s facility was with Rock because Rock’s properties were provided as security.[3]

[3]Affidavit of Magda Sowitha sworn 15 March 2018 at [27].

When cross‑examined, Mr Sowitha gave the following evidence:

You asked NWC to pay the settlement sum directly to - - -?---No, I haven’t asked them. They actually put it as a condition.
Directly to the - that it had to be a condition?---They put it a condition and I haven’t settled the loan until today.
Right. So they put it as a condition that it had to go straight across to pay?‑‑‑Yes.
That was a condition, all right?---It was a condition.[4]

[4]T 92.19-26.

When re‑examined, Mr Sowitha gave the following evidence:

You said yesterday that, that MWC was a condition of theirs, that you pay the Mad Brothers debt, is that right?---Of course, if they said, this is one of the condition, if they not paying, if Eliana goes, Eliana goes, because Eliana is a guarantor as well.
So, how were you aware that that was a condition?---How I aware it’s a condition? From them, in the mortgage document.
Well, let’s look at those, so in the plaintiff’s court book, volume 2?---Or in offer I think.[5]
[5]T165.13-21.
…
All right, that’s fine. So my original question was how did you come to the understanding that it was a condition of this loan that - - - ?- - - I was expecting.
You were expecting? - - - Yeah, I was expecting because this is what, um – what had been discussed with the rep.
With who, sorry? - - - With the rep, the rep, because we didn’t deal - - -
Who was the rep? The rep for MWC? - - - Yeah. It’s – it’s a – it’s, um - - -
MR PALMER: Yes, it was discussed? - - - The rep probably is not - - -
MR BROWN: Can Mr – stop with the commentary. If you want an objection, make an objection. Sorry, go on, Mr Sowiha? - - - Yeah, the rep – the rep, um, um, or the broker –
Broker, I think is the right word. The broker – we – we – we discussed with him, and, um, um, - and, ah, he told us they – they want to pay, and Mad Brother paid.
So that’s how your understanding came about? - - - Oh, I – I – I was – yeah, I was – I was, ah, understand this in the document. [6]

[6]T167.24–168.12.

The defendant submits that there are four parties included in this transaction: NWC, Eliana, Rock Development, and the defendant. The fact that there are four parties is said to distinguish this case from the general cases involving preferences where a third party makes the payment on behalf of the company that has gone into liquidation.

In order to demonstrate that the payment is not a preference, the defendant relies on Rambaldi (Trustee) v Commissioner of Taxation (‘Rambaldi’).[7]
[7][2017] FCAFC 217.

In that case the Commissioner of Taxation filed a petition in Bankruptcy against Ms Athena Alex and a sequestration order was made against Ms Alex’s estate. The Commissioner received a bank cheque for $118,071.61. The monies in question were advanced by Quality Australia Investments Pty Ltd pursuant to a loan agreement between Quality Australia Investments Pty Ltd, Ms Alex and City Nominees Pty Ltd, a company controlled by Ms Alex. The Full Court held that the involvement of City Nominees Pty Ltd was not relevant.

Pursuant to the loan agreement Ms Alex was required to use the loan for payment of the income tax debt owed by her to the Australian Taxation Office and payment to her legal representatives.

The plaintiff, the trustee of Ms Alex’s estate submitted that the payment was void pursuant to the Bankruptcy Act 1966 (Cth) and that an order be made that the Commissioner pay the trustees the sum of $118,071.62. At first instance the primary judge dismissed the trustees application with costs. He held that the loan funds paid by Quality Australian Investments Pty Ltd were held on a Quistclose trust and did not become the property of Ms Alex.

Here the defendant also submits that there has been a Quistclose trust and that Eliana’s application should fail. A Quistclose trust may exist where a lender and borrower intend, where monies have been advanced to the borrower by the lender for a specific purpose, that the monies advanced will be a fund separate from the borrower and the lender will retain the beneficial interest in the monies that were advanced.

The defendant relies on the condition that the money borrowed by NWC was to go to the defendant. The money was not to go to Eliana. It says that Eliana had no power to direct NWC where to pay the money. Eliana also had no power to direct Rock Development where to pay the money. In such circumstances it submits that there clearly was a Quistclose trust.

In Barclays Bank Ltd v Quistclose Investments Limited,[8] the monies were paid into the debtor’s account and actually came into its hands. In Rambaldi the monies did not pass into Ms Alex’s hands. The trustee submitted that as the funds did not pass to Ms Alex there was no need to assume the creation of a Quistclose trust. The primary judge rejected that argument and held that the question was not whether there was a need for a trust at the time of payment, but whether the parties had intended that there be a trust.[9] The Full Court rejected that there was a Quistclose trust in these circumstances.
[8][1970] AC 567.
[9]See Rambaldi, [28].

As to the settlement between Eliana and the defendant Mr Sowitha deposes that:

The settlement agreement required the settlement sum to be paid directly into the Defendant’s solicitor’s Madgwicks’ trust account on 15 September 2016. I directed that NWC to pay the settlement sum directly into this trust account quoting the given reference. NWC followed my instructions and made the payment accordingly. The company subsequently recorded the transaction in its general ledger.[10]

[10]Affidavit of Magda Sowitha sworn 15 March 2018 at [28].

Here, as in Rambaldi, the payment did not pass into Eliana’s hands, but went directly to the creditor. There was no Quistclose trust as the funds passed directly to the defendant and therefore no trust came into effect.

I also note that none of the documentary evidence supports the evidence given by Mr Sowitha. None of the loan documents nor the mortgage refer to a term that the payment was to be made directly to the defendant. At best it appears that an oral representation may have been made allegedly by the broker and not by NWC. There can be no Quistclose trust here.

I note that in Rambaldi the Full Court of the Federal Court dismissed an appeal by the trustee of Ms Alex that the payment made to the Commissioner of Taxation was not void pursuant to s 122(1) of the Bankruptcy Act 1966 (Cth). The facts in Rambaldi are similar to the facts here. However, the Full Court said:

The trustees submit that a finding that there was a Quistclose trust was not inconsistent with a finding that there had been a transfer of property within the meaning of s 122. They rely upon a passage in the decision of the Full Court in Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281. That case arose under the provisions of s 588FA of the Corporations Law then in force. That provision was in similar terms to those of s 588FA of the Corporations Act 2001 (Cth). Section 122 of the Bankruptcy Act is in quite different form. It focusses on a transfer of property by the insolvent debtor in favour of a creditor. On the other hand, s 588FA focusses on a “transaction” to which the insolvent company and a creditor are parties, with or without other parties. Clearly, the word “transaction” may include many contractual or other arrangements apart from transfers. Further, under s 588FA the benefit to the creditor may not necessarily be derived from any action by the insolvent company. The decision in Emanuel focussed on the wording of s 588FA. However at 290 the Full Court said:
Finally we should indicate that in written supplementary submissions the respondent has contended that the deed on its proper construction created a trust for the payment of creditors of a type similar to that considered in [Quistclose]: on the so-called “Quistclose” trust, see Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491; 102 ALR 681; 5 ACSR 587 especially at FCR 499ff …

The Court found that the evidence did not support the submission that a trust had been created. In the present case, the trustees rely particularly upon the sentence:
All that a trust finding would do would be to change the machinery employed by the parties in extinguishing Emanuel’s debt to Blacklaw.

We see no assistance for the trustees’ case in that passage. As we understand the case, the payment by the third party lender to the creditor was made in settlement of claims between the third party lender and the debtor. Hence the payment involved a reduction in the debtor’s claim against the third party lender. Such a transaction might well satisfy s 588FA. However that proposition says nothing about the application of s 122 to the present case.[11]

[11]Rambaldi, [33]–[35].

