Sigley & De Santis
[2019] FamCA 271
•3 May 2019
FAMILY COURT OF AUSTRALIA
| SIGLEY & DE SANTIS AND ORS | [2019] FamCA 271 |
| FAMILY LAW – CORPORATIONS – complex tangle of interrelated companies and connected shareholders – family companies – family trusts. FAMILY LAW – DE FACTO PARTNERS – financial agreement – de facto husband’s assets very substantial – agreement providing that upon breakdown of the de facto relationship the de facto husband would continue to meet mortgage payments under mortgage over the former de facto wife’s home – de facto husband terminating relationship and commencing to alter his extensive corporate arrangements. FAMILY LAW – CORPORATIONS – member’s voluntary winding up – requirement for solvency – loans owed to the de facto husband’s company forgiven – no evidence of legitimate basis for forgiveness having the effect of rendering company solvent – whether proper. FAMILY LAW – CORPORATIONS – charge of de facto husband’s single share in a two share company – charge given in favour of a company owned and controlled by the de facto husband’s parents – whether charge valid and legitimate – effect of charge – subsequent default by de facto husband in meeting obligations under charge – de facto husband allegedly surrendering charged share – effect thereof – de facto husband’s company thereafter under the effective control of his parents. FAMILY LAW – ATTEMPT TO DEFEAT – s 106B of the Family Law Act. FAMILY LAW – LIQUIDATORS – application by de facto wife for orders under schedule 2 to the Corporations Act for liquidators to provide a report on the external administration of de facto husband’s company. FAMILY LAW – PRACTICE AND PROCEDURE – case management – this proceeding having been heard on 26 separate applications by 10 judicial officers – need for case to be tried. |
| Corporations Act 2001, ss 494, 536, 1274A, sch 2, ss 90‑5, 90‑15, 90‑20 Family Law Act 1975, ss 90, 106B, 114 Family Law Rules 2004, ch 13 Insolvency Law Reform Act 2016 |
| ANZ Banking Group v Harper (1988) 11 Fam LR 649 Colonial Bank v Whinney [1886] 11 AC 426 Hall v Poolman (2009) 75 NSWLR 99 In the Marriage of Bassola (No 2) (1985) 10 Fam LR 413 In the Marriage of Gould (1993) 17 Fam LR 156 In the Marriage of Hudson (1986) 11 Fam LR 189 In the Marriage of Turnbull (1990) 15 Fam LR 81 In the Marriage of Whitaker (1980) 5 Fam LR 769 Knowles v Scott [1891] 1 Ch 717 Magarditch v Australia and New Zealand Building Group Ltd (1999) 32 ACSR 367 Re Alfred Priestman & Co [1936] 2 All ER 1340 Re Anglo‑Australian Investment Co (No 2) (1893) 14 LR (NSW) Eq 110 Re Bassi and KD Sales Force Specialists Pty Ltd (1999) 25 Fam LR 678 Re Evers Motor Co Ltd [1962] QWN 6 Re Hills Waterfall Estate & Goldmining Co [1896] 1 Ch 947 Re Jackson & Bassford Ltd [1906] 2 Ch 467 Re L.G. Batten Pty Ltd [1962] QWN 2 Re Marquette Motors Ltd (1928) 29 SR (NSW) 193 Re OneTel Ltd (in Liq) (2014) 99 ACSR 247 Re Union Bank of Kingston‑upon‑Hull (1880) LR 13 Ch D 808 Stanford & Stanford (2012) 247 CLR 108 Torkington v Magee [1902] 2 KB 427 |
| Goode, Roy, Principles of Corporate Insolvency (Sweet & Maxwell, 3rd ed, 2005) Holdsworth, W. S., ‘The History of the Treatment of Choses in Action by the Common Law’ (Jun 1920) 33(8) Harvard Law Review 997 Lonergan, Wayne, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) Milman, David, The Company Share (Edward Elgar, 2018) Thomson Reuters, McPhersons Law of Company Liquidation (online at 27 April 2019) |
| APPLICANT: | Ms Sigley |
| FIRST RESPONDENT: | Mr De Santis |
| SECOND RESPONDENT: | Q Pty Ltd as trustee for Q Discretionary Trust |
| THIRD RESPONDENT: | R Pty Ltd as trustee for De Santis Family Trust |
| FOURTH RESPONDENT: | Mr S De Santis |
| FIFTH AND SIXTH RESPONDENTS: | Mr T and Mr U as liquidators of E Pty Ltd (in liquidation) |
| SEVENTH RESPONDENT: | De Santis Family Investments Pty Ltd as trustee for E Superannuation Fund |
