Scott v Carabelas and Anor No. Scciv-97-407
[2003] SASC 156
•29 May 2003
SCOTT v CARABELAS and ANOR
[2003] SASC 156Civil
WILLIAMS J.
INDEX
Part 1 The nature of the liquidator’s claims............................................. 1
Part 2 Limitation of actions
(a) The effect of amending the statement of claim................ 14
(b) Time limit for the misfeasance claim............................... 16
(c) Time limit for the preference claims................................ 32
Part 3 Insolvency...................................................................................... 35
Part 4 The misfeasance claim................................................................. 42
Part 5 The preference claims.................................................................. 84
Part 6 Conclusions................................................................................ 121Part 1 The nature of the liquidator’s claims
The defendants George Carabelas and his wife Virginia Carabelas were at all relevant times the only directors and shareholders of Angas Law Services Pty Ltd (“ALS”) which was incorporated on 25 September 1986 and is being wound up by an order of this court dated 26 April 1994 upon the application of Deputy Commissioner of Taxation presented to the Court on 16 March 1994; by that order Mr A.R. Campbell was appointed liquidator but upon his application Mr A.G. Scott, the present plaintiff, on 27 May 1996 was appointed liquidator in his stead.
This action was commenced by the liquidator on 13 March 1997; the original statement of claim (raising claims of unfair preferences) was delivered on 13 March 1997 but a further claim alleging misfeasance by the directors was added on 23 March 1999. I mention these dates (and the “relation back date” of 16 March 1994 abovementioned) because a substantial issue in the case is whether any of the various claims are statute barred.
The action is complicated by the fact of the changing statutory regimes which regulate company administration. Until 1 January 1991 the Companies Code operated and this was then followed by the Corporations Law; on 23 June 1993 the Corporations Law was amended (as now relevant) and on 14 July 2001 the Corporations Act came into force.
The liquidator makes two separate claims against both defendants:
Firstly a claim of misfeasance in the discharge of the defendants’ duties as company directors in improperly using the assets of ALS otherwise than in its interests and in then arranging the affairs of ALS in such a way that debts due to the company became irrecoverable. The liquidator claims that the company suffered a loss of $474,950 by the way in which the defendants put at risk the property of ALS to enable George to raise funds for the benefit of other companies and later rearranged the borrowings as recorded in the books of ALS so as (without justification) to relieve George of his primary liability. The claim for compensation is made pursuant to s 229(7) of the Companies Code or s 232(8) of the Corporations Law.
Secondly, a claim based upon the accounts of ALS evidencing three separate transactions each of which allegedly constituted an unfair preference giving rise to an insolvent transaction (see s 588 FA and 588 FC of Corporations Law); amounts of the respective preferences are alleged to be $72,987.22, $67,826 and $93,763.75 and the claims by the liquidator for payment are made pursuant to s 588FF(1) of the Corporations Law.
All claims in these proceedings are continued by virtue of the transitional provisions of Chapter 10 of the Corporations Act.
The claim of misfeasance involves a determination of a disputed question of fact as to whether in his capacity as borrower in his dealing with his bank George acted as a principal or as agent of the companies between whom he distributed his borrowings. In addition to their interest in ALS, George and Virginia Carabelas were also the directors and shareholders of a number of other companies and in particular Barry Simpson Pty Ltd, Citizac Pty Ltd, Wamville Pty Ltd, Tusport Pty Ltd and Blackcroft Pty Ltd. It is alleged that after George obtained a loan from the Commonwealth Bank of Australia and then made funds available to other entities, the directors then re-arranged the books of account to show the lastmentioned five companies as having a liability which in the ordinary course attached to George. To the extent that the alteration of the books disclose a transaction, this has been characterized in the plaintiff’s case as a “novation”.
The acts relevant to the misfeasance claim occurred during the financial year ended 30 June 1990 and by journal entry dated 30 June 1993 in the books of ALS that company wrote off as irrecoverable loans due to it by Barry Simpson, Citizac, Wamville, Tusport and Blackcroft each of which was insolvent; it is the plaintiff’s case that these loans (if they were ever allowed to arise) should have been properly treated as the responsibility of George.
The preference claims arise out of journal entries made by a professional accountant (Mr Vlassis) in the course of finalising the accounts of ALS (and other associated companies); George paid the accountant for the preparation of these accounts for which George and Virginia as directors had a responsibility.
The three preference claims involve alleged dealings involving Blackcroft (first and third preference claims) and Carprop Pty Ltd (second preference claim). This lastmentioned was another company of which the defendants were the only directors and shareholders.
The first alleged preference involves a journal entry for the year ended 30 June 1992. The second alleged preference involves a journal entry for the year ended 30 June 1992. The third alleged preference involves a journal entry for the year ended 30 June 1993.
It is not in dispute that the journal entries were actually drafted on or after 23 June 1993. (The Corporations Law Reform Act which as now relevant came into operation on that date and inserted new provisions into the Corporations Law (Part 5.7B) making it much less dependent on the Bankruptcy Act - see Ford’s Principles of Corporations Law, 9th edition (1999) at para 27.041 and para 27.250. See also Corporations Law s 1383 as to continued operation of “the old winding up law”.)
For the purpose of making a compromise with his bank George provided a statutory declaration dated 26 March 1993 as to his assets and liabilities. Footnotes forming part of that declaration provide a useful starting point for understanding the affairs of George and of those companies associated with the defendants. Extracts from the notes to the declaration (which I will treat as a business record) are as follows:
“3According to the last prepared financial accounts of certain Associated Companies the following unsecured loans appear to the credit of [George] Carabelas as at 31 June 1991;
Wamville Pty Ltd $224,039.13 Blackcroft Pty Ltd (net) $191,616.80 Rama Nominees Pty Ltd $321,463.06 Citizac Pty Ltd (net) $321,463.06 Barry Simpson Pty Ltd $705,036.93 Regent Street Pty Ltd $2,934.00 Angas Law Services Pty Ltd $234,576.97 Tusport Pty Ltd $682,132.12 $2,813,081.30
The above loans will not be paid as all of the above Companies are considered insolvent, and will not be able to meet their debts.
All companies are in the process of being de-registered.
According to the accounts of Carprop Family Trust for the year ended 30th June 1991 an unsecured loan of $119,213,000 is owed by G & V Carabelas.
These funds were advanced to the various group of companies which in turn invested in certain real estate properties over a period of time. It has always been agreed between the Companies and G and V Carabelas that any demand on loan accounts will be subject to all loans being met, which includes funds owed to Carabelas as listed at note 3 above.
In any case G & V Carabelas are not in a position to meet their financial obligations to Carprop Nominees Pty Ltd if demanded to do so, due to reasons listed above.”
The deed of compromise between George, CBA and Blackcroft is dated 23 June 1993. I assume that it is only coincidental that this is the date upon which the relevant amendments as abovementioned effected by the Corporations Law Reform Act took effect but it is possible to establish positively upon the evidence that the relevant journal entries giving rise to the preference claims were drafted after the making of the deed and therefore after the date on which the amendment to the Corporations Law took effect.
Part 2 Limitation of actions
(a) The effect of amending the statement of claim
Although amendments from time to time have been made to the statement of claim, no special restriction or condition has been imposed by the orders allowing the amendments as to the date upon which the amendments should take effect. On 30 January 1998 a judge ordered the statement of claim to be struck out “with liberty to the plaintiff to file and serve a different statement of claim…” Undoubtedly, the Court has a power to mould its interlocutory orders to ensure that in the event of the introduction of a new cause of action pursuant to the enabling order, the right of the defendant is preserved to rely upon an accrued period of limitation as a defence. The operation of the rules of court in this respect are discussed by von Doussa J in Brook v Flinders University (1988) 47 SASR 119 especially at 125-126. In the absence of a special order the amended or substituted statement of claim operates from the date when the proceedings were instituted. The defendants seek to draw a distinction in this behalf between the amendment of a statement of claim and the substitution of a fresh statement of claim; in my view this is a distinction without a difference. In Sneade v Witherton Barytes [1904] 1 KB Collis MR at 297 pointed out that upon an amendment being allowed the writ as amended becomes the origin of the action and the claim thereon endorsed is substituted for the claim originally endorsed. The reasoning of the Master of the Rolls at 197-198 would leave no room for the distinction which counsel for the defendants now seeks to make. In ANZ Banking Group v Larcos (1987) 13 NSWLR at 292 it is clear that Rogers J was there dealing with an application to “add or substitute a new cause of action” (cf in South Australia SCR 53.03(c) dealing with “adding or substituting” a new cause of action); His Honour’s approach draws no distinction between an “amendment” and a “substitution” in the statement of claim. In my opinion the South Australian rules of court do not recognise the distinction upon which the defendants’ counsel relies.
In my opinion, when considering the possible application of a limitation period, the plaintiff’s claims should be treated as having been instituted by this action on 13 March 1997.