Based on the comments of the Court of Appeal it would appear that Rambaldi does not apply in relation to a preference pursuant to s 588FA of the Act. Rambaldi as decided is in conflict with the leading authorities regarding s 588A of the Act.

The plaintiff relies on Re Emanuel (No 14) Pty Ltd (In Liq); Macks v Blacklaw and Shadforth Pty Ltd (‘Re Emanuel’),[12] Burness, In the matter of Denward Lane Pty Ltd (ACN 065 418 411) (In Liquidation)(‘Burness’)[13] and Commissioner of Taxation v Kassem (‘Kassem’) to demonstrate that the payment came from Eliana and not Rock Development, as is contended by the defendant.[14] In support of its submission that the payment was made by Eliana and is therefore a preference the defendant on the other hand relies on Evolvebuilt Pty Ltd (‘Re Evolvebuilt’),[15] a decision which the plaintiff maintains should be distinguished.
[12](1997) 147 ALR 281.
[13](2009) 259 ALR 339.
[14](2012) 205 FCR 156.
[15][2017] NSWSC 901.

In Re Evolvebuilt, Evolvebuilt Contracting Pty Ltd (‘Evolvebuilt’) subcontracted the defendants to, on its behalf, perform interior work on a payment in which Evolvebuilt was subcontracted to do work on the project. There was a dispute between the head contractor Built NSW Pty Ltd (‘Built’). Built refused to pay Evolvebuilt. The defendants stopped work because Evolvebuilt was not paying the defendants. A letter was sent by Evolvebuilt to Built requesting that the defendants be paid directly by Built. The default in payment to the defendants and also its employees was brought to the attention of the CFMEU. CFMEU notified Built that it was concerned that Evolvebuilt was not paying employees their full entitlements and requested an urgent conference. Following negotiations with the CFMEU, Built terminated its contract with Evolvebuilt and payments were made directly to the defendants. Evolvebuilt went into liquidation and the liquidators claimed that the payments received by the defendants were unfair preferences pursuant to s 588FA of the Act.

Brereton J found that the payments to the defendants were not preferences. He found that the payments were not made at the request of Evolvebuilt but at the request of the CFMEU. His Honour said:

The decisive considerations are not the terminology adopted by the parties in their correspondence, but the substance of the transaction. Relevantly:
(1)while under cl 38.2 Evolvebuilt could request Built to pay secondary subcontractors, it had no legal right to require Built to do so – Built’s compliance was discretionary;
(2)there is no evidence that there were any moneys owing by Built to Evolvebuilt out of which such a payment could have been directed; to the contrary, the evidence is that Evolvebuilt’s payment claim was assessed at nil; and
(3)there was no property or right to the benefit of which Evolvebuilt was entitled, out of which the impugned payments were made. The liquidators submitted that the payments had the effect of diminishing Evolvebuilt’s claim against Built in respect of Evolvebuilt’s liabilities to its secondary subcontractors, on the theory that by discharging those subcontractors’ claims against Evolvebuilt, that somehow reduced Evolvebuilt’s claim which was said to be founded on them. But Evolvebuilt’s rights under its contract with Built depended upon assessment of the progress of the works, not on the claims made on Evolvebuilt by the secondary subcontractors.

In those circumstances, although it may well be that the payments by Built had the effect of discharging Evolvebuilt’s indebtedness – either because Evolvebuilt assented to them, or because the liquidators subsequently did so – it does not follow that they were made by or received from Evolvebuilt. The payments were made out of Built’s assets, and not out of any asset to the benefit of which Evolvebuilt was otherwise entitled. Thus they were made by, and received by the defendants from, Built and not Evolvebuilt. This is so, even if making the payment gave Built some right to restitution against Evolvebuilt. If it were otherwise, then the satisfaction of a creditor’s debt by the debtor’s guarantor would constitute a payment on behalf of the debtor and be liable to be avoided as a preference.[16]

[16][2017] NSWSC 901, [50]–[51].

On appeal in Hosking v Extend N Build Pty Ltd,[17] the Court of Appeal dismissed the appeal. The Court of Appeal held that there are two matters which must be established for a transaction to constitute an unfair preference. First, the company and the creditor must be party to the transaction. Second, as a result of the transaction the creditor must receive more than it would receive if the transaction was set aside.
[17][2018] NSWCA 149.

The Court of Appeal did not disagree with any of the authorities relied upon by the plaintiffs, being Re Emanuel, Burness or Kassem. Re Evolvebuilt can be distinguished on its facts from the other three cases. In Re Evolvebuilt, even though the payment was made by a third party to the creditor, it was not paid at the request of the debtor company but at the request of the CFMEU.

In Re Emanuel (No 14) Pty Ltd, Emanuel entered into a contract with a third party to make a payment to a creditor. Emanuel was at that time in dispute with a third party and in full settlement of that dispute, the third party agreed to make a payment at the direction of Emanuel to the creditor. That payment was held by the Full Court of the Federal Court to be a preference.

The Court of Appeal in Hosking referred to Re Emanuel and said:

Re Emanuel is essentially authority for two unsurprising propositions. First, an agreement for consideration between a debtor company and a third party by which the third party is required to pay funds to a creditor of the debtor company and does so pursuant to a direction by the debtor company can constitute a “transaction” within the meaning of that expression under s 9 of the Act. Second, a payment to the creditor pursuant to a direction of the debtor company with which a third party is contractually bound to comply is a payment “from” the debtor company for the purpose of s 588FA(1)(b) of the Act.[18]

[18]Ibid, [31].

In Burness, two payments were made by a related company of the debtor company to the creditor in reduction of a running account. They were made at the direction of the debtor company. Gordon J held that the payments were an unfair preference.

When considering Burness the Court of Appeal said:

In Burness, it was clear that, at the very least, Denward Lane had acquiesced in the payment of its debts as part of a transaction whereby Pre Cast Panels took over its business. Further, it must be noted that the payment was found to be part of a “course of dealing” that was intended to, and did, extinguish the creditor’s debt.[19]

[19]Ibid, [34].

In Kassem, two payments were made using funds provided by a related company to the Commissioner of Taxation. Payments were placed into an account comprising the company’s indebtedness for primary tax debts. The Commissioner exercised his powers under the Taxation Administration Act 1953 (Cth) to allocate the payments to an account for the company’s indebtedness for a superannuation guarantee charge. The Full Court of the Federal Court held that the payments were transactions which constituted unfair preferences.

The Court of Appeal in Hosking considered Burness and said:

In Kassem, the Full Court stated that it was “a clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower’s directions”, or that, even if it was not correct to describe the transaction as a “loan”, it involved a payment being “made by or on behalf of” the debtor Mortlake. It was not in contest that Mortlake was a party to the transaction: see Kassem at [40]-[43].[20]

[20]Ibid, [110].

The New South Wales Court of Appeal in Hosking have reaffirmed the decisions upon which the plaintiffs rely. I accept the plaintiffs’ submission that the New South Wales Court of Appeal did not disagree with the following propositions that arise in Re Emanuel, Burness and Kassem that:

-a transaction can be made up of a series of interrelated dealings or a composite transaction;
-the debtor company and the creditor need not be a party to each part of the transaction; and
-if a potential restitutionary claim results from the transaction to which the debtor company was a party, the payment can be said to be received from the debtor company.

Re Evolvebuilt can be distinguished. The payment made was not made pursuant to the request of Evolvebuilt but pursuant to an agreement by the CFMEU and Built. Rock Development, however, was directed to make the payment on behalf of Eliana.

