Re: Pacific Hardware Brokers (Qld) P/L

[1997] QSC 234

IN THE SUPREME COURT
OF QUEENSLAND

Brisbane  No.9573 of 1996

Before the Hon. Mr Justice Mackenzie

[re: Pacific Hardware Brokers (Qld) P/L]

IN THE MATTER of the Corporations
Law

- and -

IN THE MATTER of PACIFIC HARDWARE BROKERS (QLD) PTY LTD (IN LIQUIDATION)

ACN 056 564 419 

CATCHWORDS:           CORPORATIONS LAW - liquidation - void dispositions - solitaire diamond engagement ring and furniture paid for by cheques and debits against company’s assets by director, - whether transactions voidable as insolvent and/or uncommercial transactions - whether company insolvent at those times - whether recipient of the ring is a party to the transaction for the purposes of s.588FG - applicability of defence in s.588FG - whether ring can be recovered from her - whether ring purchased by director with loan from the company - whether purported compromise able to be rescinded.

Counsel:Mr P.A. Looney for the applicant.

Mr P.W. Hackett for the respondent.

Solicitors:MJ Murray & Co for the applicant.

HCF Lawyers for the respondent.

Hearing date:  8 December 1997

JUDGMENT - MACKENZIE J.

Judgment delivered 19 December 1997

This is an application by the liquidator of Pacific Hardware Brokers (Qld) Pty Ltd for orders under the Corporations Law concerning a solitaire diamond ring and furniture paid for by cheques and other debits against the company’s assets.

With respect to the furniture an order is sought under s.483(1) of the Corporations Law that it be delivered to the liquidator or, in the alternative, that Kristopher Hollworth pay $2,519 (the purchase price) to the liquidator. With respect to the ring which was given by Mr Hollworth to the woman whom he subsequently married as an engagement ring the following orders were sought:-

·that Kristopher Hollworth deliver it pursuant to s.588FF or in the alternative s.483(1) of the Corporations Law;

·further or in the alternative to those orders an order under s.588FF against Mrs Hollworth for delivery of the ring;

·in the alternative to all of those orders an order under s.588FF(1)(d) that Mr Hollworth and/or Mrs Hollworth pay $41,926, the value attributed to the ring in a certificate dated 31May 1996 by the jeweller who manufactured the ring;

·in the alternative to an order to pay that sum, an order against Mr Hollworth pursuant to s.588FF(1)(a) that he pay $30,000, the purchase price of the ring.

Mr Hollworth was the sole director of the company.  Mrs Hollworth was not in any way concerned with its management or its operations.  The furniture was purchased from Freedom Furniture with a cheque drawn on the company account on 10 May 1996.  The butt is endorsed “office furniture”.  In his evidence Mr Hollworth conceded that he had intended to use that description to gain a tax advantage and the furniture was never situated at the company’s office and that the only use to which it was put was at his residence. 

The ring was purchased from a jeweller at Annerley for $30,000.  It was paid for by two cheques of $10,000 dated 10 June 1996 and $5,000 dated 21 June 1996 respectively with the balance  of $15,000 being paid by means of a Bartercard docket for $15,000 drawn on the company.  The cheque butts bear no explanation of the reason for the expenditure other than the name of the jewellery shop.  According to the rules of the Bartercard trading programme a “trade dollar” is an accounting unit equivalent to $1 used to record the value of goods and services traded.  If a trade account is in credit it represents an asset of the member and entitles the holder to obtain goods and services to an equivalent value from another member but not otherwise.  If the account is in debit there is an obligation to supply goods and services of an equivalent value to another member or pay  to the Exchange company an equivalent amount in dollars.  Therefore while someone may have built up a credit within the Bartercard system the credit does not have any intrinsic value except within the Bartercard system. 