| EIGHTH RESPONDENT: | V Partners Pty Ltd (formerly P Partners Pty Ltd) |
| NINTH RESPONDENT: | B Accountants Pty Ltd |
| TENTH RESPONDENT: | X Pty Ltd as trustee for Trust for the Children of Mr & Mr AA De Santis |
| ELEVENTH RESPONDENT: | Ms De Santis (also known as Ms BB De Santis) |
| TWELFTH RESPONDENT: | E Pty Ltd |
| FILE NUMBER: | MLC | 9296 | of | 2015 |
| DATE DELIVERED: | 3 May 2019 |
| PLACE DELIVERED: | Melbourne |
| PLACE HEARD: | Melbourne |
| JUDGMENT OF: | Wilson J |
| HEARING DATE: | 23 April 2019 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr P Agardy |
| SOLICITOR FOR THE APPLICANT: | Peter Szabo Family Law |
| COUNSEL FOR THE FIRST RESPONDENT: | No appearance |
| SOLICITOR FOR THE FIRST RESPONDENT: | None |
| COUNSEL FOR THE SECOND RESPONDENT: | No appearance |
| SOLICITOR FOR THE SECOND RESPONDENT: | Berry Family Law |
| COUNSEL FOR THE THIRD RESPONDENT: | No appearance |
| SOLICITOR FOR THE THIRD RESPONDENT: | Berry Family Law |
| COUNSEL FOR THE FOURTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE FOURTH RESPONDENT: | Berry Family Law |
| COUNSEL FOR THE FIFTH AND SIXTH RESPONDENTS: | Dr A P Trichardt |
| SOLICITOR FOR THE FIFTH AND SIXTH RESPONDENTS: | None |
| COUNSEL FOR THE SEVENTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE SEVENTH RESPONDENT: | None |
| COUNSEL FOR THE EIGHTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE EIGHTH RESPONDENT: | V Partners Pty Ltd |
| COUNSEL FOR THE NINTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE NINTH RESPONDENT: | Berry Family Law |
| COUNSEL FOR THE TENTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE TENTH RESPONDENT: | Berry Family Law |
| COUNSEL FOR THE ELEVENTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE ELEVENTH RESPONDENT: | KCL Law |
| COUNSEL FOR THE TWELFTH RESPONDENT: | No appearance |
| SOLICITOR FOR THE TWELFTH RESPONDENT: | None |
Direction
On or before 8 May 2019 counsel for the parties are to confer so as to discuss when the liquidators must report.
Order
On or before 15 May 2019 the parties are to bring in a minute that gives effect to these reasons, such minute to also make provision for the further conduct of this proceeding.
Note: The form of the order is subject to the entry of the order in the court’s records.
IT IS NOTED that publication of this judgment by this court under the pseudonym Sigley & De Santis has been approved by the Chief Justice pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
Note: This copy of the court’s reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.02A(b) of the Family Law Rules 2004 (Cth)), or to record a variation to the order pursuant to r 17.02 Family Law Rules 2004 (Cth).
| FAMILY COURT OF AUSTRALIA AT MELBOURNE |
FILE NUMBER: MLC 9296 of 2015
| Ms Sigley |
Applicant
And
| Mr De Santis |
First Respondent
And
| Q Pty Ltd as trustee for Q Discretionary Trust |
Second Respondent
And
| R Pty Ltd as trustee for De Santis Family Trust |
Third Respondent
And
| Mr S De Santis |
Fourth Respondent
And
| Mr T and Mr U as liquidators of E Pty Ltd (in liquidation) |
Fifth and Sixth Respondents
And
| De Santis Family Investments Pty Ltd as trustee for E Superannuation Fund |
Seventh Respondent
And
| V Partners Pty Ltd (formerly P Partners Pty Ltd) |
Eight Respondent
And
| B Accountants Pty Ltd |
Ninth Respondent
And
| X Pty Ltd as trustee for Trust for the Children of Mr De Santis & Mr AA De Santis |
Tenth Respondent
And
| Ms De Santis (also known as Ms BB De Santis) |
Eleventh Respondent
And
| E Pty Ltd |
Twelfth Respondent
REASONS FOR JUDGMENT
introduction
The issue in this interim application was whether I should order the liquidators of the E Pty Ltd (in liquidation) to produce a report in relation to the external administration of that company pursuant to sch 2 of the Corporations Act. The applicant wife in this litigation sought the order. Her application was opposed.