The defendant, when given the opportunity to file further submissions relating to Hosking, submitted that the Court of Appeal confirmed that it was necessary to identify a transaction to which Evolvebuilt was a party before the payment could be held to be a voidable transaction under s 588FA(1) of the Act. The defendant notes that the appellant argued in Hosking that Evolvebuilt had requested the third party to pay the subcontractors and that the requests were part of a chain of causation which resulted in payments being made. The Court of Appeal held that it was not helpful to refer to a chain of causation but that it was necessary to identify a transaction and determine whether Evolvebuilt was a party to it.

Here, the defendant submits that the plaintiffs also sought to rely upon a chain of causation argument, and it submits that the chain of causation approach is unhelpful in this case as the plaintiffs also need to prove that the payment was made to the defendant pursuant to a transaction to which Eliana was a party. The defendant submits that the payment was made to the defendant under an agreement between Rock Development and NWC Finance. It says that facility from NWC was for a larger sum than the amount paid to the defendant and Eliana was not a party to that transaction. It relies on the evidence of Mr Sowitha that it was a requirement of NWC Finance that part of the moneys advanced pursuant to the facility entered by Rock Development with NWC Finance was paid to the defendant.

I have found that the Quistclose trust does not exist. In effect there were only three parties to the transaction: Eliana, Rock Development, and the defendant. I do not accept that there was a requirement that the monies were to be paid directly to the defendant.

The defendant also relies on Ramsay v National Australia Bank Ltd,[21] to demonstrate that the payment did not come from Eliana. In that case, the Full Court of this Court held that a payment out of his own money by B to C, pursuant to an obligation imposed by B by a contract between A and B to discharge A’s debt to C, is not a payment made by A to C within the meaning of s 451 of the Companies (Victoria) Code.
[21][1989] VR 59.

In Re Emanuel, the Full Court of the Federal Court referred to Ramsay and said:

In that case, in construing the words “a payment made ... by” in s 451(1) of the Companies (Victoria) Code, the Full Court (at VR 63) rejected the proposition that:
... a payment out of his own moneys by B to C, pursuant to a contractual obligation to discharge A’s debt to C, an obligation imposed upon B by a contract between A and B, can be said to be a payment made by A to C. The words of s 451 must be given their ordinary, natural meaning.

We have, with respect, some difficulty with this conclusion. Before a payment made by B to C can be effective to discharge A’s debt to C, ordinarily it must be made with A’s authorisation or ratification: see Mason and Carter, Restitution Law in Australia, para 846, (Butterworths, Sydney, 1995); Goff and Jones, The Law of Restitution, p 17, (4th ed, Sweet and Maxwell, London, 1993); and see generally on payment of another’s debt, Beatson, The Use and Abuse of Unjust Enrichment, Ch 7, (Clarendon Press, Oxford, 1991). Where a payment is so made it can properly be said that it is A’s act that makes B’s payment efficacious at law to discharge the debt to C. This, of itself, does not provide reason for saying that the payment itself is made by A. Nonetheless where that payment constitutes part of the consideration B furnished and A required in the A-B contract and where, inter alia, that consideration is in the final settlement of the obligations inter se of A and B, then we see no compelling reason for not concluding that A has made the payment to C albeit by using B as its instrument for the purpose. It is, though, unnecessary to consider either this matter or Ramsay’s case further for reasons we give below.[22]

[22](1997) 147 ALR 281, 287-288.

Ramsay appears to be in conflict with the leading cases regarding what constitutes a preference, including Re Emanuel, Haskins and Burness. It is not for me to resolve this conflict. However, Ramsay can be distinguished. It relates to s 451(1) of the Companies (Victoria) Code. That section provides:

A settlement, a conveyance or transfer of property, a charge on property, a payment made, or an obligation incurred, by a company that, if it had been made or incurred by a natural person, would, in the event of his becoming a bankrupt, be void as against the trustee in the bankruptcy, is, in the event of a company being wound up, void as against the liquidator.

Section 451(1) of the Companies (Victoria) Code is a different provision to the provisions relating to preference payments in the Act. Section 451(1) accumulates some of the various provisions that are contained in the Act, but it is not as broad as the provisions contained in the Act, including, for example, the wide definition of transaction that is contained in s 9.

Ramsay can also be distinguished on its facts. In Ramsay, the Full Court in making its decision, focussed on the fact that there was an internal transfer, a book entry rather than a payment. Here, there was no internal transfer. There was an actual payment. The Full Court said:

It seems to us that the proper inference to draw from Mr. Arthur’s evidence is that the customer Distributors, in the person of Mr. Holloway, told the bank to credit its account with the bank so as to “wipe out” its overdraft. At the same time, Industries, in the person of Mr. Holloway, instructed the bank to debit its account with a sum sufficient to wipe out Distributors’ debt to the bank.
The corresponding debit and credit are then made in the two accounts reflecting, as Mr. Arthur agreed, the instructions which the bank received in the matter from the parties concerned. Does this amount to a preferential payment by Distributors or a disposition of property? We think not.
If Industries had drawn a cheque in favour of Distributors and lodged it to the credit of Distributors’ account, and had the bank then collected the amount of the cheque and having done so on instructions credited it to itself - then on the analysis made by Buckley L.J. in the above extract from his judgment in the Gray’s Inn Case, there would have been a disposition by the bank of Distributors’ property.
Even if this is accepted as correct, it appears from the above reference to the evidence of Mr. Arthur, and from the documentary evidence produced that the transaction was effected by “internal book entries”. Marks J found: “It has not been shown that there was a moment when the $54,045.77 was so in the hands of or under the control of Distributors which if frozen (sic) could have resulted in a benefit to creditors generally.”
It follows in these circumstances that it has not been shown that the events of 24 August 1984 constituted a preferential “payment” nor did it amount to a disposition of property within the meaning of the relevant sections.[23]

[23][1989] VR 59, 70.

Re Emanuel, Durress and Kassem can apply here. Re Evolvebuilt can be distinguished, as can Rambaldi and Ramsay. The payment made is a payment made by Eliana to the defendant and not by Rock Development to the defendant.

The Relationship Between Eliana and Rock Development

The defendant submits that there was no debtor/creditor relationship between Eliana and Rock Development, and it was necessary that such a relationship existed for there to be a transaction between Eliana and the defendant. It says that the plaintiff failed to discharge the onus that Rock Development was a debtor of Eliana.

The plaintiffs submit that it is not critical to the plaintiff’s case that a debtor/creditor relationship be established between Eliana and Rock Development where the payment was made by Rock Development on request on authorisation of Eliana. It says nothing more is required. I agree. I note that in Burness, Gordon J was of the view that it was not necessary that there be evidence of an arrangement of a debtor/creditor relationship between the debtor and the third party in order for a third party payment to be a preference. Her Honour said:

I do not accept that Re Emanuel (No 14) is authority for the proposition that before a payment by a third party can be taken to be a payment “accepted” or “made” by the debtor there must be evidence of an arrangement between the debtor and the third party whereby at the direction of the debtor, the third party made a payment to the creditor in discharge of an obligation owed by the third party to the debtor. That is not what the authorities establish: see Simpson v Egginton (1855) 10 Ex 845 at 847-8; Smith v Cox [1940] 2 KB 558 at 560; Oakleigh Acquisitions Pty Ltd (in liq) v Steinochr [2005] WASCA 247 at [81] (Oakleigh). Where a payment made by a third party to a creditor is authorised by the debtor, nothing more is required. The debt is discharged by the third party at the request of or with the acceptance of the debtor.[24]

[24][2009] 74 ACSR 1, [45].