Section 483(1) of the Corporations Law empowers a court to require an officer of a company, amongst others to pay, deliver or transfer property in that person’s hands to which the company is prima facie entitled. Mrs Hollworth falls into more of the categories to which s.483 extends. This power does not extend to a case where there is a question as to ownership of the property as between the liquidator and an officer of the company (Kenross Homes Pty Ltd (in liq) (1994) 2 Qd.R 137). Section 588FF empowers the court to make a range of orders where it is satisfied that a transaction of a company is voidable pursuant to s.588FE. It was submitted that the transactions in issue were voidable because they were insolvent transactions and also uncommercial transactions. There is no doubt, if they were, they were entered into within the prescribed period (s.588FE(3)). A transaction of a company is an “uncommercial transaction” if and only if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefits (if any) and the detriment to the company of entering into the transaction. If a proper analysis of the facts is that the company purchased the ring I am satisfied that it was an uncommercial transaction.

With respect to Mrs Hollworth, she deposed that Mr Hollworth had proposed to her in May or June 1996 following which they discussed the design of her engagement ring with the jeweller. She deposed that as far as she was aware her husband had paid for it and that she knew nothing of her husband’s business activities or whether the company was solvent or insolvent at the time she received the ring (June 1996). She was not required for cross-examination. I proceed on the basis that what she says is accepted as correct. Insofar as she is concerned, it is conceded that the critical issue is whether she is “party to the transaction” since s.588FG prohibits the making of an order materially prejudicing the right or interest of a person other than a party to a transaction if the person received the benefit in good faith and at the time it was received the person had no reasonable ground for suspecting the company was or would become insolvent because of entering into the transaction.

She was the recipient of the ring and benefited thereby. She had input into its design. Nevertheless she was not a party to the transaction in the sense contemplated by s.588FG. The liquidator has not challenged her evidence that she was not aware of the source of the funds and, in particular, her evidence that she was not aware that funds were to be derived from the company. If the facts had been as she believed them to be, she would have been entitled to the ring as between her and her husband on the basis that a gift in contemplation of marriage is a gift conditional upon marriage occurring, which condition was fulfilled by her (Kais v.  Turvey (1994) 11 WAR 357). Whether a person fits the description of a party to the transaction will depend to a degree on the facts of the individual case. In the present case she was not a party to the transaction and, on the evidence, fits the other criteria which protect her against an order under s.588FF. There is no basis for making an order of any kind against her.

So far as the ring is concerned there is no basis upon which an order can be made under s.483 against Mr Hollworth since it is not in his hands, because it has been disposed of by a gift to a person who, on the evidence, was not a party to the transaction of the company which resulted in its acquisition and who took it in good faith without grounds for suspicion as to the source of the money or the company’s financial standing. 

Before exploring the question of insolvency of the company at relevant dates and what order should be made if a basis is made out, it is recorded that on matters where credibility is important Mr Hollworth’s evidence was significantly deficient.  His evidence, particularly under cross-examination, demonstrated this and was generally supportive of the adverse impression to be gained from his dealings with the liquidator concerning the property which the liquidator was trying to recover.  During the liquidation, negotiations were entered into in the mistaken belief on the part of the liquidator that the ring had been purchased for $15,000 since that was the amount paid by cheques.  The liquidator was not aware of the additional $15,000 accounted for under the Bartercard system.  An arrangement was entered into, without any attempt on the part of Mr Hollworth to disclose the full extent of payments for the ring, under which he agreed to pay the liquidator the value of the furniture and an additional $15,000 in two installments of $9,000 and $8,519 respectively.  Mr Hollworth reneged on this arrangement almost immediately.  His explanation that he thought that the  advantageous proposal was being advanced by the liquidator in recognition of the fact that the ring would bring only a fraction of its value is not worthy of any credit.

Since the issue of credibility arises with respect to an account with another barter organisation, Contrabart Pty Ltd, it is convenient to discuss it at this point also.  This account was raised in connection with setoff against the loan.  Mr Lipscombe, Managing Director of Contrabart, gave evidence that the company had an account with Contrabart.  Mr Hollworth denied that the account was in the name of the company and said it was at all times intended to be a personal account in his name.  The application for an account shows the company as applicant and Mr Hollworth as the contact within it.  The writing showing the company as applicant and giving its bank as its business bank is his.  The company is recorded in Contrabart’s accounting system as the member.  Mr Hollworth tried to make out his case by saying that it was understood by him and the officer of Contrabart (not Mr Lipscombe) who had completed the application that it was to be a personal account.  He relied on his signature on the form which appears under the words “signed by the sole trader/partner/authorised company representative of the applicant.”  Underneath the lines upon which the signature of Mr Hollworth appears are the words “members name” and “members signature”.  Taken as a  conglomerate of words, at best they are equally consistent with Mr Hollworth’s claim that the account was a personal account.  Read as a whole the form shows the company as applicant and Mr Hollworth as the contact and principal cardholder.  I do not accept that it was a personal account.  It is noted that all transactions on the account appear to post-date the transactions that are relevant in these proceedings.  The Contrabart account is therefore of no assistance in connection with a claim made that the value of the ring was more than offset by contributions from Mr Hollworth’s personal funds arising from a real estate transaction entered into using the Contrabart account.  I reject Mr Hollworth’s version of the conversation which led to Mr Lipscombe giving an affidavit in the proceedings.  As the claim that the account was a personal account, not a company account, fails at the threshold it is not necessary to explore the details of that transaction.