Expressed most basically, the wife propounded this application relying on a collection of contentions. They are developed below but the following is a précis of them –
a)prior to its being placed in a member’s voluntary winding up, the issued share capital of E Pty Ltd was $2 divided into two shares each of $1;
b)in circumstances unknown to the wife, E Pty Ltd’s shareholding was diluted to three;
c)E Pty Ltd’s assets and undertaking were at one time very substantial, in the estimated value of more than $10 million;
d)for reasons not readily apparent a variety of loans that otherwise represented assets in the books and accounts of E Pty Ltd were forgiven;
e)the true value of the shares in E Pty Ltd was commensurately reduced;
f)the directors of E Pty Ltd resolved to place E in a member’s voluntary winding up;
g)E Pty Ltd is said to be currently valueless;
h)the current value of E Pty Ltd (in liquidation) has a significant bearing on the asset pool that falls for division in this case;
i)the applicant and her accountancy and legal advisors are unable to explain how E Pty Ltd’s once profitable status has been so substantially diminished;
j)the liquidators of E Pty Ltd (in liquidation) have not provided an explanation for the forgiveness of various loans or for the diminution in the value of its shares; and
k)the wife’s accountancy advisors have contended that a report, prepared under sch 2 to the Corporations Act is likely to explain how E’s shares diminished in value so significantly.
In opposing the application for the orders sought, Dr Trichardt of counsel contended –
a)no useful purpose would be served from the report contemplated because all documents relevant to the winding up have been exchanged between the parties;
b)the wife had no standing to bring this application;
c)the orders sought by the wife were more appropriate in a winding up in insolvency rather than in a member’s voluntary winding up and as E was being wound up under a member’s voluntary winding up, the report proposed was not suitable; and
d)the limited funds available in the winding up of E Pty Ltd (in liquidation) will be unnecessarily depleted by experts’ fees in the preparation of the report proposed.
Against that background I was requested to determine the wife’s application.
Synopsis
For the reasons that follow in my judgment it is appropriate to make an order under s 90‑5(2) of sch 2 to the Corporations Act in the terms sought by the wife.
Relevant factual setting
This proceeding was commenced in late 2015. The parties have been before the court on the following dates –
a)5 November 2015 – Bennett J;
b)2 December 2015 – Johns J;
c)16 February 2016 – Cronin J;
d)2 March 2016 – Bennett J;
e)6 April 2016 – Cronin J;
f)13 April 2016 – Cronin J;
g)8 June 2016 – Thornton J;
h)3 August 2016 – Thornton J;
i)5 October 2016 – Macmillan J;
j)21 October 2016 – Macmillan J;
k)14 November 2016 – Macmillan J;
l)8 February 2017 – Bennett J;
m)15 February 2017 – Registrar Mestrovic;
n)5 April 2017 – Johns J;
o)13 April 2017 – Macmillan J;
p)15 November 2017 – Registrar Jenkins;
q)11 December 2017 – Thornton J;
r)11 January 2018 – Thornton J;
s)1 February 2018 – Thornton J;
t)3 July 2018 – Macmillan J;
u)7 September 2018 – Registrar Field;
v)16 October 2018 – Baumann J;
w)3 December 2018 – Macmillan J;
x)21 February 2019 – Macmillan J;
y)23 March 2019 – Macmillan J; and
z)23 April 2019 – Wilson J.
Over the period November 2015 to April 2019 the case has been heard before 10 different judicial officers on 26 separate occasions. Those are lamentable statistics. The time has come for this case to be intensely case managed to get the case to trial. From this date henceforth, I will assume responsibility for this case until the hearing and determination of the trial of it or other resolution of it.
Some, although not all of the relevant facts accompanying the disputes in this case have been recorded in the written reasons for judgment already delivered on the return of various applications. Those include the reasons for judgment of Thornton J on 8 June 2016, Macmillan J on 5 October 2016, Macmillan J on 13 April 2017, Thornton J on 11 January 2018 and Macmillan J on 3 July 2018.
On 8 June 2016 Thornton J made orders in the nature of restraints under s 114 of the Family Law Act preventing the first respondent, Mr De Santis, from placing himself voluntarily in bankruptcy. As early as that date, the wife indicated her reliance upon a binding financial agreement and her application for enforcement of it under s 90UM of the Family Law Act. Thornton J addressed, albeit briefly, the role of an investigative accountant whose name is Mr C as being relevant to an assessment of the wife’s application. Thornton J relied on the High Court’s observations in Stanford & Stanford[1] in restraining the first respondent from presenting his own petition in bankruptcy.