(b) Time limit for the misfeasance claim
The allegations constituting the misfeasance claim may be regarded as a course of conduct giving rise to a breach of statutory duty arising under the Companies Code (which was overtaken by the Corporations Law). When so characterised the claim should be regarded as falling within s 35(c) of the Limitation of Actions Act 1936 by treating the action as one “founded on tort” - see Cooper v Municipality of Brisbane (1900) 2O QLJ 120 at 124. (I have discussed this in more detail later in these reasons.)
The defendants argue that the proceedings are now subject to Federal law and a special regime by virtue of the transitional provision of s 1383 of the Corporations Act. That section forms part of Ch 10 of the Corporations Act whose object is set out in s 1370(1):
“…the object of this Part is to provide for a smooth transition from the regime provided for in the old corporations legislation of the States and Territories in this jurisdiction to the regime provided for in the new corporations legislation, so that individuals, bodies corporate and other bodies are, to the greatest extent possible, put in the same position immediately after the commencement as they would have been if:
(a)that old corporations legislation had, from time to time when it was in force, been valid Commonwealth legislation applying throughout those states and Territories; and
(b)the new corporations legislation (to the extent it contains provisions that correspond to provisions of the old corporations legislation as in force immediately before the commencement) were a continuation of that old corporations legislation as so applying.
Note:The new corporations legislation contains provisions that correspond to most of the provisions of the old corporations legislation. Generally, the only exceptions to this are provisions of the old corporations legislation that related to the fact that the Corporations Law operated separately in each of the States and Territories (rather than as a single national law).”
In my opinion Ch 10 of the Corporations Act employs a drafting technique in which the operation of the Limitation of Actions Act is picked up by s 79 of the Judiciary Act (see John Robertson v Ferguson Transformers (1973) 129 CLR 65 at 80-81 and 95). Chapter 10 imposes a time limit for continuing actions in terms of s 1402 by adopting the “old corporations legislation time limit”. I doubt that this expression picks up the provisions of the Limitation of Actions Act but I see no reason to exclude the operation of s 79 of the Judiciary Act.
In the result it is my opinion that the plaintiff faces a time limit of six years in respect of the misfeasance claim but is entitled to seek an extension of time under s 48 of the Limitation of Actions Act. The liquidator conducted an enquiry before a Master into the affairs of the company and relies upon the information thus gained to support his application for extension of time. I will deal with the merits of that point separately.
I reject the plaintiff’s contention that the misfeasance claim is a speciality within s 34 of the Limitation of Actions Act (involving a time limit of 15 years). Likewise I reject the argument of the defendants that the misfeasance claim is subject to a time limit in accordance with s 1317K of the Corporations Act; that section imposes its own time limit of six years in respect of proceedings for a compensation order and the defendants claim that this provision “covers the field” so as to leave no room for an extension of time under State legislation. In my opinion s 1317K (forming part of Pt 9 of the Corporations Act) governs proceedings for the recovery of damages under Pt 9 (which includes s 1317HA) but the Corporations Act does not prescribe a time limit for proceedings which are continued under the transitional regime of Pt 10. Indeed, in view of the object of Pt 10 it would be surprising to find in the Corporations Act (except by reference to the former State law) a time limitation for proceedings continued by virtue of Pt 10; the defendants’ construction of s 1317K defeats rather than promotes the Parliamentary intention (and see Pedersen v Young (1964) 110 CLR 162 at 166-167). I also reject the defendants’ submission that the misfeasance action commenced under South Australian law is an action for a civil penalty within s 180 of the Corporations Act; that section (like s 1317K) is not concerned with transitional proceedings continued under Pt 10 of the Corporations Act.
I have dealt with the time limit arising under s 229 of the Companies Code and s 232 of the Corporations Law; the statutory claim under these sections leaves little (if any) room for the operation of some further and more extensive duty apart from the statute (see AWA v Daniels cited below). When pressed on this point counsel for the plaintiff did not identify any right which could not be satisfactorily disposed of under the statute and, if required, counsel was prepared to elect to proceed for the statutory remedy. Therefore, I have not found it necessary to consider any rights or remedies except those conferred by statute. However, Gower’s Principles of Modern Company Law (4th ed) at 572 identifies the duties of directors of loyalty and good faith (analogous to the duties of trustees) and the duties of care and skill (which differ from those of normal trustees). Gower at 606 notes the remedies which are available for breach of duty, including damages for breach of a common law duty of care and compensation for breach of fiduciary duty. To the extent to which it may be relevant I would treat the plaintiff’s rights under the general law as being analogous to a tortious claim and subject to a time limit of six years. The plaintiff’s case is not based upon fraud but upon impropriety and I do not consider that any time limit other than six years should be applied to the circumstances of the case. It is sufficient to establish a breach of duty that directors exercise their powers otherwise than in good faith for the benefit of the company and for a proper purpose.
I note that if the reasoning in Blakely v BMP (1998) 29 ACSR 469 were applied a time limit of 15 years might be applied to a breach of s 229(2) and (7) of the Companies Code; in Blakely Supreme Court Master Bredmeyer decided that an action against a director for breach of statutory duty (under the Companies Code s 229(2) and (7)) should be treated “arguably” as a specialty for the purposes of s 38(1)(e)(1) of the Limitation Act (WA). However, the Master was dealing with an interlocutory application to dismiss a claim as time barred; he did not make a final determination of the point. At 470-471 the Master said:
“The defendants say that leave to bring this action against the proposed defendants should be refused, because it is time-barred under s 38(1)(a)(9) of the Limitation Act 1935 (WA) where the limitation period for actions of this type is two years. The plaintiffs say that the cause pleaded is not time-barred, as it falls under s 38(1)(c)(i) of the Act which provides for a limitation period of 20 years. Those two sections read:
‘38(1)Subject to the preceding sections of this Act and as hereinafter provided, actions, suits, or other proceedings as herein set out shall and may be commenced within the time herein expressed after the cause of such actions, suits, or other proceedings respectively:-
(a)(i)Actions for penalties, damages, or sums given by an enactment to the party grieved;
(ii)….
Two years
.....
(e)(i)Subject to sections four and thirty-two of this Act, and to paragraph (d) of this subsection, actions of covenant or of debts upon any bond or other specialty; and
(ii)….
Twenty years.’
There has been no case cited to me which is precisely on point. There is no case which decides that an action against a director or other officer of a corporation for breach of his statutory duties under the Companies Code or the Corporations Law falls under s 38(1)(a)(i) or s 38(1)(e)(i) of the Limitation of Actions Act. The cases quoted to me have all been decided on other statutory causes of action. The most useful authority is State Government Insurance Commission v Teal (1990) 2 WAR 105, a decision of Commissioner Dr Williams QC, which contains a detailed review of numerous cases on this topic. The statutory cause of action in that case was given by s 7(5) of the Motor Vehicle (Third Party) Insurance Act 1943 (WA). Having considered all the cases cited to me, I am firmly of the view that the cause of action under s 229(7) of the Code arguably falls under the category of s 38(1)(e)(i) and the limitation period is 20 years. The reference to “specialty” there usually denotes a contract under seal and a specialty debt is an obligation under seal securing a debt. However, the word is not limited to that and includes a debt due under a statute: Teal at 114. The proposed action under s 229(7) of the Code is such an action. I consider it is not an action for a penalty and there is no possibility of double damages being awarded which would introduce a penal element. That is because although under s 229(10) a non-statutory cause can be combined with the statutory cause, only one lot of damages would be recoverable. An action under s 229(7) does not fall within the scope of s 38(1)(a)(i). The words there “actions for penalties, damages, or sums given by any enactment to the party grieved” have been interpreted in an ejusdem generis way, meaning that the “actions for … damages, or sums given by any enactment” must be actions in the nature of penal actions. They must be actions in which punishment was the prime object rather than compensation for the plaintiff, although the plaintiff might get some of it: Teal at 113. The plaintiff in the proposed cause of action under s 229(7) is seeking compensation for loss and an account of any profit made.
In the absence of any precise or firm authority in favour of the defendant’s objection, I do not propose to reject this statement of claim on the basis that it is time-barred. I am also mindful of the High Court’s advice in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514; 109 ALR 247 that the court should not, in an interlocutory application, except in the clearest of cases, dismiss a claim as being statute-barred. This is not a clear case of a good limitation point.”
This discussion is to be compared with the approach taken by Real J in Cooper’s case (supra) where the plaintiff claimed compensation under the Local Government Act for injury to her property by reason of the construction by the defendant of an unauthorised drain; the defendant relied upon the Statute of Limitations. Real J traced the history of an action for statutory compensation and concluded that before the Judicature Acts the claim would be an action on the case and not an action for a specialty. I consider the reasoning of Real J to be persuasive and I adopt it.