Even though it is not necessary to demonstrate that there is a debtor/creditor relationship, the plaintiffs rely on the following evidence to demonstrate such a relationship existed:

-the construction contract between Sentosa Apartments Pty Ltd (‘Sentosa’), Rock Development and Eliana. Where Sentosa and Rock Development are referred to as owners, and Eliana is referred to as the builder. Mr Sowitha deposed in his affidavit that in the majority of developments Rock Development was the developer and Eliana was engaged as the builder;[25]
-the agreement with Delphi Bank. Delphi Bank was requested by Rock Development to make payments directly to third parties in connection with completion of works at Bulleen. Davis Lawyers advised that they acted for Delphi Bank and enclosed a copy of a deed. The deed refers to the parties as Bendigo and Adelaide Bank Limited, Sentosa, Rock Development as borrower, and Eliana as builder. The agreement is undated and unsigned;
-the general ledger report of Eliana which records various debts and credits between Rock Development and Eliana, excluding unpaid progress payments. The defendant submits that not much can be drawn from these accounts because the evidence demonstrates that the accounts were non-accurate, were confused by internal accountants, did not reflect accurately the company’s financial position, and no reconciliation was made by Mr Cant in relation to the accounts. The defendant says that Mr Cant’s assertion that Eliana must be owed money by Rock Development should be disregarded.

[25]Affidavit of Magda Sowitha sworn 15 March 2018 [4].

When cross‑examined, Mr Cant gave the following evidence.
I’m paraphrasing, all right, but consistently throughout your reports and the meetings and your affidavits and so on and in your evidence today, you’ve said that the accounts of this group of companies and entities were in a mess. Is that a fair comment? - - - They – let’s say they were incomplete and not properly reconciled.
And they’ve never been properly reconciled, have they? - - - I don’t believe – I believe there are errors in them, yes.
Well, you said they weren’t properly reconciled. Is that what you’re saying? - - - Ah, yes.
And they’ve never been properly reconciled, have they? - - - I don’t believe so.
In order to ascertain what the position was regarding debits and credits, given the complexity and the number of entities involved, you’d need to do such a reconciliation, wouldn’t you? - - - Ah, that – that’s one step.
But you agree with me you’d need to do that? - - - You – you may need to do that. It – it depends on the – on the benefit of doing that.
If you want to work out what the – the loan accounts for the company suggest that Rock was a creditor of Eliana, don’t they? That’s what’s recorded in the accounts. Correct? - - No, a debtor.
Isn’t it recorded as a credit? - - - No, that it owes money.
Rock is owed money by Eliana on the ledger? - - - Ah, no, I don’t think so.
You don’t think so? - - - No, No.
Is that because of the progress payment claims that you refer to in your report? - - - There are a whole lot of – a whole lot of transactions that Eliana was the builder; Rock, the developer. Rock in its own right basically engaged Eliana to build on its behalf. Rock owed money to Eliana for the building works that it did. That – that – that’s – that in broad principle is what the – Rock was not doing anything for Eliana.
The ledger will speak for itself, but that’s your position, that’s what you’re saying. All right? - - - And that’s part of the inaccuracies in the accounts – is that both if, um, ah, - and – and that schedule there shows the properties that are registered in the director’s name.
Which schedule are you talking about? - - -Ah, that one there.
MR BROWN: This is the one that I tried to hand up to Mr - - -
MR PALMER: Well, that’s not in evidence, so if you don’t - - -? - - - Okay. So what I will - - -
MR BROWN: Well, he can refer to a schedule. If he’s got a schedule, he can refer to it? - - - What I’ll say is - - -
MR PALMER: Trying to get this in desperately, aren’t they? - - - - - - that in summary in my – my broad conclusions that I’ve come to about the books of Eliana, it is – it is the entity that has incurred all of the expenses in terms of building properties, whether that be – and whether on – that was on behalf of Rock, third parties or – and ultimately, the way Rock and the director received apartments in developments that were done, the, the costs were all pretty much all incurred by Eliana as the builder. And – and the significant deficiency in Eliana is principally – well, one of the factors, including just losses and some bad debts to third parties – but it’s incurred expenses and hasn’t been paid in full for the development work that it has done. This was his plan.
Rock was the one that was borrowing money. In respect of the development at Sentosa, Rock was the one that owned the land. Correct? - - - Ah, the land - - .[26]
[26]T184.28–186.29.
-when the unpaid progress payments are added to the amounts referred to in the loan account general ledger, Rock Development is clearly a debtor of the company.
-the plaintiffs produced to the Court a letter from Robert James, lawyer, dated 18 May 2018 which they received during the course of proceedings. Mr Cant had commenced an action against Sentosa seeking payment of progress payment claims. That letter disputes that Sentosa is indebted to Eliana in the amount of $1,661,177.96. Under a heading ‘Claimed Debt’, there is a reference to an allegation that the joint venture parties, being Sentosa and Rock Development, failing to pay the sum of $1,255,233.30, being the balance of progress claims. There is nothing in that letter to deny that the sum of $1,255,233.30 is not payable. The letter does contain details of offsets. Some of those offsets are post-liquidation of Eliana. One of those off-sets refers to a refund of GST payments in the sum of $468,120.00 which has been conceded by the plaintiffs.
-The defendant submits that upon a close consideration of the letter from Robert James it appears the letter does not assist the plaintiffs to prove that Rock Development and Sentosa were indebted to Eliana. It refers to the amount conceded of $468,120.00 and other off-setting amounts. It says that even if Eliana was entitled to progress payment claims, the joint venturers, including Rock Development, would be entitled to set‑off amounts totalling $807,728.11 which exceeded the sum of $782,000.00.
-The defendant also relies on the evidence of Mr Sowitha that Rock Development paid all progress payment claims with the exception of two. The defendant submits that the fact that the express terms of the Sentosa contract did not provide for progress payment claims and that there were issues with whether the statutory declarations provided in support of the progress claims were correct, cast doubt as to whether there were any progress payments.
-I note, however, that Mr Cant has taken action against Sentosa to claim these progress payments. On the evidence before me, I am unable to determine whether the progress payments are payable at present.
-there was a $600,000.00 shortfall payment by the joint venture to Eliana on account of Rock Development’s equity in the joint venture.
-The letter of 18 May 2018 from Robert Jones was put to Mr Cant during re‑examination and Mr Cant gave the following evidence:
And then interest of 405,994. Can I ask you to turn over to p.2, and paragraph 5. What they refer to there is that Mr Sowiha, the common director of Eliana and (indistinct) failed to direct Rock to make payment of its equity contribution in accordance with the terms of the JVA, alternatively in accordance with the bank’s direction. Do you know what they’re referring to there? --- Um, I have read the joint venture agreement and other agreements around this transaction, and – and I know Rock was to make equity contributions, and that part of those contributions were to be deducted from the payments to Eliana under the agreement. But the specifics of the numbers and I can – I’d read it but I, yeah.[27]
…
At the bottom of that paragraph it says, “In September 2014, the bank informed the joint venture payers required Rock to make an upfront contribution of 600,000 towards its equity contribution. According to the quantity surveyor’s second progress report dated 22 September 2014, the cost of works completed at the time of inspection on 18 September 2014 was 778,753. The second quantity surveyor report further shows no payments had been made to Eliana, despite the fact an early progress claim had been assessed, and that the recommended amount for payment to Eliana was 778,753. The bank deducted $600,000 from the assessed amount in the second column of the quantity surveyor’s report and paid $178,753 to Eliana on 24 September 2014”. Have you had an opportunity to look into those allegations and whether any of that is correct? - - - I can’t recall the specific terms of the joint venture agreement, and I’m not sure if I’ve seen the agreement between the joint venture parties and the bank regarding those equity contributions. However, putting my accounting hat on, I would’ve said that therefore Rock would owe Eliana 600,000 for the amount that was deducted from the progress claims.[28]
-the liquidator concludes his opinion that Rock Development was a debtor of Eliana. In his report, the liquidator states:
From my enquiries and investigations to date, it appears that the loan account ledger did not accurately reflect the relationship between the entities and it appears that Rock was a debtor of the Company. The Company was the appointed builder of a property development project situated at 194-196 Manningham Road, Bulleen and the property developers were Sentosa Apartments Pty Ltd (“Sentosa”) and Rock. Under the building contract dated 10 April 2014, Rock and Sentosa were jointly and severally liable to the Company for building works and other works. From my investigations it appears that the amount of approximately $1.2million is outstanding for unpaid invoices dated between August 2014 and February 2016 and further, it appears that unpaid invoices dated between August 2014 and February 2016 and further, it appears that Rock’s debt to the Company has not been included as a debit in the Company’s loan account Ledger. As such, I am of the view that based on the information available that Rock is a debtor of the Company and has been a debtor of the Company since the end of 2014.[29]
[27]T266.12-24.
[28]T268.26–269.16.
[29]Affidavit of Anthony Robert Cant sworn 7 March 2018, exhibit ARC-12.