Another issue resolved by the finding as to credit concerns the submission that the ring was actually purchased by Mr Hollworth with a loan provided to him by the company.  It is undoubtedly  not uncommon for a transaction of this kind to be accomplished by and recorded as a loan from the company to a director.  However there is nothing in the evidence that satisfied me that there was a contemporaneous intention at the time of purchase of the ring that the $15,000 was a loan from the company to Mr Hollworth.  I am satisfied that he did not turn his mind to that issue at all.  So far as the Bartercard component is concerned, the credit could be used only by the account holder, the company.  I am satisfied that it was an afterthought on Mr Hollworth’s part that the transaction might be represented as a loan to him.  There is no contemporaneous suggestion in any written form of the transaction being a loan.  I do not accept that he specifically discussed the transaction with his now deceased accountant (his uncle).  Further the early dealings with the liquidator acknowledge that the company paid for the ring (Exhibit C affidavit B A Pleash).  This version of what occurred at the meeting was not challenged.  Further, the notion of repaying the money as if it were a loan account appears to have emanated from the liquidator’s assistant (ibid) and was embraced enthusiastically by Mr Hollworth until he obtained legal advice.  This is inconsistent with the suggestion that he had prior advice from his accountant that the matter would be treated as a loan.  The basis upon which the matter is resolved  is that the payment of $15,000 by the two cheques was not conceived at the time when it occurred as being a loan.  The $15,000 payment by way of Bartercard was a company transaction for the reasons previously given for rejecting the notion that the Bartercard account was Mr Hollworth’s personal account. 

Reference has previously been made in connection with issues of credibility to an agreement under which Mr Hollworth agreed to pay $17,519 in satisfaction of the liquidator’s claims against him.  It was submitted that this was a compromise which had been reached and if the liquidator wished to recover anything from Mr Hollworth, action should be taken in respect of the failure to carry out the compromise.  The liquidator and his staff were obviously under a misapprehension that only $15,000 had been paid.  Their inquiries had failed to reveal the full consideration.  It was submitted that Mr Hollworth’s silence in the circumstances was not a misrepresentation.  The general rule is that mere silence is not a misrepresentation.  Mere acquiescence in self-deception by another does not entitle the party to a remedy.  However, silence may provide the basis for setting aside a contract for mistake.  The principle in that regard is that a party who has entered into a contract under a serious mistake about its contents in relation to the fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering into the contract under some serious mistake or misapprehension either about the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension (Taylor v. Johnson (1983) 151 CLR 422). However where silence distorts a positive representation the silence may result in misrepresentation. It was a case where it was obvious to the representor that the liquidator was seeking to recover the assets used to purchase the ring. It was a distortion of the true situation to deliberately state that there was a loan of $15,000 from the company. The fact was that $30,000 of company assets were used to fund its purchase. Exhibit D to Mr Pleash’s affidavit was, according to Mr Hollworth, an offer and subject to acceptance by the liquidator. By implying that $15,000 of the company’s assets had been used, it was a misrepresentation. I am satisfied that it was causative of the liquidator’s agreement to the proposal. The liquidator was entitled to rescind the agreement which he effectively did on 28 July 1997.

The next question is whether the company was insolvent at material times.  This is complicated by evidence that at various times the company had accounts with commercial organisations running barter schemes and the exclusion of the credit available from those schemes at the time of the impugned transactions from the calculation of the company’s position.  Mr Kelly the liquidator’s employee agreed that the company was using at least four systems but thought that at the relevant times Bartercard was the only operative system. 