McGee on Limitations Periods (4th ed) at 46 par 4.003 says:
“It may be suggested that a cause of action is founded on tort where it is brought for the breach of some personal obligation owed by the defendant to the plaintiff, that obligation not being one which arises out of any agreement between the parties. In R v Secretary of State for Transport, ex p Factortame Ltd and Others (No 6) a claim for damages was made by fishing-vessel owners who had successfully challenged the legality under European Community law of the enactment by the United Kingdom of provisions in the Merchant Shipping Act 1988 which discriminated against non-UK, and particularly Spanish, vessel owners who sought licences to fish in UK waters. The ECJ held that the applicants were entitled to damages for loss and injury caused by the UK government’s breaches of Community law and their claims were transferred to the Technology and Construction Court. Preliminary issues were raised as to whether applications made between May and September 2000 to add additional parties to the proceedings were statute-barred under section 2 of the 1980 Act. It was held that an action for damages for an infringement, contrary to section 2 of the European Communities Act 1972, of rights conferred by Community law amounted to a breach of statutory duty and could therefore be considered “an action founded on tort” for the purposes of section 2. The term “an action founded on tort” should be widely construed as including any claim in respect of the breach of a non-contractual duty (including one under Community law) which gave a private law right to recover compensatory damages at common law. In general it is no doubt fair to say that the concept is well understood in practice, but there are a number of borderline cases that may give rise to difficulty.”
In support of his argument that the statutory claim for misfeasance should be treated as a specialty, Mr Wilkinson relied upon the terms of the statute itself which enables the company “to recover as a debt” an amount equal to the loss (see, for example, Corporations Law s 232(8)). Mr Wilkinson relied upon the statements of principle in Collin v Duke of Westminster [1985] 1 QB 581 at 601-603 as to the nature of a “speciality” for the purposes of the English Limitation Acts (and discussing R v Williams and Cork & Bandon Railway v Goode - see below).
In South Australia s 34 of the Limitation of Actions Act provides that:
“All actions for rent reserved by any lease by deed and all actions of covenant or debt upon any bond or other specialty or upon any judgment or recognizance shall be commenced and sued within fifteen years next after the cause of action accrued or the recovery of the judgment and not after: Provided that if any acknowledgment has been made either by writing signed by the party liable by virtue of the deed bond specialty judgment or recognizance his agent or by part payment or part satisfaction of any principal or interest being then due thereon, any person entitled to any such action may bring an action for the money remaining unpaid and so acknowledged to be due within fifteen years after that acknowledgment by writing or part payment or part satisfaction.”
In Halsbury’s Laws of Australia, par 255-165 treats an action for damages flowing from a breach of directors’ duties under the former Corporations Law s 229(7) as being “arguable a debt due under a statute” (citing Blakeley v BMP); see also Royal Trust Co v Attorney-General for Alberta [1930] AC 144.
I prefer the approach taken in Hinson and Redmond, Limitation of Actions (Queensland) (1987) at par 210.10:
“Action Upon a Specialty
An action upon a speciality must be brought within twelve years from the date upon which the cause of action accrued, unless some shorter period of limitation is prescribed by another provision of the Act in which case that shorter period applies. In R v Williams [1942] AC 541, 555 Lord Maugham described a specialty in these terms:
‘The word “specialty” is sometimes used to denote any contract under seal, but it is more often used in the sense of meaning a specialty debt, that is, an obligation under seal securing a debt or a debt due from the Crown or under a statute ... Such an obligation was for centuries treated as very different from an ordinary debt ... Unlike debt it is enforced by an action of covenant ... The deed itself was the foundation of the action and the original debt, if any, was merged. The terms of the deed were conclusive. Specialty debts till recent times conferred special rights ... They were said to be “of a higher nature” than debts by contract.’
A judgment debt was also regarded as being a specialty debt: Cork & Bandon Railway Co v Goode (1853) 13 CB 826, 835. Separate provision is made in s 10(4) for actions upon judgments.
A statute is a specialty, but not all actions upon a statute are actions upon a specialty. An action on the case on a statute was never regarded as an action upon a specialty. Actions on the case on a statute were barred after six years by the 1623 Act, and are now barred by s 10(1)(a). Such actions were actions for damages or compensation for the breach of a statutory duty: Cooper v Municipality of Brisbane (1900) 10 QLJ 120, 124 per Real J.
An action under a statute to recover a sum of money due by the statute, if enforceable by way of an action of debt and not by way of an action on the case, is an action upon a specialty and until 1833 was not subject to any period of limitation. In that year s 3 of the Civil Procedure Act (Imp) prescribed a twenty year limitation period for actions of debt upon a specialty.
Such an action is now characterised as an action to recover a sum recoverable by virtue of an enactment and falls within s 10(1)(d). It is still an action upon a specialty, but it is not subject to the twelve year limitation period prescribed by s 10(3) because of the second paragraph of that subsection: see Collin v Duke of Westminster [1985] !B 581, 603. In that case the Court of Appeal doubted a dictum of Goddard LJ I Leivers v Barber, Walker & Co Ltd [1943] KB 385, 398 to the effect that the express provision made for debts recoverable by virtue of an enactment in s 10(1)(d) meant that the word ‘specialty’ in s 10(3) referred only to deeds and contracts under seal and did not include statutes. That dictum was approved in Central Electricity Board v Halifax Corporation [1963] AC 785, 799 by Lord Reid with whom Lord Hodson and Lord Pearce agreed.
In Collin’s case, Oliver LJ preferred the view that a statute was still a specialty for the purposes of s 10(3). The tenant’s action for a declaration that he was entitled to acquire the freehold of a house under the Leasehold Reform Act 1967 was held to be an action upon a specialty. If the Limitation Act applied to such an action (which was not expressly decided), the action was only barred after the expiration of twelve years, as the action could not be characterised as an action of debt upon a statute for which a six year period was prescribed by s 10(1)(d).”
and at par 210.14 the authors explain how the definition of “action” is sufficiently wide to include proceedings for equitable relief where a limitation period may be applied by analogy.
In reaching my conclusion I have had regard to the analysis undertaken by Rogers CJ Comm Div in AWA v Daniels 7 ACSR 759 at 869-872 as to the various duties of care and diligence arising from a director’s fiduciary role the breach of which is often referred to as negligence.
Based upon his Honour’s approach and applying the Full Court decision In re Claridge House (1981) 28 SASR 481 which he cites, it seems that for the purposes of applying the Limitation of Actions Act the relevant section only provides a summary mode of enforcing rights which otherwise must have been enforced by the court’s ordinary jurisdiction. Such an action is to be distinguished, for example, from an action by a liquidator against a contributory in respect of a call made in a winding up (ie an action upon a specialty) where in the absence of the statute no liability will arise.
In my opinion the claim for misfeasance is not one created purely by statute and analogy should be applied to characterise it as an “action founded on tort”. The statute provides a convenient method of enforcing rights which would otherwise exist.
(c) Time limit for the preference claims
With reference to a claim based upon a transaction which is voidable under s 588FE leading to an order under s 588FF(1), the Corporations Law s 588FF(3) provides:
“An application under subsection (1) may only be made:
(a)within 3 years after the relation-back day; or
(b)within such longer period as the Court orders on an application under this paragraph made by the liquidator within those 3 years.”
This section is clearly applicable to the third preference claim but the defendants contend that the first and second preference claims are governed by s 565 of the Corporations Law upon the footing that the relevant “payments were made before the commencement of Pt 5.7B of the Corporations Law” on 23 June 1993. The defendants contend that applying s 565(2) of the Corporations Law the relevant time limitation is to be found in s 127(5) of the Bankruptcy Act so the action “shall not be commenced after the expiration of 6 years from the [relation back date]”.
It seems to me to be unnecessary to resolve any question as to which time limit ought to be applied to the first and second preference claims. The relation back date is 16 March 1994 and the action was brought on 13 March 1997. Upon no view are the preference claims out of time. In reaching this conclusion I refer to Part 2(a) of these reasons in which I express my opinion as to the effect of amendments to a statement of claim upon the deemed date of the commencement of the action. It is not suggested that otherwise the claim of the plaintiff would be relevantly affected by the application of the Corporations Law rather than the Companies Code; the rights under both statutes are substantially the same as applied to the facts of this case.
Part 3 Insolvency
The insolvency of Angas Law Services Pty Ltd from and after 30 June 1990 has been formally put in issue with respect to the preference claims. Likewise the incapacity of other companies (namely Barry Simpson, Citizac, Wamville, Tusport and Blackcroft) to repay relevant debts is not admitted for the purposes of the misfeasance claim.
As at the date of winding up ALS owed the Australian Taxation Office $25,408.41 for capital gains tax incurred on 11 October 1989 upon the sale of its Angas Street property; this amount became due and payable on 4 March 1991 together with late payment tax. ALS acknowledged its inability to meet the debt to the Australian Taxation office by letter dated 23 September 1993. This letter reinforces the conclusion which otherwise is obvious.
The defendants acknowledge the debt due to ATO but submit that the existence of the one unpaid debt is not sufficient to prove insolvency; however, it is not the existence of the debt standing alone that must be considered but the inability to meet the debt in a timely fashion or at all.
