Royal v El Ali

Case [2016] FCA 782

FEDERAL COURT OF AUSTRALIA

Royal v El Ali [2016] FCA 782

File numbers: NSD 1731 of 2013
NSD 771 of 2014
Judge: DAVIES J
Date of judgment: 5 July 2016
Catchwords:

BANKRUPTCY – voidable transactions – dispositions of real property – whether intent to defraud creditors – relevant principles – whether properties held on trust –where transferees purported to have been appointed as trustees – relevance of subjective belief of bankrupt that properties were held on trust – whether properties had no value – relevance of subjective belief of bankrupt as to value – whether transferee acted in good faith – Conveyancing Act 1919 (NSW) s 37A

BANKRUPTCY – voidable transactions – dispositions of real property – whether alienation of property – where properties held by companies controlled by bankrupt – where company executed transfer of property before settlement of purchase of the property – Conveyancing Act 1919 (NSW) s 37A

BANKRUPTCY – voidable transactions – transfers of shares – whether intent to defraud creditors – relevant principles – where assets of companies claimed to be held on trust – whether shares had no value – whether transferee acted in good faith – Conveyancing Act 1919 (NSW) s 37A

BANKRUPTCY – voidable transactions – transfers of shares – relevant principles – main purpose of transfers – where assets of companies claimed to be held on trust – whether shares had no value – whether defence under s 121(4) available – whether transferee had notice of main purpose of transfer – whether transferee had notice of insolvency – Bankruptcy Act 1966 (Cth) s 121
Legislation:

Bankruptcy Act 1966 (Cth) ss 116, 121, 302B

Conveyancing Act 1919 (NSW) ss 7, 37A

Duties Act 1997 (NSW) s 54(3)

Property Law Act 1958 (Vic) s 172

Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 1996 (Cth)
Cases cited:

Agusta Pty Ltd v Provident Capital Ltd (2012) 16 BPR 30,397; [2012] NSWCA 26

Ashton v Prentice; in the matter of Jury [1999] FCA 671

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34

Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557; [1998] HCA 26

Chen v Marcolongo (2009) 260 ALR 353; [2009] NSWCA 326

Coghlan v Alexander (1905) 5 SR NSW 441

Commissioner of Taxation v Oswal (2012) 91 ATR 684; [2012] FCA 1507

Deputy Commissioner of Taxation v Haritos (2014) 287 FLR 136; [2014] VSC 379

Dwyer v Ross (1992) 34 FCR 463

Hall v Poolman (2007) 215 FLR 243; [2007] NSWSC 1330

Jew v Holloway [2013] VSCA 260

Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242; [2008] FCA 1454

Leedale (Inspector of Taxes) v Lewis [1982] 3 All ER 808

Lewis v Condon (2013) 85 NSWLR 99; [2013] NSWCA 204

Marcolongo v Chen (2011) 242 CLR 546; [2011] HCA 3

PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515

Re Burton; Wily v Burton (1994) 126 ALR 557; [1994] FCA 1146

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AGLC
Royal v El Ali [2016] FCA 782
Case
[2016] FCA 782
Decision Date

CaseChat Overview and Summary

In the Federal Court of Australia, Royal v El Ali addressed the bankruptcy and voidability of several transactions involving dispositions of real property and shares. The applicants sought to have certain transactions voided as they believed they were intended to defraud creditors. The central issue was whether these transactions were made with the intent to defraud creditors and if they could be considered voidable under the relevant legislation. Specifically, the court examined whether the properties and shares were held on trust, the value of the assets, and whether the transferees acted in good faith. The principles from the Conveyancing Act 1919 (NSW) s 37A and the Bankruptcy Act 1966 (Cth) s 121 were central to the analysis.

The court meticulously evaluated the subjective beliefs of the parties involved, particularly Mr El Ali's assertion that the properties were held on trust and that the shares had no value. The evidence presented by Mr El Ali, Mr Zreika, Mr Stojanovski, and Mr Nazloomian was scrutinized under the Briginshaw v Briginshaw standard, requiring a high level of satisfaction before adverse findings could be made. The applicants argued for adverse credit findings against the respondents, but the court found that the evidence did not meet the required threshold. The court also considered the transferee's knowledge of the main purpose of the transfers and their awareness of Mr El Ali's insolvency, which were pivotal in determining the validity of the transfers.

