RMS Financial Services Pty Limited (In Liquidation) v Mohamad Skaf

[2008] NSWDC 63

CITATION:	RMS Financial Services Pty Limited (In Liquidation) v Mohamad Skaf [2008] NSWDC 63
HEARING DATE(S):	3/12/07 - 5/12/07, 27/3/08.
JUDGMENT DATE:	15 April 2008
JURISDICTION:	Civil
JUDGMENT OF:	Rolfe DCJ
DECISION:	Verdict and Judgment for the Defendants.
CATCHWORDS:	Claim by Company in liquidation for balance of purchase price said to be owing under a contract for sale of land - Defence of set off - Claim by Liquidator that alleged set off based on sham transaction - Preference Claim - Application to amend pleadings on last day of hearing
LEGISLATION CITED:	Corporations Act 2001
PARTIES:	RMS Financial Services Pty Limited (In Liquidation) (1st Plaintiff) Raymond George Tolcher (2nd Plaintiff) Mohamad Skaf and Raife Skaf (Defendants)
FILE NUMBER(S):	1793/06
COUNSEL:	J Johnson (Plaintiffs) R Newton (Defendants)

JUDGMENT

1 The First Plaintiff in these proceedings, RMS Financial Services Pty Limited (In Liquidation), is a company which was wound up on 29 August 2004 by order of the Supreme Court of New South Wales. On that date the Second Plaintiff, Raymond George Tolcher, was appointed official liquidator of the First Plaintiff. From now on, I will refer to the First Plaintiff as the “Company” and the Second Plaintiff as the “Liquidator”.

2 Prior to the Company being wound up, on 14 May 2004 it entered into a contract with both defendants for the sale by the Company to the defendants of the property known as 1021-1021A Canterbury Road Lakemba (the “Property”) for the price of $1,500,000.

3 As at the date of the contract, the defendants’ son, Roy Skaf, also known as Rayed Skaf, was a director of the Company. From now on I will refer to him as either “Skaf” or “the son”.

4 It was an express term and condition of the contract that $150,000 was payable as a deposit by the defendants to the Company on exchange. It was also an express term and condition that on completion the defendants would pay the balance of the purchase price of $1,350,000. That price was to be paid as directed by the Company.

5 Although the deposit was not paid on exchange, the defendants say that payment of the deposit was deferred by the Company until completion of the contract. On completion, the defendants say they paid the Company the whole of the purchase price, plus or minus the required adjustments under the Contract.

6 The plaintiffs’ case is that although the contract was completed on 6 August 2004, the defendants were in breach by failing to pay the deposit of $150,000 and part of the purchase price in the amount of $352,949.11.

7 The defendants’ case is that on 30 June 2003 they entered into a loan agreement (the “Loan Agreement”) with the Company as a result of which they advanced the amount of $500,000 to the Company. (The document is found at exhibit A 872-892). It was a term of the Loan Agreement that the loan would be repaid on or prior to 31 December 2003.

8 It is also the defendants’ case that on 30 June 2003, by deed of charge of that date (the “Charge”), the Company charged its assets and undertaking with repayment of the Company’s debt to the defendants under the Loan Agreement. (The document is found at exhibit A 864-871). The defendants say the Charge operated as a fixed charge over the Property. In this respect, the plaintiffs do not dispute that, under s 262(8) of the Corporations Act, it was unnecessary for the Charge to be registered.

9 The defendants say that, on or about 14 May 2004, the Company, through Skaf, agreed that the amount owing by the Company to the defendants under the Loan Agreement would be applied towards the deposit and the balance of the purchase price payable by the defendants under the Contract.

10 Settlement of the sale occurred on 6 August 2004 when the sum of $987,122.57 was paid by an incoming mortgagee to discharge an amount owing under an existing mortgage. The defendants say that the amount they owed the Company for the balance of the purchase price (including the deposit) was paid by them setting off their liability in this regard against an equivalent amount of the Company’s indebtedness to the defendants under the Loan Agreement.

11 In response, the plaintiffs say that the Loan Agreement is a sham. Alternatively, the plaintiffs say that, to the extent the Loan Agreement was not a sham, that it had nothing to do with the Company and evidenced a loan made by the defendants to Maroubra Properties Pty Limited (“MP”). In this regard, the plaintiffs rely on a proof of debt lodged by Skaf on behalf of the defendants in the winding up of MP on 15 May 2004.

12 Further, in the alternative, the plaintiffs say that, if in fact the Company credited the defendants with amounts totalling $502,949.11 in partial satisfaction of any monies owed by the Company to the defendants, that the payments constituted insolvent transactions within the meaning of s 588 FC of the Corporations Act and the transactions are voidable pursuant to s 588 FE (2) of the Act.