[1](2012) 247 CLR 108.
In her Honour’s reasons for judgment delivered on 14 November 2016, Macmillan J made orders striking out the respondent’s response and her Honour ordered the enforcement of paragraph 6 of the financial agreement dated 24 October 2013 between the applicant and the first respondent.
Costs issues were addressed by Macmillan J in her Honour’s reasons delivered 13 April 2017. It was unnecessary for her Honour to descend into the factual minutiae on that occasion.
By the time Thornton J delivered reasons for judgment on 11 January 2018, the second to the seventh respondents had been added as parties to the proceeding. On that occasion, her Honour dealt with various costs applications. In the course of her Honour’s reasons, no detailed examination was directed to the factual scenario underpinning the lis pendens in this proceeding. Conversely, on 7 August 2018 Macmillan J addressed factual issues relevant to orders restraining the first and fourth respondents from doing anything that would or might “vary the existing share structure of any company” (I infer, meaning any corporate respondent in the proceeding) without the written consent of the applicant or leave of the court. Pursuant to those orders her Honour restrained Mr T and Mr U from disbursing any sum to any other respondent until further order. Various other restraining orders were made by her Honour, although a detailed excursus of the complicated factual dispute in the case was not given.
In October 2013 the applicant, then aged 45, was an instrument technician. The first respondent, then aged 50, was a director of “The Family Company” as his occupation was described in the financial agreement made on 24 October 2013 under s 90UC of the Family Law Act. It is convenient to refer to the respondents by their given names as several respondents have names similar to one another. At all events, the applicant and the first respondent Mr De Santis had lived together from May 2012. They wanted to make provisions for their financial arrangements. They instructed a solicitor to prepare a financial agreement that they executed on 24 October 2013. The applicant and Mr De Santis were independently advised on legal matters, on the effect of the agreement and on the advantages and disadvantages of making the agreement.
Clause 6 of the agreement canvassed the division of property in the event of the breakdown of the de facto relationship into which the applicant and Mr De Santis entered. The agreement defined “separate property” in relation to the applicant as meaning the property described in Annexure A. The applicant’s estimated net asset position as recorded in Annexure A was upwards of $858 000. Mr De Santis’s estimated net asset position as recorded in Annexure B to the agreement was in excess of the $7 680 000. The applicant and Mr De Santis did not disclose joint assets. The reference to Mr De Santis’s interest in the family company was not defined. However, in Annexure B at item 3 Mr De Santis identified as an asset an “interest in E Pty Ltd” the estimated value of which was $8 500 000.
On 8 June 2015 the applicant and Mr De Santis separated upon Mr De Santis sending her a text message that read “you and I are finished”.
By consent, on 2 December 2015 Mr De Santis was ordered to do all things so as to give effect to the obligations in paragraph 6(a), (c) and (d) of the 24 October 2013 agreement. Mr De Santis failed to do as by agreement what he was ordered to do.
In March 2016 Commonwealth Bank of Australia issued a proceeding as mortgagee seeking to recover possession of the applicant’s home at Y Street, Suburb Z. The applicant and Mr De Santis had given personal covenants to meet the applicant’s liability to the bank under a mortgage in favour of it over Y Street, Suburb Z.