On the evidence before me, on the balance of probabilities, I am satisfied that Rock Development was a debtor of Eliana. There is no doubt that there was a $600,000.00 shortfall by the joint venturers to Eliana. The documentary evidence involving the ledger accounts demonstrates that Rock Development was a debtor.

The plaintiffs submit that if the Court finds that Rock Development was not a debtor of Eliana at the time of payment, then there is much evidence of an independent financial relationship between Rock Development and the company. They submit that:

-Eliana and Rock Development were involved in a number of developments together, with Rock Development as the developer and Eliana as the builder;
-Mr Cant noted that it appears that for some of these developments, Eliana was not paid in full but apartments were transferred to the director. Mr Cant when re-examined gave the following evidence:
--- Uh look, just looking at some of the um, and I can’t think of a particular one, but Eliana built a number of apartments and it seems that at the end, a number of those apartments, a material number of apartments, ended up in the name of Magdy Sowiha or in the name of Rock and the costs of building those, or the builder was Eliana. If there was going to be particular apartments as part of the project, then you would expect that they should have ended up in the name of Eliana, rather than in the name of the director or Rock.
I’m sorry, from what basis are you saying that, that the apartments should have ended up in Eliana’s name - - - [30]
[30]T230.10-21.
…
I think you were in the process of answering a question about, you’d just given evidence about apartments that should have been in Eliana rather than Magdy personally, I think the question was why do you say that they should have been in Eliana rather than Magdy? - - - Eliana has traded at a loss, I think the loss has been exacerbated also by apartments that were – where Eliana was the builder, ended up in the name of Rock or ended up in the name of the director personally.[31]
[31]T231.11-19.

-the liquidator suspects that there has been no proper accounting between Eliana, Rock Development and Mr Sowitha in relation to these developments. Mr Cant when re-examined gave the following evidence:
MR PALMER: (indistinct words)? - - - Look, I believe so, I haven’t gone through and married up the particular apartments with the particular contract that was undertaken. Some of these were joint ventures with others, where he or Rock ended up with apartments out of the project, the development.
MR BROWN: Okay? - - - They are separate legal entities, and but I don’t think, I suspect there hasn’t been a proper accounting as between Magdy and Rock to Eliana.[32]
[32]T232.25-T233.2.

-Eliana and Rock Development shared the same operational bank account. Mr Sowitha when cross-examined gave the following evidence:
Rock Developments and Investments Pty Ltd, did it use the bank account? - - - Yes.
Did it use the bank account since 2008? - - - Since we opened Rock. We opened Rock I think 2015 or 2012, I can’t remember.
Two thousand and twelve, you think? - - - I can’t remember exactly.
But it used the same bank account - - - ? - - - Yes.
- - - as Eliana? - - - We - --
No, did it use the bank account as Eliana, yes or no? - - - Yes, yes. It’s one bank account.[33]
[33]T63.17-25.

-transactions for related entities in the shared bank account were initially posted to a shareholder loan account and reconciled from there. When cross‑examined, Mr Sowitha gave the following evidence:
Relevant to what you just said, you were asked yesterday about the Eliana Commonwealth Bank account, the one with 600,000 overdraft, do you remember those questions? You need to say yes or no for the transcript? - - - Ah, yes.
And you said that that account was used for more than one company, not just Eliana? - - - That’s true, that’s very true.
So how was that accounted for by the accountants? - - - We have internally an account in that book called shareholder loan. And that was the biggest audit been done in that account. Because if the transaction- like for example, for example, we take example of the $38,000 here of the thing we have to pay, or Magdy pays. This is 8000 - - -
So sorry, just to clarify, so you’re talking about the – on the top of p. 496, that 6500, is that what you’re referring to? - - - Yeah, the one that said Magdy paid.
Yes, all right? - - - If this is come from Eliana bank account, okay. So this is not Eliana, Eliana shouldn’t pay that, Magdy should pay that. Then the $6000 will be written into the shareholder loan. And to complete the example, when I getting money from my properties, like I – I inject about 3.2 million into Eliana in 2015 to mid-2016, trying to survive. And that’s how much Eliana was paid. So I was having small loans from my bank, so I – my loan ratio, putting up with my banks. Even I refinanced with Bank of Melbourne some of the property. And when that money come, it goes to Eliana’s account. So when it goes to Eliana’s account, it does actually go to the shareholder as well, as a payment.
Shareholder loan in the books of Eliana? - - - Books of Eliana. This how we was operating it.
And then what would happen. Would there be – would it just sit in the shareholder’s loan account, or - - - ? - - - Well, conciliation. Would be conciliation. This is – to do the conciliation between – so we recorded that Magdy made a payment to Eliana as a loan, you know, and that. When Magdy pays something for himself – well like, for example, my property, I was paying mortgage. I was taking from that out my wages, because I didn’t – there’s no money to get my wages. So it goes there as well, to draw, to – for the loan. It’s like a transaction.
Yes, I understand that, but then I’m wanting to know does the accountant then do anything at the end of the financial year for example, if that - - - ? - - - Yeah, yeah, they have to.
So what would happen? - - - They have to. They reconcile it. They reconcile the accounts.
Against what? - - - They reconcile what’s come in and what’s come out.
And then do – and for what purpose? - - - So it shows in Eliana, and show because there are in profit and loss, I think, there are shareholder. Shareholder entitlement and so it does affect the shareholder things.[34]
[34]T159.14–T161.4.

-loans obtained by Rock Development to the extent that they did not go directly to construction costs were paid into the same CBA account. When cross‑examined, Mr Sowitha gave the following evidence:
Eliana, so there’s another account. So Rock was borrowing money, wasn’t it? - -- No, no - - -
Sorry, just please listen? - - - You can’t cut my answer.
Rock was borrowing money, wasn’t it? - - - Yeah, Rock was borrowing all the money.
And the money that Rock was borrowing was being paid into this bank account, wasn’t it, a Commonwealth bank account that I’ve just referred you to. Correct? - -- Rock, the money borrowed, it went direct to the lands.
To the lands? - - - To the – except the last loan we have from NWC. It went - - -
No, just stop. Rock was borrowing money to undertake development to do construction? Was it borrowing money for construction purposes? - - - For construction and buying lands and stuff.
Yes, and that money was going into that bank account, wasn’t it? - - - And buying lands.
Mr Sowiha, please answer my question? - - - It doesn’t come to me.
I know it doesn’t come to you? - - - It’s come to the (indistinct) side.[35]
…
MR PALMER: Yes, that’s for the purchase of the land, correct? - - - Yes.
And Rock was taking out loans for construction, wasn’t it? You – stop. You know the difference between buying land and buying money for construction, don’t you? - - - Construction loan, of course.
Yes? - - Like the one in Sentosa.
So the construction loans that were being borrowed by Rock were being paid into that bank account, weren’t they? - - - Yeah, when we do - --
Thank you? - - - When we do – can I complete the answer. When we do again - - -
No, thank you.
HIS HONOUR: Finish the answer? - - - When we do a claim, the claims go to the builder which is Eliana accounts. So Eliana made the work, and then the money goes to the bank account. When the claim been done, like Sentosa. We have like 21 claims.[36]

[35]T68.14–T69.2.