13 The background to the matter is that prior to June 2003 Skaf and two business associates, Jim Kolios (“Kolios”) and Joul Jamal, were involved in development projects through various companies including Central Development Group Pty Limited (“CDG”) and MP. Kolios was, in effect, Skaf’s business partner in the separate finance broking business conducted by the Company.

14 The defendants are elderly people who migrated from Lebanon to Australia. They have a very limited command of English and their evidence was given through an interpreter.

15 The defendants made a joint affidavit (exhibit 1). In it, the defendants said that they advanced $500,000 to the Company after obtaining the funds by mortgaging their home at 3 Harold Street Mt Lewis. It was the defendants’ understanding that their loan to the Company was secured over its assets.

16 The defendants said that they made the loan to the Company at the request of their son who told them that the Company needed to borrow money to put out on a short term investment. Skaf told his parents that he could arrange a loan over their home and they could then on-lend the money to his Company. Skaf told his parents it would be a short-term loan and “ … it will be repaid with a 30% return. You will get security over the company” (para 4 exhibit 1). Based on what their son had told them, the defendants said they decided to lend the money to the Company and mortgage their house. They then went ahead with the transaction.

17 The defendants said that in early 2004 they were concerned that their loan had not been repaid. They did not wish to force a sale of the Property and, instead, decided to purchase it. They said that in late April 2004 they had a discussion with their son in which he told them that the Company would sell them the Property at a fair valuation. Skaf told his parents he would obtain a valuation and have solicitors prepare a contract. Skaf did both of these things. He also explained to his parents that they could apply whatever the Company owed them under the Loan Agreement against the purchase price for the Property. As to the balance of that purchase price, Skaf promised his parents that he would arrange a loan for them so they could complete the transaction. Once again, the defendants said they then decided to purchase the Property based on what their son had told them.

18 Shad Partners, a firm of solicitors, acted for the Company on the sale. The defendants said that Chad Partners also acted for them as solicitors on the purchase. The defendants left it to their son to make whatever arrangements were necessary with the solicitors for the purchase of the Property to go ahead. The defendants also said they found out after settlement that they were still owed some money by the Company under the Loan Agreement. If successful in these proceedings, it is the defendants’ intention to lodge a proof of debt for this amount in the winding up of the Company.

19 Mr Johnson of counsel appeared for the plaintiffs and Mr Newton of counsel appeared for the defendants. Both counsel provided the Court with detailed written submissions. Those of Mr Johnson in chief are dated 8 February 2008. Those of Mr Newton in response are dated 29 February 2008. Mr Johnson’s submission in reply are dated 20 March 2008.

20 The plaintiffs point to a number of alleged deficiencies in the defendants’ case in support of their contention that the Loan Agreement was either a sham transaction or the basis of a loan to another entity other than the Company. These matters are set out in detail in Mr Johnson’s submissions.

21 The plaintiffs submit that the evidence establishes that the defendants’ affidavit, exhibit 1, as well as their affidavit verifying their defence, was prepared by the defendants’ solicitors on Skaf’s instructions, and not the instructions of the defendants and that Skaf translated the document to the defendants and the affidavit was then signed in his presence. Although the Court was not referred to any portion of the transcript in this regard, when looked at in isolation at T 44.9-38, it might seem, on first impression, that this submission is correct. However, when one considers the first defendant’s evidence at T44.40ff and T45, recalls the way it was given in the witness box and the impression it then gave the Court, I am satisfied that the first defendant was confused concerning the documentation he was being asked about and was directing himself to the circumstances when he signed the Loan Agreement and Mr Finn, the Company’s accountant, was in attendance. In reaching this conclusion I have been very conscious of the fact that neither of the defendants could read English, let alone speak it in any fluent way. I am also fortified in coming to my conclusion by having regard to the confusion in the first defendant’s evidence at T49.56 where he said he had not ever met his solicitor, Mr Nasti, other than at the son’s office (exhibit 1 was sworn at a different location, Bankstown). The first defendant also said that Mr Nasti was not a solicitor, further evidencing his confusion. The first defendant’s evidence became more cogent when, at T58.53 he said he went to the solicitor’s office and he identified the solicitor as Mr Nasti, whose son, Sam Nasti, also a solicitor, was present in Court instructing counsel. The first defendant then said he had been to the solicitor’s office on at least 3 or 4 occasions (T 77.30) and he confirmed he and his wife had signed the affidavit verifying their defence at Mr Nasti’s office in the presence of an interpreter (T 78.49). The first defendant said he had an interview with his solicitor and, through an interpreter, told the solicitor everything (T 79.9). Later on in re-examination, the first defendant said that he was shown exhibit 1 before he and his wife signed it, that this was done at Mr Nasti’s office and that there was an interpreter present. The interpreter, Mohammed Alali, has signed exhibit 1 and certified that he translated the affidavit to each of the defendants, and they accepted and understood its contents before each of them signed it. It is perfectly clear on the evidence that the interpreter was there at the time (T78.49, T79.9, T80.2, T80.26 and T85.14).