The applicant appointed Mr C of Messrs D, chartered accountants, and instructed Mr C to confer with Mr L of B Accountants, chartered accountants representing the E group of companies. In late March 2016 Mr C provided a report of his investigations into Mr De Santis’s holdings in various corporate entities. That report revealed the following as at March 2016 –
a)Mr De Santis held 50% of the issued shares in the capital of E Pty Ltd;
b)Mr De Santis’s father, Mr AA De Santis owned the other 50% of the issued shares in the capital of E Pty Ltd;
c)Mr De Santis was the sole director of E Pty Ltd;
d)Mr De Santis was the sole director of E2 Pty Ltd and the holder of 100% of the issued shares in the capital of that company, its share capital being divided into 10 ordinary shares and a collection of ordinary shares having no par value;
e)Mr De Santis held 50% of the issued shares in the capital of E3 Pty Ltd;
f)Mr De Santis’s father, Mr AA De Santis, held the other 50% of the issued shares in the capital of E3 Pty Ltd;
g)Mr AA De Santis was the sole director of E3 Pty Ltd;
h)Mr De Santis held 10% of the issued shares in the capital of CC Pty Ltd;
i)Mr De Santis was once but ceased being a director of CC Pty Ltd on 7 October 2015;
j)Mr De Santis held 50% of the issued shares in the capital of De Santis Group of Companies Pty Ltd;
k)Mr De Santis was a director of De Santis Group of Companies Pty Ltd;
l)Mr AA De Santis was a director of R Pty Ltd, the trustee of The De Santis Family Trust;
m)Mr De Santis was a director of Q Pty Ltd, the trustee of The Trust for the Children of Mr De Santis and Ms De Santis;
n)Mr De Santis was a director of De Santis Family Investments Pty Ltd, the trustee of the E Superannuation Fund;
o)Mr AA De Santis was a director of De Santis Family Investments Pty Ltd, the trustee of E Superannuation Fund;
p)Mr De Santis was a director of E4 Pty Ltd;
q)Mr AA De Santis was a director of E4 Pty Ltd;
r)Mr De Santis’s son, Mr S De Santis was a director of E4 Pty Ltd;
s)E5 Pty Ltd held the issued shares in the capital of E5 Pty Ltd;
t)Mr De Santis was a director of E5 Pty Ltd;
u)Mr AA De Santis was a director of E5 Pty Ltd; and
v)Mr S De Santis was a director of E5 Pty Ltd.
On 5 October 2016 E Pty Ltd was placed in liquidation pursuant to a member’s voluntary winding up. Mr T and Mr U were appointed liquidators of E Pty Ltd (in liquidation). The applicant’s counsel, Mr Agardy, insinuated that the circumstances leading to the member’s voluntary winding up were odious.
In his financial statement made 4 November 2015 Mr De Santis made a collection of statements about the financial circumstances under which he operated as at that date. It will be recalled that the details of his asset position in October 2013 (being the date of his entry into the financial agreement) indicated his net assets were in the vicinity of $7 680 000. A little over two years later he stated in his financial statement that his liabilities stood at over $3 746 000 and his assets stood at no more than $1 001 000. He stated he was unemployed as at November 2015. However, he stated that the value of his shareholding in E Pty Ltd was $1 000 000 and he attributed a value of $1 000 to his clothing. He asserted that he was liable to E Pty Ltd under a loan from it in the sum of $912 561. He said he was also liable under a loan from the De Santis Family Trust for almost $1 500 000. His financial statement painted a bleak picture of a man in financially straitened circumstances. It stood in stark contrast to the financial position portrayed in the information set out in Annexure B to the 24 October 2013 agreement.
The wife’s solicitors and Mr C investigated the allegations by Mr De Santis that –
a)three directors of E Pty Ltd had been appointed prior to that company being placed in liquidation; and
b)Mr De Santis owed the sum of $400 000 to R Pty Ltd, the trustee of the De Santis Family Trust, pursuant to a loan allegedly made between them in November 2009.
Taking first the matter of the directors of E Pty Ltd, according to the historical company extract of that company taken from the database maintained by the Australian Securities and Investments Commission under s 1274A of the Corporations Act, E Pty Ltd had three directors in the period December 2014 to October 2016, the latter date being the date on which liquidators were appointed to it. According to the ASIC extract –
a)Mr AA De Santis was appointed as a director of E Pty Ltd on 28 June 1996 and remained as a director until the liquidators were appointed to the company;
b)Mr De Santis was appointed as a director on 28 June 1996 and continued until 1 February 2011 then he was later appointed on 24 March 2011 and continued until the liquidators were appointed to the company; and
c)Mr De Santis’s son, Mr S De Santis then aged 19, was appointed as a director on 5 December 2014 and continued until liquidators were appointed to the company.
The relevant documentation lodged with ASIC to record the appointment of Mr S De Santis as a director, namely a form 484E was exhibited yet nowhere in the material exhibited to affidavits was Mr S De Santis’s consent to act as a director nor were minutes of any meeting exhibited recording approval of his appointment.
So far as the alleged loan from R Pty Ltd for $400 000 was concerned, the documentation was sparse. It seemed to be common ground among Mr C and Mr L that on 12 November 2009 the relevant loan instrument was executed. Pursuant to that instrument, R Pty Ltd advanced to Mr De Santis and Q Pty Ltd the sum of $400 000. The loan instrument was prepared by solicitors. R Pty Ltd’s execution was attested by its directors Mr AA De Santis and Ms AA De Santis, those being Mr De Santis’s parents. Neither signatures appeared to have been witnessed. Q Pty Ltd executed the deed in its own right and as trustee for the Q Discretionary Trust. In both capacities, Mr De Santis attested his signature as a director of Q Pty Ltd. Mr De Santis executed the loan deed as a borrower in the presence of Mr L.