Mr John Irving, a chartered accountant of Sims Lockwood, is a partner of the liquidator Mr Scott. Mr Irving furnished a written expert’s report as to the financial health of the various entities. Mr Irving gave evidence and was cross-examined. His independence was challenged by reason of his professional relationship to Mr Scott and his evidence was probed. I consider that Mr Irving was an impressive witness whose testimony I accept. Mr Irving has correctly identified the concept of insolvency and I adopt his opinions and conclusions in his report as my own. I consider this to be a convenience course to adopt in view of the absence of any alternative opinion and in the absence of any real attack on his reasons or dispute as to the underlying material upon which he relied.
In summary Mr Irving in regard to ALS expressed his views as follows:
“In my opinion the company was unable to pay all its debts, as and when they became due and payable, on 30 June 1992 and on 30 June 1993.
On these dates, the company:
1exhibited substantial deficiencies in working capital in the following amounts (refer to section 11 of this report):
(Deficiency)
$
30 June 1992 (183,018)
30 June 1993 (154,274)2had failed to pay an income tax obligation upon which debt the company was wound up (refer to section 8 of this report).
3by its directors, had admitted insolvency in Annual Returns (refer to section 9 of this report); and
4had substantial net asset deficiencies (refer to section 10 of this report).”
On 4 May 1990 Mr Vlassis as accountant wrote to the ATO on the instructions of the defendants and explained their financial position. That letter and the accounts of the companies for the year ended 30 June 1991 demonstrate the inability of Barry Simpson, Blackcroft, Wamville, Tusport and Citizac to repay debts due to ALS (see exhibit P1, Tabs 20 to 28). Although the test of insolvency is the ability to pay debts as they fall due, it does not follow that a deficiency in net assets in itself will prove insolvency. Nevertheless such a deficiency is one factor. The annual report of Blackcroft, Citizac and Wamville as at 31 December 1990 confirms the plight of those companies and confirms Mr Irving’s opinion expressed in the course of his asset and liability analysis in Part 10 of his report as to insolvency at the time mentioned in his report.
In the course of submissions the defendants’ counsel sought to argue that as a result of the arrangements made by George with CBA on 23 June 1993 he was entitled to pass on to ALS and the other debtor companies the benefit of his compromise with the bank. I reject that submission. George borrowed on his own behalf and not as an agent. Contrary to the defendants’ case, there was no joint venture between ALS and others (see, for example, par 6.3 of the defence).
Part 4 The misfeasance claim
On or about 30 September 1986 ALS purchased the property at 71 Angas Street, Adelaide. To facilitate the purchase of this property, ALS borrowed $407,937 from the Hindmarsh Building Society. The Hindmarsh Building Society took security by way of first registered mortgage over the Angas Street property to secure the advance to ALS.
On or about 14 June 1988, George made application to the Commonwealth Bank of Australia (“CBA”) to borrow the sum of $2,525,000 in his own name and the loan was subsequently approved.
On 4 July 1988, ALS granted a mortgage to CBA over the Angas Street property in consideration of certain advances and accommodation granted or to be granted at the request of ALS to George. The mortgage secured all monies then or thereafter advanced by CBA to George.
Upon the plaintiff’s case this transaction (on 4 July 1988 and its implementation on 15 July 1988) constituted the first act of misfeasance by the defendants. They caused ALS to pledge the Angas Street property as security for the loan to George. The only advantage to ALS was that George made some funds ($435,040) available to ALS to repay the Hindmarsh Building Society. However, the pledge of the land gave the CBA the right to apply its total value to repay George’s indebtedness to the CBA. The plaintiff contends that there was no commercial interest in ALS mortgaging its property and incurring a liability otherwise to the extent of $435,040. The mortgage effectively was guaranteeing George’s whole debt to the CBA.
It is further the plaintiff’s case that on or about 15 July 1988, CBA advanced the sum of $1,750,000 to George. As mentioned above, George lent the sum of $435,040 from this CBA advance to ALS to pay out the mortgage to the Hindmarsh Building Society. As a result ALS became indebted to George in the sum of $435,040. This indebtedness was recorded in the 1989 financial accounts of ALS by Mr Vlassis, who kept the books of ALS under the direction of the ALS directors. The books of account of ALS were prepared so as to show that George borrowed the money from CBA and that George “on-lent” the money to ALS. (See Exhibit P1 Tab 11 and Mr Vlassis’ evidence at T122 l 16-19). Note 10 to the 1989 accounts of ALS shows “Creditors and Borrowings (Current - Secured - G Carabelas (Commercial Bill) - $435,040”.
On or about 11 October 1989, the Angas Street property owned by ALS was sold for $910,000. At settlement the CBA took the whole of the proceeds of the sale to reduce the indebtedness of George to the CBA. The bank was entitled to act in this way because ALS’ property was mortgaged to the CBA as security for all monies owed by George and not only the $435,040 advanced by George to repay the Hindmarsh Building Society.
The financial statements for ALS for 1990 record that whereas previously ALS had owed $435,040 to George, ALS owed nothing to George (cf Exhibit P1 Tab 11 and Tab 19). The debt owed by ALS to George was paid by appropriating $435,040 of the money taken by the CBA to pay off this debt to George. This left a difference of $474,960 ($910,000 - $435,040).
The journal entry of 30 June 1990 (GJ2) (exhibit P1 Tab 18) shows that this balance of $474,960 was recorded as:
$474,960.00
less$ 3,616.13
Rental income adjusted
Agent’s costs & commission $27,750.00$ 31,366.13
Balance $443,593.87
Plus penalty interest $ 3,116.44
Balance $446,710.31This balance was debited to George’s loan account with ALS so as to show that he owed that money to ALS.
By a further journal entry (GJ10) (exhibit P1 Tab 18 p 2) dated the same date (and apparently made after the first journal entry) this situation was changed so that instead of the sum of $446,710 being owed by George to ALS that sum was treated as owing to ALS by Barry Simpson Pty Ltd, Blackcroft Pty Ltd, Wamville Pty Ltd, Tusport Pty Ltd and Citizac Pty Ltd together with George loan account. The journal entry carries the notation “being correction of posting of GJ2 (T) - proceeds on sale of Angas St going towards various other co-Bills”. This journal entry shows the appropriation of $435,040 to George’s account “(commercial Bill)” and follows this with six entries of postings to loan accounts with ALS:
“Barry Simpson 61,160.94
Blackcroft201,109.98
Wamville134,236.45
Tusport18,657.36
Citizac16,044.99
George Carabelas 15,501.59”
Total446,710.31
(I have totalled these amounts myself in order to show how the alterations may be reconciled with the total identified in GJ2 abovementioned.)
Upon the plaintiff’s case, the making of the journal entry CJ10 (and the transaction which it records) constitutes the second act of misfeasance. The CBA had taken monies due to ALS and applied them to George’s borrowings from the bank so that George’s loan was reduced by ALS money. The effect of this journal entry is that George was relieved of his liability to ALS which was replaced by loans from the various companies which could not and did not repay any money to ALS. (The plaintiff contends that there was no commercial reason for doing this. It is contrary to the normal method of recording such matters and - upon the plaintiff’s case - the only reason for doing this is to relieve George of the liability).
During the financial year ending June 1990 George and Virginia were the only directors and shareholders of Barry Simpson, Citizac, Wamville, Tusport and Blackcroft. This enabled them to complete the alleged act of misfeasance concerning ALS to which I have just referred. The journal entries in exhibit P1 Tab 18 form part of the financial statements for the year ended 30 June 1990. The accounts for years ended 30 June 1989, 1990 and 1991 have been signed by the directors.
At the time of the journal entry by which the amount of $446,710.31 was altered to be shown as owing by Barry Simpson, Blackcroft, Wamville, Tusport and Citizac these companies had no ability to repay the debts due by each of them to ALS and have never made repayment. By a journal entry dated 30 June 1993 (exhibit P1 Tab 29), the defendants caused ALS to write off the receivables due to ALS by Barry Simpson, Citizac, Wamville and Tusport (but not Blackcroft) on the basis that such companies were insolvent. The writing off is recorded in the financial accounts of ALS (see note 6 to the 1993 accounts - exhibit P1 Tab 30).
The directors’ obligations under the Companies Code at the time were set out in the following sections:
Section 267:
“(1)A company shall -
(a) keep such accounting records as correctly record and explain the transactions of the company … and the financial position of the company; and
(b) keep its accounting records in such a manner as will enable-
(i)the preparation from time to time of true and fair accounts of the company; and …”
Section 269:
“(1)The directors of a company shall … cause to be made out a profit and loss account for the last financial year of the company, being a profit and loss account that gives a true and fair view of the profit or loss of the company for that financial year.”
“(2)The directors of a company shall …cause to be made out a balance-sheet as at the end of the last financial year of the company, being a balance-sheet that gives a true and fair view of the state of affairs of the company as at the end of that financial year.”
(The plaintiff contends that the accounts are binding on the directors).
At the relevant time, the Companies Code provided:
Section 229:
“(7)Where a person contravenes or fails to comply with a provision of this section in relation to a corporation, the corporation may …recover from the person as a debt due to the corporation by action in any court of competent jurisdiction -
(a) if that person or any other person made a profit as a result of the contravention or failure - an amount equal to that profit; and
(b) if the corporation has suffered loss or damage as a result of the contravention or failure - an amount equal to that loss or damage.”