The court concluded that the applicants were entitled to the relief sought. The transactions in question were found to be voidable as they were made with the intent to defraud creditors. The parties were directed to provide proposed short minutes of order within seven days, ensuring that the court's findings were implemented effectively.

Orders

Orders of the court

1. The parties provide, by way of email to Chambers, proposed short minutes of order to give effect to these reasons on or before 26 July 2016.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

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Evidence

Evidence Before The Court

Mr El Ali, Mahmoud, Mr Zreika, Mr Stojanovski and Mr Nazloomian each gave evidence-in-chief by way of affidavit and the credit of all of them was put into issue by the applicants. The applicants submitted that the Court should make adverse credit findings against each of them and should largely reject their evidence concerning the reasons for the transfers. Given the serious nature of the allegations, their evidence is to be tested by reference to the principles in Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34 and a very high level of satisfaction should be reached before making the findings urged by the applicants. THE EVIDENCE RELATING TO THE TRANSFERS OF MR EL ALI’S SHARES IN ISAAC & JACOB AND OTTOMAN TO MR NAZLOOMIAN Mr El Ali and Mr Nazloomian described each other in evidence as friends. Mr El Ali stated that he had known Mr Nazloomian for many years and “had come to think very highly of him”. Mr Nazloomian deposed that he had developed a “very close and trusting commercial relationship” with Mr El Ali and they generally had “care towards each other’s financial and personal wellbeing”. Mr Nazloomian described Mr El Ali as a “very honourable man” and stated that he trusted him. They first met in the 1990s when Mr El Ali, then a lending manager at Sunway Metcorp, handled Mr Nazloomian’s application for an extension of credit. After Mr El Ali started up EasyChoice in 2000, Mr Nazloomian kept in contact with him and had regular business dealings with him, which included lending money to Mr El Ali and his companies for various ventures. It was uncontroversial that as at October 2010, Mr Nazloomian was owed approximately $1.2 million in respect of those loans. Mr Nazloomian deposed that in or about October 2010, he was pressing Mr El Ali for repayment of his loans and Mr El Ali asked him to consider being the director and shareholder of Isaac & Jacob and had a conversation in which Mr El Ali told him to the effect that:That way you will control the assets it holds, and have some comfort that you are in control of all the assets available. It would give you comfort about the outstanding loan accounts you have. Mr Nazloomian deposed that he was aware at that time that Isaac & Jacob was the trustee of the Elali Family Trust and the Second Elali Family Trust and that its sole function was to act as the trustee of those trusts. He deposed that he was “extremely honoured by the level of trust” that Mr El Ali had in him and that Mr El Ali was “prepared to hand over control to give [Mr Nazloomian] comfort and security over outstanding loans [he] held”. Mr Nazloomian deposed that he thought that he would be able to carry out the duties required in managing the trusts, and that “to oversee the management of the assets” would give him some security and so he decided to accept Mr El Ali’s offer. Unsatisfactorily Mr Nazloomian left wholly unexplained why the shares in Ottoman were also transferred to him and why he assumed the role as sole director of that company. Nor did he give any evidence as to why he transferred the Ottoman shares back to Mr El Ali on 14 December 2010 and resigned as director of that company. The only evidence about these share transfers came from Mr El Ali.

Decision

Reasons for decision

Counsel for Mr Zreika maintained that the Deed of Retirement and Appointment appointing Mr Zreika as trustee of the Ottoman Investments Unit Trust was effective. If effective, that transaction is also voidable pursuant to s 37A of the Conveyancing Act as part of the steps by which Mr El Ali alienated the Taren Point property with intent to defraud his creditors within the meaning of s 37A of the Conveyancing Act. CONCLUSION The applicants are entitled to the relief sought against the respondents. The parties are directed to provide minutes of proposed orders giving effect to these reasons within seven days.

Ratio Decidendi

Legal Principle Established

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