[36]T69.10–T69.27.

Even though I do not need to determine this, on the evidence I find that there was an independent financial relationship.

Rock Development’s liability as an undisclosed principal

Eliana engaged the defendant to perform earthmoving works at Taylors Hill. That land was owned by Rock Development. Although called upon to produce the building contract between Rock Development and Eliana in respect of the Taylors Hill site, the plaintiff advised the defendant that it did not have such a building contract. The defendant submits that it appears that Eliana, as Rock Development’s agent, engaged the defendant to perform work for Rock Development at the Taylors Hill site. It says accordingly, Rock Development was an undisclosed principal and had the primary liability to pay the debt. It also says Rock Development could be sued on the transaction by the defendant directly. The payment was made directly from NWC Finance pursuant to a loan facility.

The defendant submits that based on the above facts Rock Development was an undisclosed principal and liable for the debt for the work done at Taylors Hill. I do not accept that submission. It is telling that all of the invoices were sent by the defendant to Eliana. There is nothing on the evidence which could lead to a conclusion that Rock Development was an undisclosed principal and Eliana was its agent. This is a mere assertion by the defendant.

Mr Sowitha’s guarantee

The plaintiff submits that the payment to the defendant was made to discharge Mr Sowitha’s liability under a guarantee and that the payment is not a preference payment made by Eliana.

During cross‑examination, Mr Sowitha agreed that he signed a guarantee for the debt that was owed to the defendant.[37] Mr Sowitha, when cross‑examined, agreed that his former counsel, who was representing Eliana in the wind up application, had sought to include him as a party to a deed of settlement relating to the payment of the debt by Eliana to the defendant. When cross‑examined he gave the following evidence:
[37]T81.17-18.

So, what I’m going to say, put to you is this. Your barrister was trying to get you included as a party to the settlement agreement, that’s correct isn’t it? - -- That’s his job.
Yes, and that’s his job, and they were your instructions - - -? - -- What do you mean, no.
I’m right - - - ? - - - No.
You were concerned about getting - - - ? - - - But that’s his work.
You were concerned - - - ? - - - No, I wasn’t concerned.
You were concerned about getting released as a guarantor - - -? - - - Why you trying to make, try to make it that way. If I sign a loan - - -
Please stay – could you just answer my question - - - ? - - - No, no, no, I will make it very simple. The winding up, it’s for Eliana, the winding up is in the morning, I have to sign a loan for 66 per cent to get the money, to save Eliana.
You were trying - - - ? - - - Magdy as a guarantor, what is the problem with Magdy as a guarantor tomorrow morning.
You were trying to get a release of yourself, from the guarantee and you got a release of yourself under the guarantee under the agreement - - - ? - - - That’s normal, any lawyer would do that.
HIS HONOUR: He said that is normal, any lawyer would do that. His is answer is that is normal, any lawyer would do that.
MR PALMER: Yes, and you knew he was doing it, didn’t you? - - - I didn’t, didn’t even talk about it.
You were talking to Mr Stavris at that time - - - ? - - - I didn’t talk - - -
- - - but you didn’t talk about getting - - - ? - - - We didn’t discuss it.[38]

[38]T147.23 -T128.22.

A deed of settlement was drawn so that Mr Sowitha could obtain a release, but it was not signed.[39] The deed of settlement that was signed contains a mutual release, but Mr Sowitha was not a party to that deed. He signed the deed on behalf of Eliana.
[39]T148.11.

The plaintiffs submit that if Mr Sowitha was concerned about his guarantee and being released from his guarantee, his lawyer would have insisted on him being a party and insisted on there being a specific release to the guarantee. I also note that the evidence of Mr Sowitha was that his main focus at the time was the wind up application and having Eliana released from the wind up application. I do not accept the defendant’s submission that part of what was bargained for and what was provided was a release of Mr Sowitha.

Solvency

There is no challenge by the defendant that Eliana was insolvent when the debt was made. There is no dispute between the parties relating to solvency.

The good faith defence

The defendant relies on the defence founded in s 588FG(2)(b) of the Act. Pursuant to s 588FG(2)(b), the defendant must establish that there were no reasonable grounds for suspecting Eliana was insolvent and that a reasonable person in the defendant’s circumstances would not have had such grounds for so suspecting.

In Tamaya Resources Ltd v Claymore Capital Pty Ltd,[40] Farrell J considered the requirements to demonstrate the existence and reasonable grounds for suspicion. His Honour said:

It follows, then, that the existence of reasonable grounds for suspicion should be determined by reference to commercial reality derived from the particular industry as applied to the facts at the time of the transaction without using hindsight. There is no single factor whose presence invariably establishes that there was, or should have been, reasonable grounds for suspicion. It is necessary to identify the factors pointing towards insolvency of the debtor and which of those factors were apparent to the creditor and their cumulative impact. There may be countervailing factors and circumstances to be weighed in the balance which could tend to dispel suspicion at the time an impugned payment is made: see Sutherland (in his capacity as liquidator of Sydney Appliances Pty Ltd (in liq)) v Eurolinx Pty Ltd (2001) 37 ACSR 477; [2001] NSWSC 230 (“Sutherland v Eurolinx“) at [43]–[47] per Santow J.[41]

[40][2015] FCA 357.

[41]Ibid, [34].

In Sutherland v Lofthouse,[42] the Court of Appeal when considering what ‘suspicion’ meant stated:

The effect of the section is to put the burden on the creditor of establishing both the subjective and objective legs of the defence. It follows that in this case the burden was on the appellants to establish both that they had no reasonable grounds for suspecting that the company was insolvent and that a reasonable person in their circumstances would not have had reasonable grounds for so suspecting. “Suspicion” for that purpose means a mistrust of the company’s ability to pay its debts as they become due and of the effect which acceptance of a payment would have as between the appellants and the company’s other creditors.[43]

[42](2007) 64 ACSR 655.

[43]Ibid, [16].

The approach to determine the intention and knowledge of a corporate defendant in assessing whether it has a defence under s 588FG(2)(b) was also considered by the New South Wales Court of Appeal in Cook’s Construction Pty Ltd v Brown.[44]The Court of Appeal stated:

There is no doubt that the onus is on the defendant in the proceedings to satisfy the court that: (1) it had no reasonable grounds for suspecting DML was insolvent, the so-called subjective test; and (2) that a reasonable person in the appellant’s circumstances would have had no such grounds, the so-called objective test. It is always difficult to ascertain what is the intention or purpose of a corporation in various aspects of the law and this has been noted time and time again, perhaps most significantly in Re Mayor, City of Hawthorn; Ex parte Co-operative Brick Co Ltd [1909] VLR 27 at 51; (1908) 14 ALR 664 at 673 and Arthur Yates and Co Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37 at 69; [1945] ALR 474 at 481.
The question is always one of fact. Often it is necessary to look at the acts and words of a number of directors of the corporation: see eg Sydney Municipal Council v Campbell [1925] AC 338 (PC). In other cases one can look at the controlling mind of the corporation or its appointed spokesperson: see for instance Johns v Australian Securities Commission (No 2) (1992) 35 FCR 146; 108 ALR 405; 8 ACSR 156 at 182.[45]

[44](2004) 49 ACSR 62.

[45]Ibid, [19]–[20].