In the result the plaintiff contends the defendants are liable to the company for their misfeasance either pursuant to the general law or by the provisions of s 229 in the sum of $446,710 as ALS either has lost the sum of $446,710 by virtue of the defendants granting a mortgage for the whole of its value (so that CBA could take the whole sale price) or by virtue of the defendants “novating the liability” from George to Barry Simpson, Blackcroft, Wamville, Tusport and Citizac so that ALS could not recover the sum from George.
The defendants deny that money was advanced by the CBA to George. They contend that his borrowing from the Bank, although in his own name, was undertaken on behalf of a number of companies between whom the loan monies were divided. The defendants contend that in relation to this transaction George was acting only as an agent and not as a principal. Accordingly the defendants contend that George was entitled to be indemnified by his principals.
Although I would prefer to treat the alleged acts of misfeasance as constituting a course of conduct, the defendants have identified four separate points of criticism in the plaintiff’s case and they address each of these four points individually and so seek to justify each step.
Step 1 concerns the actions of ALS in giving an all monies mortgage over its Angas Street property to the CBA bank as security for monies to be advanced to George. The defendants contend that the various companies which guaranteed George’s borrowings were in fact co-adventurers who were sharing the risks of borrowing in order to obtain the benefits of mutual support. The defendants contend that “the group was effectively a joint venture in which for land tax purposes separate companies were used to acquire individual properties using funds borrowed for investment purposes from a common source.”
Step 2 concerns the actions of CBA in applying the proceedings of sale of the Angas Street property on 11 October 1989 in reduction of the liabilities of George generally to the bank. The defendants argue that this outcome is merely a consequence of the financing arrangement already mentioned and the exercise by CBA of its rights under the mortgage but leaving ALS in the position where it has claims against its co-adventurers. The defendants contend that there was no misapplication of the surplus funds arising from the sale.
Step 3 concerns the alleged novation. The defendants deny that any such transaction as alleged was effected. They contend that the original borrowing of monies by George was not as a principal but on behalf of the various companies mentioned in the journal entry GJ 10 dated 30 June 1990.
Step 4 concerns the writing off of the inter-company loan accounts as at 30 June 1993. The defendants contend that this was merely the writing off of bad debts as an accounting exercise to recognise the insolvency which had occurred; but writing off is not itself a transaction.
In my opinion the evidence established that between June and September 1988 George made an arrangement with the CBA to put in place a line of credit which was available to him generally but subject to the approval of the Bank from time to time as to his various investment projects. The deal extended to all aspects of George’s business (including his solicitor’s trust account which was to be transferred with all other his banking services to CBA). The arrangement required all surplus monies upon the sale of a property to be returned to the Bank (as happened with the sale of the Angas Street property). However, this lastmentioned sale generated a profit for ALS which gave rise to a capital gains tax liability to Australian Taxation Office.
According to George, the Bank took the whole of the proceeds upon the sale of the Angas Street property because that had been the arrangement with CBA from the outset. Carabelas said at T206:
“Q.When the proceeds of the sale of the Angas Street property were paid to the bank, was that at the bank’s direction.
A.That was part of the original arrangement.
Q.It wasn’t volunteered by you to reduce your debt.
A.Certainly not, because the bank was advanced 100 per cent of the purchase price in other properties, so it was part of the arrangement that all funds would go to the bank, pending an overall settlement of the total assets of the various companies.”
In his evidence George asserted that he regarded himself as “borrowing on behalf of the companies”. However, he also said at T202:
“Q.You’ve heard Mr Vlassis say that he reflected that position in the accounts of various companies by treating it as a loan from the bank to you and then an on-loan of various parcels of money to the individual companies.
A.I heard him say that, yes.
Q.Does that accord with your recollection.
A.I must be honest, I don’t have much of a recollection what happened in ’86 or ’87, other than to say that we basically carried out the transaction, what had to be done and reported everything to Mr Vlassis.”
Mr Vlassis was asked (at T121) to explain the way in which he prepared the accounts:
“Q.When you prepared the accounts to reflect that the money had been borrowed by Mr Carabelas and distributed throughout the group, on what basis did you do so; did you do so, for instance, on the basis that Mr Carabelas had borrowed the money and on-lent a portion of it to each of the companies, or was there some other way.
A.It was quite clear to me, your Honour, that the money was borrowed primarily for the purchase of properties. The reason why I can recall that is that I asked Mr Carabelas during the course of preparing the accounts from one year to the next: ‘Why did not each company borrow a loan in its own right, and why was this multi-loan facility under your name’. He responded by saying that the bank thought it would be more economical to advance one large loan rather than provide separate loans, so I finalised the account on the basis that the money was used for investing.
Q.So, I take it that it was a loan that was recorded in the accounts as a loan to Mr Carabelas and on loan to the companies.
A.Correct.
Q.Now, each of the companies provided mortgages as security for the loan. Were you aware that each of the companies’ mortgages were security for the whole of the loan, not just the portion of the loan that had been on-lent.
A.I was aware of that.
Q.In other words, they provided guarantee mortgages to the bank.
A.Yes.”
The accounts of ALS for the year ended 30 June 1989 provide a clue as to how the arrangements with the bank were constructed. The notes to these accounts show under the heading “credits and borrowings” $435,040 borrowed from George and a further $217,438.09 borrowed from ‘shareholders”. This examination of Mr Vlassis by counsel for the defendants included at T124:
“Q.If you look at tab 11 of the book please, and I take you to the second the last page, in the first item, which is creditors and borrowings - or the heading appears on the preceding page - for the year ended June 1989, the item of 435,040 represents a portion of the CBA loan which was on-lent to Angas Law Services.
A.Yes.
Q.By Mr Carabelas. And you’ll see unsecured shareholders of $271,438.09.
A.Yes.
Q.That represents a further loan from Mr and Mrs Carabelas.
A.Correct.
Q.Were those two amounts put together, do they represent the finances for the purchase by the company of the property at 71 Angas Street.
A.I’ll just have a look at the balance sheet if you don’t mind; that would be correct.
Q.I think that property was purchase for approximately $600,000 and was sold subsequently for approximately $900,000; do you recall that.
A.Yes, I do recall that.”
And at T135:
“Q.Can I put you in the picture: it is correct, isn’t it, that the purchase of the property at Angas Street was only funded partly by the Commonwealth Bank.
A.Yes.
Q.And partly by funds obtained elsewhere and provided by Mr and Mrs Carabelas.
A.Correct.
Q.Is it possible that that item may represent the portion of the funding provided by Mr and Mrs Carabelas.
A.You could say that.
Q.Which after the sale was onlent to Angas Law Services.
A.You could say the source of the funds -
Q.Sorry, onlent to Blackcroft.
A.- the source of the funds could possibly have extended from George and Virginia earlier on, yes.
A.And the next item of $54,000 represents a borrowing from George Carabelas.
A.Yes.
Q.So he’s lent Blackcroft an amount of $54,000.
A.Yes.”
In my opinion, all this evidence (and in particular the way in which the accounts for 30 June 1989 were prepared) strongly suggests that George was borrowing from the bank and then supplementing these funds from other sources as necessary to support a particular project. In my opinion, the evidence does not sustain the defendants’ contention that George had merely some subsidiary role as agent for a joint venture between a number of companies. I find that there was not a joint venture.
On 23 June 1993 CBA entered into a deed with George and Blackcroft Pty Ltd. Nothing in that document (which provides a discharge to George and Blackcroft of $2.294 million) suggests that George had the role of agent. Moreover, if the defendants’ contentions are correct, the question must be asked as to how the liabilities shown as due to George by the eight companies listed in note 3 to the declaration of 26 March 1993 came about.
No question was asked of Mr Vlassis as to his reason for amending the accounts in terms of the journal entry GJ10. The issue was squarely before the court at trial, and in the absence of any other explanation, I conclude that the journal entry GJ10 was prepared for the purpose of shielding George from liability.
The defendants contend that there is nothing unusual in an arrangement under which a number of trading entities provide mutual financial support to each other by guarantees of their collective borrowings from a common account. As relevant to this case, that proposition is an incomplete reflection of the pertinent facts. The various entities were not trading in partnership, and upon the sale of property by one company, the bank was entitled immediately to apply the proceeds of sale in reduction of the account. Although the bank in the exercise of its discretion might then be prepared to release funds for some other approved investment, the arrangement seems to me to be difficult to justify.
In my opinion, the plaintiff has demonstrated breaches of s 229(2) and s 229(4) of the Companies Code or as relevant s 232(4) and s 232(6) of the Corporations Law. I consider that a loss of $474,950 has been suffered by ALS.
As at 30 June 1990 and thereafter Barry Simpson, Citizac, Wamville, Tusport and Blackcroft had no ability to repay the debts disclosed in the accounts of ALS as due to it; Carprop Nominees (shown in the accounts as owing $67,826 to ALS on 30 June 1990 and 1991) also had no ability to meet its obligation to ALS.