For better securing the repayment of the sum advanced of $400 000, Mr De Santis granted a charge of his shareholding in E Pty Ltd. The deed of charge was a comprehensive security instrument.
On behalf of the applicant, Mr Szabo (her solicitor) swore that, according to Mr C, no third party documents have been produced to demonstrate that the sum of $400 000 was actually paid to Mr De Santis.
At the very least, good corporate governance, if not proper compliance with accountancy practice and procedure required several steps to have been undertaken prior to the advance of $400 000 being effected. From the perspective of the lender, those steps included the following –
a)the lender had in its cash reserves the sum of $400 000 which it continued to advance or it had access to a line of credit of that amount;
b)the advance of a loan of that magnitude was consistent with its constitution;
c)the advance of $400 000 was for a proper corporate purpose of R Pty Ltd and that it was commercially prudent to advance the loan;
d)the directors of the lender were not acting in breach of the duties they owed to R Pty Ltd by putting at risk the sum of $400 000;
e)the borrower had the capacity to repay the sum advanced in accordance with the terms of the loan;
f)if the borrower defaulted the security taken for the loan (the charge over the share in E3 Pty Ltd) was of a proper value such that the lender would not be unsatisfied by any such default by the borrower; and
g)the transaction was a genuine commercial arm’s length transaction and was not a ruse or a device to assist Mr De Santis.
On behalf of the lender, good corporate governance required certain internal measures to have been taken prior to the advance of the $400 000. They included –
a)the board of R Pty Ltd met to approve the advance of the loan;
b)all relevant contractual loan and security documentation had been executed properly and regularly so that the enforceability of the loan and security instruments were not compromised;
c)the transaction and the documentation executed pursuant to it could withstand scrutiny by auditors if auditors ever investigated the transaction; and
d)ensuring that the transaction did not have as a direct or indirect purpose the borrower’s evasion of revenue.
According to evidence given on behalf of the applicant, by July 2016 Q Pty Ltd and Mr De Santis were in default under the loan facility to the extent of $755 013.28. The lender’s solicitors served a notice of default on Q Pty Ltd and Mr De Santis demanding payment of that sum by 4 July 2016. That amount was not paid. On 1 August 2016 Mr De Santis allegedly communicated with the lender to the effect that he was in no position to pay the sum claimed and he had no intention of disputing the debt. On that day he transferred his share in E Pty Ltd to R Pty Ltd. Thereafter, on 5 October 2016 Mr De Santis and his son voted to place E Pty Ltd in liquidation.
Embedded in the applicant’s overall position in this case was the notion that Mr De Santis devised the creation of the debt, the charge over his share, the default and the surrender of his share to his alleged creditor as a sham or a ruse with a view to orchestrating a scheme to defeat the applicant’s claims against him in this litigation. While not presently articulated in this way, the scheme allegedly involved –
a)the fictitious creation of a “debt”;
b)the alleged debt having the appearance of a valid transaction, enforceable according to its terms; and
c)the security, namely Mr De Santis’s share in E3 Pty Ltd, being offered as a proper security for the loan.
In truth, so the applicant contended, the scheme was not proper. That was because –
a)no funds were actually paid into the hands of Mr De Santis;
b)Mr De Santis did not have the capacity or intention to “repay” the loan;
c)the “loan” emanated from Mr De Santis’s parents and was not a commercial arm’s length transaction;
d)Mr De Santis’s failure to “repay” the loan put Mr De Santis’s ownership of his share in E3 Pty Ltd in jeopardy;
e)without apparent protest, Mr De Santis voluntarily surrendered his share in E3 Pty Ltd to the lender R Pty Ltd while his son and father continued as directors of E Pty Ltd with Mr De Santis’s father holding the other share in E Pty Ltd; and
f)the upshot of the arrangement prejudiced the applicant’s financial position in this case.