In circumstances where a payment has been made by a company where a statutory demand has been served on it, it is difficult for a defendant to make out a good faith defence. In Muller v Academic Systems Pty Ltd,[46] Williams JA said:

Whilst one could not conclude that a creditor, who becomes so frustrated with an inability to recover a debt that he serves a statutory demand and within the period provided for by that demand accepts a lesser sum in full settlement, could never discharge the onus of establishing a defence under s 588FG, it has to be said that ordinarily the inference would be open in such circumstances that the creditor had grounds for suspecting that the company was insolvent at the time payment was made.[47]

[46][2007] QCA 218.

[47]Ibid, [33].

The defendant submits that under the Act the effect of failing to comply with a creditor’s statutory demand is that the Court must presume that the company is insolvent. It says that the presumption provided for in s 459C operates unless the contrary is proved for the purposes of the application. In other words, the presumption may be rebutted. I agree with the defendant that the presumption of solvency does not prevent a defendant from relying on s 588FG(2). However, an inference would be open in the present circumstances that the creditor would have suspected that the company was not solvent at the time the payment was made but it can be rebutted. The onus is on the defendant.

The defendant submits that its witnesses, Anthony Maddalon, director of the defendant, and Susan Lesley Haddrell, the financial controller of the defendant, were witnesses of truth and their evidence should be accepted. I agree they were witnesses of truth. I note that the plaintiffs did concede that the defendant accepted the payment in good faith but that does not end the matter.

The plaintiffs’ counsel did not put to these witnesses that they had reasonable grounds to suspect Eliana was insolvent at the time that the payment was received by the defendant. The reason that it was not put to them was because the test to be applied is not a subjective test, but is an objective test. The plaintiffs submit that in the circumstances in which the payment was made the defendant cannot discharge the onus based on an objective test. In other words, a reasonable person in the creditor’s position would have had reasonable grounds to suspect Eliana’s insolvency.

In order to discharge the onus, the defendant submits that there was compelling and countervailing factors and circumstances which would lead any reasonable business person in the defendant’s position to conclude that Eliana was insolvent. It relies on affidavits sworn by Mr Sowitha on 20 July 2016, 17 August 2017, and 23 August 2017 in the wind up proceedings in which he deposed:

-the reason that Eliana had not taken steps to set aside the statutory demand was because on 2 May 2016, Eliana’s in-house lawyer took personal leave and, without returning one week later, resigned by email for personal reasons. The lawyer did not bring the statutory demand to the attention of Mr Sowitha. The statutory demand was sent from the company’s external accountant and then forwarded in the mail in a bundle of documents, some of which were labelled for the internal legal department. The document lay dormant and was brought to Mr Sowitha’s attention after the expiration of 21 days;

-if Eliana had been aware of the statutory demand it would have brought proceedings to set it aside;
-before the wind-up proceeding was issued, Mr Sowitha instructed a staff member to issue proceedings in the Victorian Civil and Administrative Tribunal to dispute the debt. That matter was listed for hearing in VCAT on 14 September 2016;
-Eliana intended to defend the winding up proceedings on the grounds that it was solvent;
-Eliana owned many properties;
-Eliana had refinancing arrangements in place to raise sums in excess of $4 million; and
-Eliana requested the Court permit it to pay funds demanded in the statutory demand into Court in order to demonstrate Eliana’s capacity to pay the debt.

The defendant also relies on an affidavit sworn by the accountant for Eliana, Mokbell Gendy, on 23 August 2016, in which Mr Gendy deposed that:

-he had been the accountant for Eliana since 2000 and prepared tax returns for Eliana since 2000;
-Eliana demonstrated a profit for the years from 2012 to 2015. He had reviewed the assets, liabilities and capital of Eliana and in his opinion Eliana was both solvent and stable. Eliana’s balance sheet disclosed assets of $37,224,000.00, total liabilities comprising amounts required to satisfy litigation and alleged defective building disputes in the amount of $236,952.31, total borrowings representing a lending ratio of 45.98 per cent, and a net position of assets over the liabilities conservatively at $20,108,360.00;
-tax returns for the years 2013, 2014 and 2015 were exhibited;
-Mr Sowitha was arranging for a cash injection in excess of $3 million to Eliana; and
-he reviewed the documents and Eliana’s overall financial position and was confident that Eliana was solid and able to satisfy its debts and responsibilities under the meaning of s 95A of the Act.

The defendant submits that in those circumstances it was reasonable for the defendant to accept the evidence of Mr Gendy as having regard to the evidence as presented by Eliana, there was probably no person in a better position to give evidence as to Eliana’s financial position. The reports exhibited to the affidavit of Mr Gendy contained declarations by Mr Sowitha that Eliana was able to pay its debts as and when they fell due. The defendant was not in a position and did not have any information to contradict the sworn evidence produced by Eliana and the professional accountant that the company was solvent. The fact that Eliana’s accounts may have been incorrect was not known at the time Mr Gendy deposed that the accounts that he had prepared were correct.

In all of the above circumstances, the defendant submits that a reasonable person in the position of the creditor would not only have no reasonable grounds to suspect that the company was insolvent but, having regard to the material presented to the Court, would be compelled to the view that the company was in fact solvent.

As to the defendant’s submission regarding the alleged dispute of the debt, the plaintiffs observe that there were meetings in relation to the dispute of the debt in January 2016. The payment was made in September 2016. Between March 2016 and September 2016, the defendant embarked on a process of debt recovery, including a statutory demand and a wind-up application before the debt was paid. The affidavit in support of the statutory demand stated that as at March 2016 there was no genuine dispute in relation to the debt. Following receipt of a letter of demand, no mention was made of any dispute in Eliana’s correspondence.

Ms Haddrell gave the following evidence relating to a dispute:

And your affidavit says that you believed that there was no genuine dispute about the existence or amount of the debt. That’s true, isn’t it? - - - It is – it is true, yes, even though there was doubts earlier on, and obviously there was doubts after, but, yes, at that particular time we had that letter that said, “We’re going to pay you”, they weren’t disputing that fact then. So, yes, I did believe that.
And it wasn’t until they filed their VCAT application later on that you were aware that they were still - - - ? - - - We knew were sure.[48]

[48]T322.21-31.

It is clear that the defendant was of the view that there was no dispute. The affidavit accompanying the statutory demand makes that clear. In the correspondence in response to the letter of demand, Eliana advised that it would make payment. An issue was raised as to the $80,000.00 that they claimed had been paid. The claim at VCAT appears to be a last ditch effort by Eliana to avoid payment of the debt. The evidence demonstrates that the defendant did not accept that the debt was in dispute.

As to the affidavits filed by Eliana at the wind-up proceedings, the plaintiffs make the following observations:

-the assertion of solvency was a mere assertion by Mr Gendy without any evidence in support of the assertion and was dependent on Eliana obtaining finance. The only material filed in support of Eliana was the unaudited 2015 financial accounts which were over 12 months old.
-the failure of Eliana to comply with a statutory demand within the 21 days created a rebuttal and presumption of insolvency. There was no rebuttal of a presumption during the proceeding – merely assertions of insolvency and dependence on the proposed cash injection of $3 million.
-in order to rebut the presumption of insolvency, the Court had ordered that Eliana file and serve up to date audited accounts. No audited accounts were filed and served in the proceeding. Accordingly, the most up to date financial information that the defendant had at the time the payment was made was the 2015 audited accounts; and
-the defendant had the benefit of a presumption of insolvency pursuant to the Act. There was no reasonable basis to rebut that presumption based on the material found in the winding-up application.

The defendant states that Eliana, by its counsel, advised the Court that it could produce audited accounts and that therefore the defendant was entitled to rely upon the representation which was made to the Court in open court by experienced counsel. There was no evidence that the defendant was advised that Eliana could not produce audited accounts. The defendant was relying on the representation that was made to the Court by an officer of the Court and accepted by the Court that audited accounts would be produced.