Subject to consideration of the effect of the defence raised under the Limitation of Actions Act, I consider that the defendants are liable upon the misfeasance claim. However, as I have already observed, it is my opinion that such a claim is subject to a six-year time limit in terms of s 35(c) of the Act. The cause of action arose on or before 30 June 1990.
This is clearly a case to which s 48 of the Limitation of Actions Act should be applied. Exhibit D6 contains the transcript of the evidence of Mr Vlassis upon his examination before a Master on 2 September 1998 when he produced and explained a number of documents. In particular, Mr Vlassis gave his explanation for the journal entry GJ2 of 30 June 1990 as to the manner of dealing with money upon the sale of the Angas Street property (see pages 12-15 of exhibit D6). There is a detailed explanation of the justification for the ALS accounts insofar as the present claim for misfeasance is concerned.
I am satisfied that facts material to the plaintiff’s case were not ascertained by the liquidator until the examination of Mr Vlassis on 2 September 1998; the misfeasance claim was included in a statement of claim filed on 23 March 1999 in an action commenced on 13 March 1997 - more than six years after the events of 1988-1990 which I have described. I consider that in all the circumstances of the case, it is just to grant the extension of time as sought.
In my view the information supplied by Mr Vlassis in terms of exhibit D6 provided the “rationale” for the way in which the accounts were prepared. He explained crucial maters which otherwise would have puzzled anyone trying to read the accounts. Mr Vlassis explained:
“Q.Eight other companies in the Carabelas group.
A.Yes, at the same time, because I had to split up this Commonwealth Bank consolidated account between the various companies; where the bank charged interest, I had to work out the percentage applicable to each company.
Q.So that George had borrowed the money in his own name and had applied it to these various company debts and therefore those companies owed him money.
A.Those companies owed, in my view, the bank.
Q.The loan was in his name.
A.The name of George Carabelas was superfluous to the accounting process, because the true intention of what really happened was that the bank lent the associated companies the funds. They just used his name for the sake of expediency for the sake of lending.
Q.You treated in the accounts the money from the Commonwealth Bank as not being loaned to George, but being loaned directly to all of these companies.
A.No. I chose the name G. Carabelas Commonwealth Bank account because that was the name on the bank documents, so I tried to distinguish between that loan and George’s personal dealings by just saying George Carabelas, G. and V. Carabelas, that’s anything to do with their personal dealings was G. & V. Carabelas. Anything related to that consolidated loan I used the terminology G. Carabelas CBA property account, or CBA account.
Q.That would have been in George’s own personal statements.
A.The loan account?
Q.Yes.
A.No, as far as George is concerned, when he produced these tax returns and lodged his tax returns, we only prepared a profit and loss statement.
Q.There was no mention of the G. Carabelas loan account.
A.In his personal, no.
Q.It was something you used as a clearing account in effect.
A.Yes.
Q.As representing the eight or so companies.
A.Correct.
Q.And you, in the books of each of those companies, treated the debt which totalled George’s personal obligations to the bank as being the individual company.
A.Correct.”
This explanation provides a basis from which it may be concluded that misfeasance has occurred.
There is no suggestion that as now relevant the defendants will have been prejudiced by the extension of time. It is true that the events occurred many years ago and the memory of Mr Carabelas or Mr Vlassis may have faded but I have not detected anything to suggest that the evidence will have been different if it had not been for the effluxion of time.
In deciding to extend time I apply the principles discussed in Sola Optical v Mills (1987) 46 SASR 364.
An order extending time will be included in the final judgment.
Part 5 The preference claims
When ALS went into liquidation, its books of account were not up to date. There were discussions between the liquidator’s office, Mr Vlassis and George. Mr S.G. James, who was employed by Mr Campbell, gave evidence of his dealings with Mr Vlassis. His cryptic notes of two telephone conversations with Mr Vlassis were received as business records and provide the most reliable available evidence of events so long ago. Mr James’ notes read as follows:
27 April 1994:
“Subject: Angas Law Services
I advised of appointment of liquidator 26/4/94.
Last a/c’s prepared 6/91 - to fax through today.
Trevor has been asked by director to update accounts to 6/93 for all group companies.
I said that liquidator would not undertake to pay for ALS a/c’s preparation.
Trevor said G. Carabelas was paying.
I said that I did not disapprove of a/c “preparation”.
Trevor believes there are no assets in company”1 June 1994:
“Subject: Angas Law Services
Re: accounts for Angas and group companies.
Trevor will have completed in approx 1 week.
I emphasised that we would not be liable for costs of preparation - we are not requesting accounts to be prepared, however, in the event that they are done, we would appreciate a copy.
Trevor said he is preparing accounts for whole of group anyway, and doing Angas requires little further effort.”The accounts for years ended 30 June 1992 and 1993 were prepared by Mr Vlassis, and George paid the accountant’s fees. Having heard the evidence of George and of his accountant, I find:
1.That abovementioned accounts were prepared by Mr Vlassis upon the instructions of George, who had been his client since at least 1988; since that time Mr Vlassis prepared all accounts for all companies as he saw relevant.
2.That although the liquidator was encouraging George and Mr Vlassis to prepare accounts, the liquidator took no part in giving instructions for the accounts.
3.Mr Vlassis obtained instructions from George upon general matters of policy concerning the accounts, but otherwise Mr Vlassis exercised a professional discretion as to the manner of presentation of the accounts.
4.As a matter of general practice, Mr Vlassis did not show the journal entries to his client which supported the published accounts.
5.In the preparation of the accounts of ALS and other companies associated with George, there was an aim to present insolvent companies in a form in which they could be deregistered upon the footing that they had no assets which required administration.
6.In order to achieve the abovementioned aim, Mr Vlassis made adjustments by journal entries to the various accounts as at 30 June 1992 and 30 June 1993 in the course of making the final entries. In all cases the entries have been made by Mr Vlassis upon his own initiative (but implementing the general policy of his instructions). George and Virginia as directors of all relevant companies were in the position where they could have passed resolutions to authorise transactions evidenced by the journal entries, but this has not been done. Virginia has permitted George to conduct business on her behalf and is bound by his actions.
7.George appears in the books of ALS as a creditor and in the books of the other companies as a debtor. Mr Vlassis, by a process which he described as “netting off” (or “netting out”) has found a way of off-setting debits and credits in different companies. He discussed this exercise with other practitioners within his profession and obtained their guidance before so proceeding.
8.The accounts for ALS for the years ended 30 June 1992 and 1993 have been presented by Mr Vlassis to George and to the liquidator and they have been treated by the plaintiff as being the books of the company for the purposes of this action.
The plaintiff relies upon “transactions” which he identifies as underlying the journal entries, and contends that three transactions can be thus identified which constitute unfair preferences and insolvent transactions. However, the defendants contend that the journal entries do not bind them; they rely upon Manzi v Smith (1975) 132 CLR 671.
In Manzi v Smith journal entries were made in company books by a book-keeper so as to adjust the ledger accounts of the appellants who were shareholders and directors of the company; a question was raised under s 293 of the Companies Act (WA) as to whether the journal entries evidenced preferences; the relevant entries were made by the book-keeper on instructions from the company secretary.
At 672 Barwick CJ said:
“By journal entry under the same date $35,859 was credited to Domenico Manzi and Mariana Manzi and applied by the company through journal entries to discharge the several debts to which I have referred. It was not shown that the appellants, or any of them, were parties to, or agreed to, these journal entries.
.........
To satisfy s 293, so far as presently relevant, payment of money must have been made to the appellants or for their account. In fact no money was paid on the 22nd February 1974, or for that matter at all, in the sum of $35,859, but it was said that the entries in the company’s books of account constituted payment of money by the company to the appellants on the 22nd February 1974.
As I have said, the appellants were not shown to be in any wise privy to the said entries in the company’s books, or for that matter to have had any knowledge of them. They had certainly not adopted them.”
And at page 675 per Jacobs J:
“... The entries made through the journal and the books of the company did nothing except alter the manner in which the internal accounts of the company were expressed. If there were mutual credits, mutual debts and mutual dealings before 22nd February 1974, there were the same credits, debits and dealings after that date. On the one hand there was no agreement at the time of the various dealings or subsequently that only the balance on accounts should be owed from day to day; on the other hand there was no agreement that by the alterations in the expression of the accounts made on 22nd February 1974 there should be any alteration in legal rights.”
That case is to be distinguished from the present. George employed Mr Vlassis and in my opinion, generally speaking, is to be treated as bound by the acts of his agent. However, in the circumstances, I would be reluctant to hold George and Virginia to accounts prepared for them without giving them the opportunity to correct a mistake or something which might have been overlooked in Mr Vlassis’ instructions. I have borne in mind that George gave evidence as to his lack of knowledge as to the recording of company accounts.