As at 10 May 1996 the working capital position of the company was that it had what was described as “debtor (cash component)” of $23,683.58 and a credit balance in an NAB account of $4,354.64.  Current assets were $28,038.22.  On the raw figures there was an excess of liabilities over assets of $18,312.  However, there was also an amount of $28,085.90 potentially due to the company  from its participation in the Bartercard scheme.  However, this credit could only be used if the creditor agreed to receive payment in the form of Bartercard dollars, which effectively meant that it was a member of the scheme.

Of the creditors only two definitely had a Bartercard account.  The debts owing to them were  $5,798.80 in total.  It was uncertain whether one other creditor was a participant.  Its debt amounted to $1,307.  Total debts potentially payable by Bartercard were therefore $7,168.80.  There was still a substantial deficit of assets over liabilities.  If the liquidator had taken the bankcard credit into account there would still have been a deficiency of $11,211.32 with respect to debtors who would have to be paid in legal tender.  Even allowing for a suggestion in Mr Kelly’s evidence that of the Truspak debt about $20,000 rather than $30,602.29 was immediately due and owing there would still be a deficiency.  Reference was also made to a Brisbane Trade Express statement which showed a trade balance of $56,615.91 in trade balance.  This is treated with caution since the statements are dated 31 August 1996 and 31 October 1996.  There is no statement which specifically covers the relevant dates.  Having regard to my findings on credibility I treat with reserve Mr Hollworth’s evidence that  the balance had accrued in about February.  In any event there is no suggestion of any of the creditors being parties to that scheme and in particular when Mr Hollworth gave evidence he did not give any explanation detracting from that proposition.  In the circumstances it is inferred that no evidence could be given which would affect the issue of solvency of the company as at 10 May 1996 in respect of that credit.  It therefore does not affect the conclusion as to the company’s insolvency at that date. 

The 12th June is the day immediately before the day when the $10,000 cheque was debited to the company account.  On that day the debtors (cash component) sum was $50,564.03.  The NAB account was by this time in overdraft to the extent of $5,461.12, slightly over the $5,000 limit.  There were no other credit facilities available to the company.  Its current liabilities were said to be $94,674.59.  On the raw figures the deficiency was $44,110.56.  According to the affidavit of Mr Kelly the comments relating to the Bartercard applicable at 10 May 1996 were also applicable to the position at 12 June 1996.  By 12 June 1996 the company’s financial position had deteriorated substantially and even taking into account all possible factors reducing the raw figure the company was insolvent at that date. 

It should be said that while the evidence in the liquidator’s material required the court to perform the exercise which has been performed and it would have been more helpful had all of the relevant factors been spelt out more explicitly, I am satisfied that on both relevant dates the company was insolvent.  I am also satisfied that the transactions were uncommercial.  The remaining question is whether orders should be made under s.483 or s.588FF and if so, what orders.  The making of orders involves an exercise of discretion.  In all of the circumstances of the case an order under s.588FF(a) should be made against Mr Hollworth in respect of the ring. 

With respect to the furniture, I am satisfied that an order should be made under s.483.  The books of the company show that it was paid for with company funds and that it was described as office furniture.  As Ambrose J.  points out in re: Kenross Homes Pty Ltd s.483(1) is designed merely to enable the liquidator to take into his custody or control property to which the company is or appears to be entitled. Where such property is in the hands of an officer of the company the court may direct that that property be placed into the custody of the liquidator if the company is “prima facie entitled” to that property even if it is the contention of the officer that in fact whatever may be the prima facie entitlement of the company to the property it is the property of the officer.

The following are the orders:-

1. I order that Kristopher Gregory Hollworth pay to the company the sum of $30,000 being the money that the company has paid under the transaction in which the ring was acquired.

2. I order that Kristopher Gregory Hollworth deliver on or before 5 pm on 24 December 1997 or at such later time as may be allowed by the liquidator the furniture depicted in photographs forming part of Exhibit D to the affidavit of Blair Alexander Pleash sworn on 26 September 1997.  

   I will hear the parties as to costs.