Mr C addressed the creation of the third share in E Pty Ltd and how its allotment was not in conformity with commercial practice. Mr C said that, according to the 2015 accounts of that company, the creation of a third shareholder meant that each share became backed by assets valued at $914 818, a diminution in value in the sum of $457 410. Mr C said Mr De Santis’s son Mr S paid $1 for a share the value of which was $914 818. Mr C said in his affidavit made 16 May 2018 that the circumstances of the allotment of the share to Mr S was not in accordance with normal commercial practice. He said the following –
The circumstances of the allotment of the new share was not, in my opinion, in accordance with normal commercial practice or common sense. Ordinarily a new shareholder in a private proprietary company will be required by existing shareholders to pay additional capital into the company (if a new share is being allotted), or alternatively, to purchase an existing share from an existing shareholder. The ordinary exceptions are situations where a person is being introduced into the company to secure an anticipated role important to the future of the company, or the desire of an existing shareholder to materially benefit the new shareholder, often a family member.
So far as the alleged loan of $400 000 was concerned, Mr C said in his 16 May 2018 affidavit the key points that follow. He said –
a)the relevant general ledger did not show a payment of $400 000 to Mr De Santis;
b)he was unable to locate a third party payment to Mr De Santis of that sum;
c)in the financial year ended 30 June 2010, during an epoch when the sum of $400 000 was advanced to Mr De Santis allegedly by reason of the difficult financial times on which he had fallen, his indebtedness to R Pty Ltd had decreased by over $1 000 000;
d)no increases had been recorded in Mr De Santis’s loan accounts representing unpaid interest for each financial year ended 2010, 2011, 2012, 2013, 2014, 2015 and 2016;
e)the forfeiture by Mr De Santis in favour of R Pty Ltd of Mr De Santis’s charged share in E3 Pty Ltd attracted capital gains tax issues;
f)on 30 September 2016, five days prior to E Pty Ltd being placed in liquidation, the business and undertaking of E Pty Ltd was sold to E6 Pty Ltd for a dramatically reduced value which, according to Mr C, was manipulated to write down its proper value therefore presenting a value that was unduly low;
g)in the accounts to 30 June 2015 for E Pty Ltd Mr De Santis was recorded as owing E Pty Ltd $912 561 on a loan;
h)as at 4 October 2016, on the day the directors of E Pty Ltd placed the company in liquidation, Mr De Santis’s indebtedness to the company had allegedly increased to $1 610 552;
i)as at 30 June 2015 R Pty Ltd as trustee for The De Santis Family Trust owed E Pty Ltd $2 715 063 whereas by 30 June 2016 that alleged loan had been written down to zero;
j)as at 30 June 2015 E7 Pty Ltd owed E Pty Ltd $939 079 whereas by 30 June 2016 that alleged loan had been written down to zero;
k)as at 30 June 2015 E4 Pty Ltd owed E Pty Ltd $245 810 whereas by 30 June 2016 that alleged loan had been written down to zero;
l)the last three mentioned loan write‑downs were unsupported by documentation beyond journal entries;
m)the amount of the alleged indebtedness to R Pty Ltd was $2 758 941 whereas the amount of the alleged indebtedness of E Pty Ltd to R Pty Ltd was recorded differently as being $2 715 053;
n)no cash was revealed as being paid to balance against any of the alleged loan write‑downs;
o)in Mr C’s opinion the journal adjustments represented an “unjustified manipulation of the assets of E Pty Ltd designed to reduce its realizable assets upon liquidation” (Mr C’s words);
p)as at 6 October 2016, the books and records of E7 Pty Ltd revealed that E7 Pty Ltd still owed E Pty Ltd the sum of $1 259 491 that should have been (but which was not) included as an asset in the books and records of E Pty Ltd;
q)no assets corresponded to the allegedly repaid loans aggregating $3 899 952; and
r)if the unsupported write‑downs were returned to the balance sheet they made a very significant positive effect on the amount shareholders in E Pty Ltd would receive in its winding up.
Mr AA De Santis and his grandson Mr S De Santis met on 4 October 2016 as board members of E Pty Ltd and resolved to wind up E Pty Ltd voluntarily. They declared that E Pty Ltd was solvent.
Mr L made several affidavits in this proceeding. He said he was the chairman of the firm of accountants called B Accountants that acted for Mr AA De Santis, Mr S De Santis and several E companies. He said he had practised as an accountant since 1980. In his affidavit made 21 August 2018 Mr L debated certain statements made by Mr C, many of which have been set out above. Mr L agreed that no payment of $400 000 was recorded in the books and records of R Pty Ltd because it was a notional payment. He said that Mr De Santis became ill and incurred significant medical expenses that E Pty Ltd paid. It seemed that Mr L was deeply involved in discussions with Mr De Santis and Mr De Santis’s father about aspects of commercial advice over many years. He denied the assertion made by Mr C that Mr L had acted improperly or unprofessionally.