The defendants’ contention at the conclusion of the evidence was that the journal entries were “mere book entries performed by a fourth person” and not evidence against other persons not privy to the journal entries; they also contended that “they did not give instructions to Vlassis to record any particular set offs nor did they approve or ratify any particular set offs”. I decided to exercise power under SCR 71.03 on my own motion and I directed the taking of accounts.
On 21 March 2003 I formally directed the taking of accounts, although the outcome of that exercise was predictable. The liquidator relied upon the accounts as prepared by Mr Vlassis; the defendants challenged the accounts by:
(a)reversing the three sets of journal entries which allegedly constitute preferences;
(b)treating George as the agent of the various company for the purpose of raising funds from CBA; on this basis George claimed to be entitled to an indemnity from the companies in respect of his activities as their “agent” and entitled to credit in respect of the $430,000 paid by him to CBA in terms of the deed dated 23 June 1993 (exhibit P1, tab 34) between the bank, George and Blackcroft.
The defendants produced an account and explanatory memorandum to encapsulate these differences between the parties.
I have already decided (when dealing with the misfeasance claim) that George dealt with CBA as a principal and not as an agent; therefore I am able to reject the defendants’ accounting upon the supposed agency basis.
The reversal of the journal entries, standing alone, will necessarily have the effect of treating George (and Virginia) as having continuing liabilities as follows:
(1)as to the sum of $72,987.22 as a debtor of Blackcroft (reversal of journal entry relating to first preference claim);
(2)as to the sum of $67,826 as a debtor of Carprop (reversal of journal entry relating to the second preference claim);
(3)as to the sum of $93,763.75 as a debtor of Blackcroft (reversal of journal entry relating to the third preference claim).
These lastmentioned three adjustments affect the financial position of Blackcroft and Carprop and I intimated that if the defendants wished to maintain those contentions, Blackcroft and Carprop would be necessary parties to the proceedings. I intimated that I would not allow the defendants’ reversal of the journal entries to be brought to account unless Blackcroft and Carprop were joined as necessary parties; as Mr Vlassis had prepared the relevant accounts for those companies, the effect of his journal entries flowed through to these other companies. The various accounts as prepared and finalised by Mr Vlassis attained the status of company accounts upon which others had relied or were entitled to rely. It seemed to me therefore that there were interests which stood to be affected by the proposal of the defendants at trial to adjust the accounts further.
The defendants specifically declined to apply to join Blackcroft and Carprop (or representatives of those entities) and I therefore decline to consider the consequential accounting adjustments.
It is clear that the defendants owe the abovementioned amounts to one company or another; I do not consider that they should be allowed to put forward one set of accounts as against the liquidator of ALS and yet rely upon a different set of accounts as against Blackcroft and Carprop.
During the course of argument leading to the making of the order for accounts the following exchange occurred between the defendants’ counsel and myself at (T262-263):
HIS HONOUR: If these accounts are prepared I would expect to find that we will have to order the joinder of other parties to make sure that everyone is bound by them but I am not going to do that for the moment because if your client has in fact got an answer to what I am putting, I am not going to put anyone to the expense of that. But, as I see it, the formal orders that should be made is to direct the taking of accounts. Firstly, direct that the plaintiff serve on the defendants the accounts on which it relies. Well, we know that has already been done, that the defendant within so many days serve on the plaintiff an amended set of accounts showing what it claims to be the true position. That would be the convenient way of doing it in this case. If you had a different sort of dispute, I mean let’s say a building dispute or something like that, then it would be a different sort of way of proceeding. You would have a schedule, you know a scot-type schedule in which individual amounts would be disputed. We know here it is not the individual amounts that have been disputed, it is the way in which they have been shuffled around.
MR MANETTA: Can I just say this: we would object to any course of the joinder of Blackcroft or Carprop.
HIS HONOUR: Why?
MR MANETTA: Because it can be of no interest or comfort to the plaintiffs at the end of the day whether or not we meet our obligations to third parties. Any more than it can be of interest to Mr Scott whether Mr Carabelas pays his water bills or pays his council fees or anything else.
HIS HONOUR: It is of interest to the plaintiff to know whether the accounts that it is dealing with are the proper accounts. I mean, there is a public interest in establishing what are the proper accounts of this company. I wouldn’t allow the defendants to escape, as it were, in that way.
MR MANETTA: What we can say on the evidence, what’s clear as a bell on the evidence is that no set of accounts will ever show that Mr Carabelas owes Angas Law Services money. There have never been accounts to that effect. So,.
HIS HONOUR: No, I think that is correct. From what I have seen, that is correct.
MR MANETTA: So the most my learned friend can say is look at these accounts, Mr Carabelas owed third-parties a lot of money and that is why we say these proceedings are misconceived.
HIS HONOUR: Mr Wilkinson says these accounts show that his client is entitled to claim for a preference. Now the only way that you’re going to, as I see it, meet that, is to put forward another set of accounts which I am going to be asked as representing the true position. But in the course of doing that you’re going to, I suspect, expose yourself to a liability to other liquidators.
MR MANETTA: Well, that is as may be and that’s what we say is a matter for another day. As it happens another liquidator of Blackcroft hasn’t made demand of us.
HIS HONOUR: I suppose that’s because the liquidator of Blackcroft has accepted the accuracy of these accounts,
MR MANETTA: Yes, quite possibly.
HIS HONOUR: The court can’t allow that. I mean, we have got, no doubt, creditors standing behind all this. They would tear their hair out if they saw a debtor being able to avoid obligations in that way.”
I am satisfied that the accounts prepared by Mr Vlassis should be treated as correct and incorporating the three transactions which give rise to the three preference claims. By giving the defendants the opportunity to join others I have avoided any possibility of injustice to the defendants in requiring them to nail their colours to the mast. It is unnecessary that George and Virginia should actually meet and pass resolutions to justify the relevant journal entries if in fact those journal entries reflect the agreement of the directors. In my opinion it is to be implied from the conduct of the directors (including their response to an invitation to join other parties) that they accept the accuracy of the accounts. Virginia has not given evidence but she, like George, is faced with my order for the taking of accounts. The two directors are on notice as to the contents of the accounts and the effect thereof and they are not prepared to take the formal step to lead to an alteration in the accounts. There can be no injustice in treating them as bound by the accounts prepared in discharge of their statutory responsibility.
The supposed transactions giving rise to the alleged preference claims are identified upon the evidence in the following way by the plaintiff whose submission I adopt and reproduce:
First preference:
On or after 23 June 1993 (being the date when the provisions of the Corporations Law relevant to the plaintiff’s claim came into effect) the following transactions are recorded:
· In Blackcroft’s 1992 financial statements the sum of $71,787.22 owed by George and Virginia to Blackcroft was recorded as having been paid.
Exhibit P1, Tab 39
· This was paid by reducing the sum of $209,544.55 owed by Blackcroft to ALS by the sum of $72,987.22 (of which $71,787 was the major part) to $136,557.33. The difference between $72,987 and $71,787 is $1,200 and relates to an adjustment which is not here relevant.
Exhibit p1, Tab 39
· In ALS financial statements the sum which ALS owed George and Virginia was reduced by that sum of $72,987.22 by the first journal entry on page GJ 2 of the journal. This is confirmed in ALS financial accounts Balance Sheet.
Exhibit P1, Tab 31
Exhibit P1, Tab 32
The effect is that ALS repaid a debt which it owed to George and Virginia by $71,787.22 by paying a debt of $71,787.22 which George and Virginia owed to Blackcroft.
Exhibit P1, Tab 31
Exhibit P1, Tab 32
Second preference:
On or after 23 June 1993 (being the date when the provisions of the Corporations Law relevant to the plaintiff’s claim came into effect) the following transactions are recorded:
· In Carprop’s 1993 financial statements the sum of $119,213 owed by George and Virginia to Carprop was recorded as having been paid.
Exhibit P1, Tab 38
· This was paid, in part, by reducing the sum of $67,826 owed by Carprop to ALS by the sum of $67,826 to $nil.
Exhibit P1, Tab 38
· In ALS financial statements the sum which ALS owed George and Virginia was reduced by that sum of $67,826 by the second journal entry on page GJ1 of the journal. This is confirmed in the ALS financial accounts balance sheet.
Exhibit P1, Tab 29
Exhibit P1, Tab 30
The effect is that ALS repaid a debt which it owed George and Virginia by $67,826 by paying a debt which George and Virginia owed to Carprop.
Third preference:
On or after 23 June 1993 (being the date when the provisions of the Corporations Law relevant to the plaintiff’s claim came into effect) the following transactions are recorded:
· In Blackcroft’s 1993 financial statements the sum of $99,389.12 (being the difference between $136,557.33 and $37,168.20) is recorded as being paid.
Exhibit P1, Tab 41
· This as paid by ALS partly from funds owed to George and Virginia to ALS and partly from funds advanced to George and Virginia in the sum of the balance of $5,625.38.