22 I am therefore satisfied that it was the defendants, and not Skaf, who instructed their solicitor about the contents of their defence and their affidavit. In this regard, I had a good opportunity to observe the first defendant whilst he was giving evidence because he was in the witness box for a while. He presented as an elderly, uneducated man who had trouble understanding some of the questions that were put to him (as the discussion above demonstrates) but, overall, I have no doubt that the first defendant is an honest man and that he answered questions to the best of his ability in terms of his understanding of them. Most importantly, I am satisfied that the first defendant was a truthful witness. Moreover, whilst in the witness box, the first defendant adhered to his affidavit evidence (especially at T58.45, T63.2, T63.30, T71.28, T71.46, T72.1 and T72.41). The first defendant denied ever hearing of MP and I believed him when he gave the answer.

23 So far as the second defendant is concerned, she was in the witness box for a shorter time. Nevertheless, I am satisfied that the second defendant gave her evidence in a straightforward way and was honest and truthful in doing so. In particular, the second defendant insisted that the $500,000 was advanced to the Company not her son (T91.18). Although the second defendant identified her signature on the Charge (T90.23) but was unable to recall precisely when she signed it, she did recall signing documents with her husband at the Property in 2003. I therefore accept the second defendant’s evidence.

24 The evidence-in-chief of Skaf is contained in exhibit 2. He said that he came up with the idea of having his parents borrow $500,000 on the security of their house and then lending this amount to the Company in return for a company charge and second mortgage over the Property. Clearly, on all the evidence, Skaf talked his parents into the transaction as his evidence in exhibit 1 demonstrates.

25 In paragraphs 10-20 of exhibit 1 Skaf sets out the steps taken in his parents borrowing money, mortgaging their home to do so and making a loan to the Company. This evidence corroborated the evidence of Skaf’s parents. In cross-examination Skaf did not depart materially from this evidence. In this respect, the evidence of the defendants and Skaf is consistent with the bringing into existence on 30 June 2003 of the Loan Agreement, the Charge and a deed of guarantee and indemnity (the “Guarantee”) (exhibit A 893). Moreover, it was not put directly to Skaf in cross-examination that the defendants had not lent money to the Company.

26 The Loan Agreement, the Charge and the Guarantee were executed in the presence of Mr Peter Finn, an accountant. Mr Finn’s evidence is critical to the Court’s determination of this matter because the plaintiffs submitted that the Loan Agreement was backdated by Skaf in order to justify the set off which the defendants rely on in their defence.

27 In his affidavit, exhibit 3, Mr Finn gave evidence that he is a tax agent who had done some tax work for, or at, Skaf’s behest over a period of six years. He is not related to Skaf or the defendants and has never socialised with any of them. Mr Finn said that on 30 June 2003 he was at the Property. Whilst he was at the Property, Skaf introduced him to the defendants. Mr Finn said Skaf told him that his parents wanted to sign some documents relating to a loan and that Skaf asked him to witness their signatures. Mr Finn agreed to do so. He said he then sat at a desk with the defendants. They then signed in his presence the Loan Agreement (A 874), the Guarantee (A 893) and the Charge (A 864). He then signed each of these documents as a witness. Mr Finn also said he witnessed Skaf’s signature on the documents.

28 The defendants tendered an extract from Mr Finn’s diary for the 2003 year (exhibit 4). In exhibit 4 Mr Finn had recorded that at about 11.30am on 30 June 2003 he had gone to the Property. He told the Court that this was so he could obtain information for the preparation of BAS statements. Mr Finn said that he used to go to the Property to obtain information for that purpose and also so he could prepare the Company’s tax returns. That was the extent of him providing external accounting services to the Company. He also said he had helped Skaf prepare the report as to affairs of the Company.