I note that Mr Sowitha deposes that on 30 March 2016, a letter was sent to the defendant’s solicitors and an offer was made to settle the matter by payment of the debt in full by way of a payment plan.[49]
[49]Affidavit of Magda Sowitha sworn 15 March 2018 at [12].

On 8 April 2016, a letter was sent by Eliana to the defendant’s solicitors, again referring to the outstanding debt but advising that Eliana had paid $80,000.00 to the defendant by cheque dated 3 March 2016. Eliana proposed to make progress payments until the outstanding invoices had been approved.

As to the affidavits filed before the Court, the defendant’s solicitor must have known that the material filed was not sufficient to prove solvency. The accountants of Mr Gendy were not up to date and there were no audited accounts.[50]
[50]See Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728.

The plaintiffs submit that there were several bases upon which a reasonable person in the defendant’s position at the time would have grounds of suspecting insolvency:

-the debt was well overdue at the time the statutory demand was issued and had not been paid despite the issues of the alleged dispute being resolved, the defendant chasing payment on a number of occasions and the company promising to pay. Ms Haddrell, when cross-examined, gave the following evidence:
In your affidavit you said you telephoned Eliana on a number of occasions requesting payment of the outstanding invoices, and so when did you start telephoning them?- - - I first started telephoning them when we first came back in January of 2016, um, I can’t recall who I spoke to, but I was told that their accounts department was still on leave, which is not un-normal for the building, construction industry, they have a lot of time off. So, I wasn’t able to speak to anybody at all that could talk to me about their accounts, which is why – I knew that they had started back, and I sent Brad there.
But you said you telephoned on a number of occasions requesting payment, so what did you mean by that, when were those occasions, were they all in early January were they? - - - Um, early January I wasn’t able to speak to anybody, um, after Anthony and Brad had visited the offices on the 18^th, I believe I made a couple of phone calls, I spoke to a guy called Peter who I believe, I don’t have his last name, I believe was in a similar situation, employment role as I am, and he just kept saying yep, yep, no, no, no, our accounts department’s back soon, you’ll get paid.
So, that was after the January meetings? - - - it was - - -
So, January February? - - - yeah, uh, yeah.
So, up to the point where Madgwicks sent the demand, or did you keep chasing them after that? - -- Ummm.
So, the Madgwicks demand I think was in late March? - -- We yeah, yeah that was late March, I think when I didn’t hear anything, like I’d made my last phone call to them, my last two phone calls to them, I wasn’t able to speak to Magdy, I wasn’t able to speak to Peter, and I went oh you know what, we’re just going to hand that over to our solicitors to see whether they can get that money in for us.
Because by that stage it was 90, 120 days, it was well overdue wasn’t it? - - - It was overdue, yes.
And, you say you spoke with Magdy as well at that time? - - -Um, I can’t be 100 per cent sure whether I spoke to Magdy, I know I asked for Magdy, um, I was, I don’t remember speaking to Magdy. Um - - -
So, you think it was just Peter? - - - I think it was just Peter.
And what was his role, do you know in the company? - - - I believe that he was in a similar position to me.
Okay, and was it weekly that you were ringing them, was it regularly? - - - I couldn’t tell you, but it may have been, I couldn’t tell you, I haven’t actually got notes on it.
But for overdue accounts, it’d be normal for you to ring on a regular basis, like weekly basis? - -- Yeah, unless there was a reason not to.
Sorry? - - - Unless there was a reason not to but yeah, maybe.
And on each time, they told you to would be paid? - - - Yeah.[51]
[51]T347.13-T349.1.

-a statutory demand was issued as the debt was overdue and there were no grounds for a dispute in relation to the debt;
-the debt remained unpaid following the expiry of 21 days after the statutory demand and no application was made to set aside the demand;
-the defendant issued a wind-up application;
-the ASIC search in relation to the company filed by the defendant in the wind‑up application referred to another wind-up application against the company by WorkCover;
-on the first return date, the defendant’s wind-up application attended by its solicitor, the WorkCover wind-up application was also listed in court before the same judge on the same day. The defendant should have been aware of the application and was aware of it when Ms Haddrell gave the following evidence at cross‑examination:
And you exhibited an ASIC search of Eliana at 309. Do you see that? - - - 309. This is the – yes.
That’s the only exhibit, yes? - - - Yes.
And if you turn over to 310? - - - Yeah.
And at the bottom of the page there’s a section called ASIC documents. Do you see that? - - - I can see that. Yes.
And the first one there is a form 519, date received 31 May 2016, notification of application to wind up company under s.459? - - - I do see that. Yes.
And you saw that at the time, didn’t you? - - - I did see it at the time and obviously I didn’t understand it. This is very new to us.[52]

-no evidence was filed by Eliana to show it was solvent at the time when the payment was made; and
-on the evidence it is clear that a reasonable person in the circumstances would have concluded that the company was insolvent.

[52]T326.3-14.

Here the plaintiff made offers to pay by instalments, a statutory demand was served, a wind-up application was served, and there was at least one other creditor who had applied to wind-up the company. Those are important matters which must be taken into account. When there is a wind-up application on foot and a party accepts payment of the debt, it takes the risk that this payment could be found to be a preference. Here, it is clearly a preference. A reasonable business person would have no basis to believe Eliana was solvent in the circumstances of this case. The defendant has not discharged the onus to prove that it has a good faith defence.

The discovery

Section 26 of the Civil Procedure Act provides:

Overarching obligation to disclose existence of documents
(1)Subject to subsection (3), a person to whom the overarching obligations apply must disclose to each party the existence of all documents that are, or have been, in that person's possession, custody or control —
(a)of which the person is aware; and
(b)which the person considers, or ought reasonably consider, are critical to the resolution of the dispute.

(2) Disclosure under subsection (1) must occur at—
(a) the earliest reasonable time after the person becomes aware of the existence of the document; or
(b) such other time as a court may direct.

(3) Subsection (1) does not apply to any document which is protected from disclosure—
(a) on the grounds of privilege which has not been expressly or impliedly waived; or
(b) under any Act (including any Commonwealth Act) or other law.

(4) The overarching obligation imposed by this section—
(a) is an ongoing obligation for the duration of the civil proceeding; and
(b)Does not limit or affect a party's obligations in relation to discovery.

The defendant submits that the plaintiff failed to discover critical documents either until late in the trial or at all, including:

-bank statements prior to 19 December 2015;
-Eliana’s Bank of Melbourne bank statements; and
-building contracts and notices of disclaimer of building contracts.

The defendant says the plaintiffs’ failure to make discovery delayed the trial and prejudiced the defendant in the running of its defence. Mr Sowitha gave evidence that he left all documents for Mr Cant. The defendant submits that Mr Cant did not undertake a thorough inspection of documents itself prior to making discovery, apparently having left the matter to his staff. The defendant therefore submits that as a matter of fairness an inference should be drawn that any documents that were missing or were not produced would not assist the plaintiffs. This would be appropriate in order to give effect to the overarching obligations.

It is true that some documents were discovered late in the running of the trial but these were not critical documents and did not prejudice the defendant in the running of its defence. These documents make no difference at all. Here, there was a clear preference and there is no defence that can be raised by the defendant.

Conclusion

The plaintiffs have demonstrated that a payment of $220,000.00 was made by Eliana to the defendant and that that payment is a preference. It is voidable pursuant to s 588FE(2) of the Act. The defendant was unable to demonstrate that it had a good defence pursuant to s 588FG(2)(b) of the Act. The defendant will be ordered to pay the plaintiff $220,000.00.

[2018] VSC 833

1 November 2018