Exhibit P1, Tab 30
· In ALS financial statements the sum which ALS owed George and Virginia was reduced by that sum of $99,389.13 by the first journal entry on page GJ2 of the journal. This is confirmed in ALS accounts balance sheet,
Exhibit P1, Tab 30
Exhibit P1, Tab 42
The effect is that ALS repaid a debt which it owed to George and Virginia by $93,763.75 (being $99,389.13 less $5,625.38) by paying a debt which ALS owed Blackcroft.
Whilst it is necessary to examine the accounts of ALS, Blackcroft and Carprop together in order to understand what has happened, I make the following observations by way of summary as to what has happened:
First Preference
Blackcroft’s accounts for the year ended 30 June 1991 show as a current asset - unsecured loan George - $71,787.22 (and see note 6 to the accounts). This asset has disappeared from the 1992 accounts. The explanatory journal entry in ALS refers to the loan of $72,987.22 in Blackcroft and comments:
“Entries put through the books of Blackcroft in order to reconcile with the records of prior years and CBA loan a/c - consolidated.”
Second Preference
Carprop’s accounts for the year ended 30 June 1992 shows “current asset - unsecured G & V Carabelas - $119,213”. This asset has disappeared from the 1993 accounts. The explanatory journal entry in ALS refers to a loan of $67,826 in Carprop Nominees and comments:
“Being loan a/c netted off against consolidated CBA property a/c.”
Third Preference
Blackcroft’s accounts for the year ended 30 June 1992 show credits and borrowings - current - loan Angas Law Services - $136,557.33 but for the year ended 30 June 1993 this has reduced to $37,168.20. (See Note 6 to accounts.) This difference if $99,389.13.
The explanatory journal entry in ALS books for the year ended 30 June 1993 identifies the amount of $99,389.13 and comments:
“Being loan a/cs netted off against each other in order to reflect the fact that prior years transactions were carried out through the George Carabelas CBA loan a/c on behalf of all associated companies.”
The amount of $99,389.13 includes an amount of $5,625.38 advanced by ALS to the defendants for the purpose of the exercise. Apparently it was thought necessary to take this step in order to provide a source of funds to achieve the desired result. I have ignored the advance.
It appears on the face of these journal entries that the supposed justification for the “netting off” is an assumption that the dealings by George with CBA and the companies abovementioned involved some common enterprise. However, that assumption (if it has been made) is not supported by the facts as I have found them to be.
In the course of his evidence at the present trial (T107) Mr Vlassis acknowledged his sworn testimony upon examination before a Master on 2 September 1998 as to his instructions from George to finalise the accounts:
“A.Yes, I would have used terminology like ‘George, in order to de-register this company and other companies in accordance with the law, there’s got to be no assets on the balance sheet and this is one way of making sure there’s no assets and we’ll apply for de-registration’ that’s the sort of terminology I would have used.
Q.He would have said ‘Well, I agree with that’.
A.He would have said ‘Do what you have to do’.
Q.When would this have occurred.
A.I would say it would have occurred, from memory, around about the time where George and the Commonwealth Bank would have agreed upon a settlement.
Q.When, in your memory, was that, or do you have some documents that will remind you.
A.Actually should be - there is a deed floating around with the Commonwealth Bank.”
Chapter 3.6 of the Corporations Law sets out the obligations of directors to cause to be made out accounts which give a true and fair view of the company’s position (see s 292 and s 293) together with directors’ reports and statements (s 301 and s 304). In my opinion the various accounts prepared by Mr Vlassis and the supporting books of account are business records and admissible in evidence as such. The books are prima facie evidence of any matters stated or recorded in the books. In my opinion upon the facts of this case the journal entries made by Mr Vlassis are evidence of transactions to which the defendants are parties.
The journal entries are evidence of transactions which occurred before the winding up of ALS commenced. They are transactions whereby the defendants in each case have obtained an advantage, namely the use of their monies as unsecured creditors for a purpose of their own choice. They are bound by the accounts (including the journal entries) because they authorized Mr Vlassis to make the relevant entries.
I find that the allegations in paragraphs 25 to 28 (first preference), paragraphs 33 to 36 (second preference) and paragraphs 41 to 45 (third preference) of the statement of claim are proved. Those paragraphs summarise in another (but useful) way the effect of the transactions which I have above described. There is no dispute between the parties as to the state of the accounts except as to whether the defendants are bound by the journal entries and the “transactions” which they purport to support.
In the case of the first and second preferences, balances standing to the credit of the defendants in ALS have been used to satisfy debts owed to ALS, to Blackcroft and to Carprop by “netting out” those credit balances against the moneys owed by the defendants to Blackcroft or Carprop. The defendants as creditors of ALS have thus had the use of their money ahead of other creditors in circumstances where ALS is insolvent.
In the case of the third preference, the defendants have used their credit balance in ALS to reduce a debt due to ALS from Blackcroft. In that instance the defendants have again had the use of their money to the prejudice of the general body of the unpaid ALS creditors; the effect of that transaction is that the defendants have used their funds to reduce a debt due to ALS by its debt to Blackcroft.
In my opinion it is therefore self evidence that in each of these three instances the defendants have obtained “payments” as a result of the respective journal entries. The journal entries evidence transactions to which the defendants were parties - see Re Hardman [1932] 4 ABC 207 at 210:
“Payment is also a very wide term and ‘may generally be made by a mere transfer of figures in an account without any money passing’ - see Stroud, Second Edition, pages 14-35 and cases there referred to showing the wide application of the term ‘payment’: ...”
(See also Re Smith, Bird and Tully [1933] 6 ABC 49 at 56.)
To these facts the following provisions of the Corporations Law may be applied:
By s 9 “Transaction”:
“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 charge created by the body on property of the body; 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.”
By s 588FA(r):
“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 ...; 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; ...”
By s 588FC:
“A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, ..... and;
(a)any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into;
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; ...”
By s 588FE:
“(1)Where a company is being wound up, a transaction of the company that was entered into at or after the commencement of this Part may be voidable because of any one or more of the following subsections.
..........
(4)the transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) a related entity of the company is a party to it; and
(c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day.”
By s 588FF(1):
“(1)Where, on the application of a company’s liquidator, the Court is satisfied that a transaction of the company is voidable because of section 588FE, the Court may make one or more of the following orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction.”
By s 588FF(3):
“An application under subsection (1) may only be made:
(a)within 3 years after the relation-back day; or
(b)within such longer period as the Court orders on an application under this paragraph made by the liquidator within those 3 years.”
The evidence shows that the journal entries were made after 23 June 1993 when the relevant Part of the Corporations Law commenced.
This action (as regards the preference claims) was commenced on 13 March 1997, within three years after the “relation back day” (namely 14 March 1994) and concerns transactions within four years of the relation back day (see s 588FE and s 588FF).
It is unnecessary in the circumstances for the plaintiff to seek to rely upon an extension of time in accordance with s 48 of the Limitation of Actions Act with respect to the preference claims. However, in case I am wrong with my analysis, I make a finding that in the course of the examination before the Master in September 1998 (as in the case of the “misfeasance transaction”) the liquidator obtained valuable information relevant to the preference claims which would entitle him to an extension of time if that should be necessary. Facts material to the plaintiff’s case were not ascertained until this examination. For example, in exhibit D6, pages 25-26, Mr Vlassis explains the netting off:
“A.Now, I debited that entry against the unsecured shareholders account. You asked me why did I do that and I did it for the sake of expediency to eventually get to the company where there’s no assets, so I can de-register it. There has been no asset to G. Carabelas physically in any shape or form. If I didn’t do it that way, if I didn’t debit the G. and V. shareholders loan account and what I did I created a new loan account under current assets, then the liquidator -
Q.And Angas Law Service.
A.That’s correct, and then the liquidator of Angas Law Services would say ‘Hang on, there is somebody theoretically owes me $70,987’ they would go to the G. Carabelas CBA account. Now, you know, under the law - I don’t know what the law suggests about that particular type of entity, but it certainly wasn’t meant to be George Carabelas personally.
Q.No, because you treated it as a clearing account.
A.That’s correct.”
I consider that it would be just in all the circumstances to grant an extension of time if (contrary to my view) the claim is out of time.
I have considered the question as to the date at which the transactions represented by the journal entries relating to the first and second preference claims should be treated as having occurred. Although the journal entries relate to the accounts as at 30 June 1992 and although the entries are dated 30 June 1992 there is evidence that they did not arise until George gave his instructions to Mr Vlassis after 23 June 1993. I consider that the relevant events are governed by the Corporations Law as amended by the Corporations Law Reform Act 1992. The preference claims are therefore all properly brought pursuant to s 488FF(1) of the Corporations Law.
Part 6 Conclusions
The plaintiff has established his case as pleaded. There will be an order for extension of time under the Limitation of Actions Act with respect to the misfeasance claim. Having put the plaintiff to election upon his alternative claims I direct that judgment be entered for the plaintiff against both defendants as follows:
1.As to the amount of $474,950 by way of compensation for misfeasance.
2.As to the sums totalling $234,576.97 pursuant to s 588F(1) of the Corporations Law.
I will hear the parties as to consequential orders (including interest and costs) which may be sought.
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