29 I was very impressed with Mr Finn when he gave evidence. My initial reaction was a degree of circumspection about how he could remember so clearly being present on 30 June 2003 at the Property when the documents referred to above were signed by the defendants in his presence. At the end of his cross-examination I was firmly convinced that, not only was Mr Finn a truthful witness, but that, in fact, he had a very good recollection of what occurred on 30 June 2003. Mr Finn had a very good recollection because he had only met the defendants twice and one of those occasions was recently. Mr Finn clearly recalled meeting the defendants for the first time at the Property when he witnessed their signatures. He was emphatic that the documents were signed on 30 June 2003 and not some time in the following year. When the Court asked him how he could be so sure that it was 30 June 2003 when the documents were executed, his evidence was (T 192.19) with reference to the Property:

“I have been there frequently, yes, but I remember it was the end of the financial year and I’m sure it was 2003. You tend to remember those things because it’s our worst time of year coming up.”

30 In other words, independently of his diary entry, Mr Finn had a clear recollection of being at the Property on 30 June 2003 when he witnessed the defendants’ signatures on the documents referred to above. I should also add that, in coming to the conclusion I have about the truthfulness of Mr Finn’s evidence and his honesty, I have taken into account his conceded partiality in terms of his ongoing association with a company controlled by Skaf’s wife (T 196.9-25).

31 The Liquidator gave evidence that he relied on what his staff had told him and that he did not look at all the relevant documents (T15.30-47). None of his staff who had investigated this matter gave evidence and the Liquidator conceded that Skaf told him in an interview shortly after the winding up that the defendants had lent money to the Company which, in turn, had on-lent funds to CPG (T18.22). The Liquidator did not tender any records of interview (although they were available to him: T28.48) and conceded in cross-examination (T18.27) that he had seen documents supporting the on-lending of funds by the Company to CPG (exhibit A 856 dated 30 June 2003 records funds of $496,974.50 being advanced by the Company to CPG). The Liquidator also agreed that he could observe from the Company’s balance sheets the existence of a loan by the Company (T22.3) and a reduction in the loan balance (T22.30). No steps were taken by the plaintiff to call the bookkeeper who prepared the Company’s financial records. It would also seem that the Liquidator took no steps to interview Mr Finn to ask him about the execution of the Loan Agreement by the defendants (T31.30).

32 Counsel for the plaintiffs submitted that the Court should draw an adverse inference against the defendants because they did not call Kolios to give evidence about another loan agreement between MP and the defendants dated 30 June 2003 (exhibit A 857) (the “MP Loan Agreement”). However, I do not see why the defendants needed to call Kolios; rather, if anything, the plaintiff’s case required them to call this witness in order to make out their case that the Loan Agreement was a sham, particularly when Skaf’s evidence was that the MP Loan Agreement was a sham (T142.50, 143.19, 179.56, 180.30 and 180.34) and the defendants had never heard of MP. Similarly, I do not see why the defendants should have called evidence from Ahmed Merheb, the person who witnessed Skaf’s signature on the MP Loan Agreement between MP and the defendants; rather, if anything, the plaintiffs should have called this witness in support of their case that the Loan Agreement was a sham. Further, in this respect, the evidence establishes that the defendants did not personally sign the MP Loan Agreement or the proof of debt in the MP liquidation. The Court is not satisfied that the defendants advanced any funds to MP on 30 June 2003 or thereafter. The proof of debt signed by Skaf was a false claim lodged by him with the liquidator of MP to extract money out of the liquidation of MP.

33 Counsel for the plaintiffs also submitted that the defendants should have called the son’s wife, Kylie Skaf, about the termination of the Lease. I accept the defendants’ submission that Kylie Skaf’s evidence would only have been relevant to the plaintiffs’ claim for recovery of GST which is dealt with later in this Judgment.

34 In the context of the plaintiffs’ submissions that the Loan Agreement was a sham, the Court has taken into account the evidence concerning the sale of the Property.

35 It is common ground that Shad Partners acted as solicitor for the Company as Vendor and for the defendants as purchasers. In this respect the plaintiffs submitted that an adverse inference ought be drawn against the defendants because no evidence was led from Mr Shad or one of his employees concerning the instructions received about the Contract. Although this was said to be relevant to the alleged backdating of the contract and other matters, it is the plaintiffs’ case that such backdating occurred and that the defendants have failed to pay monies under the Contract. If anyone should have called Mr Shad or one of his employees it should have been the plaintiffs. In this respect the Shad Partners settlement statement (exhibit A11) records the payment of monies on settlement. The payments reflect payment of a deposit of $150,000 which Skaf told Shad Partners had been taken up directly between the parties (T156.40, T156.44) as part of the set off arrangement. Further, the settlement statement also records a payment “direct to the Vendor” of $352,949.11 and “balance of purchase monies paid direct to Vendor” in the same amount. Skaf’s evidence (exhibit 2, para 28) was that the capital component of the defendants’ secured loan to the Company was set off against the balance of the purchase monies. I accept this evidence because it was corroborated by the evidence of the defendants who depose in exhibit 1 at paragraph 5 that such a set off was their intent. In this respect it was not put to Skaf or the defendants that, in fact, no set off had been applied to effect payment of the deposit or balance of purchase price. At the same time, the Liquidator appears not to have taken the matter up with the solicitors who acted on the sale (T18.55), notwithstanding that the Liquidator obtained the solicitor’s file and therefore appears to have had access to all of the relevant documents on the conveyancing side. In this respect the transfer delivered at settlement on 6 August 2004 (exhibit A p 37) bears the words:

“The transferor acknowledges receipt of the consideration of $1,500,000.00”

That transfer was provided in draft by Shad Partners to the solicitors for the incoming mortgagee in a facsimile dated 30 July 2004 (exhibit A p 36). Those solicitors must have been acting on instructions from the Company and the defendants. The Court infers that the settlement monies were calculated in accordance with the instructions of both parties. Accordingly, the receipt in the transfer has not been impeached.

36 The plaintiffs’ case on the Loan Agreement therefore fails. The Court is comfortably satisfied that on 30 June 2003 the defendants loaned $500,000 to the Company, that the Loan Agreement was entered into on that date, that the Loan Agreement was not a sham transaction and that the Company’s obligations to the defendants were secured under the Charge.

37 The Court is therefore satisfied that there are no monies owing by the defendants to the Company under the Contract for sale of the Property. In reaching this conclusion the Court rejects the plaintiffs’ application to amend the Statement of Claim to include a claim for GST. The application was made during the final stages of the hearing. Counsel agreed that the application was best dealt with in their written submissions and, consequently, by this Court, in this Judgment.

38 No claim for GST was made in the original proceedings and it is a matter which ought to have been specifically pleaded. The GST issue was not raised by counsel for the plaintiffs until the third day of the hearing when leave was sought to amend (T197.21).

39 Counsel for the defendants opposed leave being granted because he said that his clients would be prejudiced in not being able to meet such a claim at that point in time. Counsel for the plaintiffs was therefore invited to make submissions to the Court that the claim could be made without there being prejudice to the defendants.

40 Apart from the failure of the plaintiffs to explain the reason for the lateness in the amendment being sought, I am not satisfied that the defendants would not be prejudiced if they had to meet the GST claim on the evidence as it stands. I accept the defendants’ submissions that they would have to call further lay evidence so the Court could objectively establish the intention of the parties to the Contract regarding any adjustment for GST including evidence from solicitors who handled the transaction and in particular, the author of the handwritten note on the letter dated 13 May 2004 from Shad Partners to the Company (exhibit A 288). Apart from the defendants and their son having to provide proofs of evidence themselves, the defendants said, quite rightly, that expert evidence would need to be called on the question of whether, in fact, there was a sale of the Property on a going concern basis and, if so, whether the going concern was maintained up until completion of the sale. I accept that before such expert evidence could be obtained it would be necessary for the defendants to complete further investigations into the matters including the taking of the proofs of evidence I have just referred to. On this basis, the Court is satisfied that the defendants have established prejudice. The Court therefore refuses the plaintiffs’ application to amend.

41 Having dealt with the application to amend on the above basis, it is not necessary for the Court to consider the submissions made by counsel for the defendants in paragraph 45 of his written submissions.

42 No written submissions were made by counsel for the plaintiffs in relation to the preference claim. No doubt this was because such a claim was directly at odds with the plaintiffs’ main claim that the loan transaction was a sham and that there was no payment of the deposit and balance of purchase monies. As a result of the Court’s finding against the plaintiffs on these matters it follows that the defendants were in fact secured creditors who took priority over the unsecured creditors of the Company and they did not receive a preference as required by s 588AF (1)(b) of the Corporations Act. It also follows from the Court’s findings that there was no voidable transaction pursuant to s 588 FE (2) in connection with the set-off of monies owing to the defendants in their capacity as secured creditors of the Company as against the monies they owed to the Company under the contract of sale.

43 Accordingly the Court dismisses the plaintiffs’ preference claim.

44 In the result the Court makes the following orders:

1. Verdict and Judgment for the Defendants.

2. Direct the exhibits be returned.

45 Costs should follow the event on the ordinary basis but I will hear the parties if there is any basis upon which they wish to make submissions that a different order should be made.

**********