Mr T, the liquidator of E Pty Ltd (in liquidation) made an affidavit on 20 February 2019 and one on 17 April 2019. He stated –
a)he had acted as liquidator in many hundreds of liquidations including member’s voluntary liquidations;
b)nothing had come to his attention in the liquidation of E Pty Ltd to cause him to doubt the solvency of the company; and
c)he was unable to resolve the issue raised by Mr C given that as liquidator he had limited access to all necessary books and records.
The issue in context
It will be recalled that pursuant to the orders made by the Honourable Justice Macmillan on 14 November 2016 her Honour ordered in paragraph 2 as follows –
Pursuant to s 90UN of the Family Law Act 1975 (Cth) (“the Act”) paragraph 6 of the Financial Agreement dated 24 October 2013 made between the parties pursuant to s 90UC of the Act (“the Agreement”) be enforced as if it were an order of the Court.
The whole of paragraph 6 of the 24 October 2013 agreement thereby became an enforceable order of the court. It is relevant to recall that entire paragraph in terms. It was as follows (with errors in the original) –
It is agreed by the parties that in the event of the breakdown of the de facto relationship evidence by separation as set out in paragraph 5 above, then;
(a)Mr De Santis and subsequently his estate shall continue to meet all repayments in relation to the mortgage(s) over Y Street, Suburb Z in the state of Victoria (“the Suburb Z property”) or any other property acquired by the parties and shall discharge the mortgage(s) when funds are available to do so.
(b)Ms Sigley shall not redraw on the mortgage over the Suburb Z property or any other property after the date of separation unless agreed by the parties and evidenced in writing.
(c)Mr De Santis and subsequently his estate shall continue to make all repayments to Finance Company for Ms Sigley’s current Maserati or any replacement vehicle registered in Ms Sigley’s name.
(d)Mr De Santis will ensure that his life insurance policy, number …09, or any alternate but equivalent policies fully paid at all times and will ensure that Ms Sigley at all time remains the beneficiary named therein.
(e)the property and financial resources of the parties will be divided as follows:
(i)Each party will remain individually entitled to their separate property, entitlements in any Trusts, and to their interest in joint property to the exclusion of the other and have the right inter vivos or by will to dispose of any such property as they see fit
(ii)Any joint property will be divided between them in accordance with their entitlements as evidenced in writing or title documentation
(f)Joint personal property will be divided between them in accordance with their entitlements as evidenced in writing or in title documentation and in the event of failure to agree as to who is to have possession of any property then it shall be sold by public auction at which either party may bid and the net proceeds divided between them in accordance with their entitlements;
(g)in relation to furniture which is jointly owned but agreement cannot be reached as to which pieces are to be retained by which party then Ms Sigley shall prepare to list of furniture which Alfie shall choose one of them with Ms Sigley having the furniture on the list not chosen.
The applicant has pursued this proceeding subsequent to 14 November 2016 with a view to dividing assets between her and Mr De Santis in accordance with cl 6 of the agreement made between them on 24 October 2013. The applicant contended that despite the unusually large number of appearances in this case thus far, the applicant’s attempts to ascertain precisely the true financial condition of E Pty Ltd prior to its being placed in liquidation have been thwarted if not wholly frustrated. She said she has incurred very considerable expense with legal advice and forensic and investigative accountancy assistance thus far. Despite that, so she said, the approach adopted by Mr De Santis, Mr AA De Santis, Mr S De Santis and more recently by the liquidators of E Pty Ltd has created a seemingly insurmountable obstacle to her in delving into the circumstances –
a)surrounding the alleged loan to Mr De Santis of $400 000; and
b)the forgiveness of a variety of debts that led to the declaration of solvency of E Pty Ltd thereby enabling it to be placed in liquidation pursuant to a member’s voluntary winding up.
In an endeavour to contain the runaway nature of this case, Macmillan J required the applicant to identify with a high degree of precision the issues on which the applicant sought a determination in this litigation and therefore final relief. In answer, Queen’s Counsel retained by the applicant produced a five page document dated 2 December 2018. In it, on behalf of the applicant, the list of issues included the following –
a)whether, pursuant to s 106B of the Family Law Act orders setting aside certain transactions should be made, namely –
i)the share in E Pty Ltd to Mr S De Santis;
ii)the forfeiture of Mr De Santis’s share in E Pty Ltd in favour of R Pty Ltd;
iii)the sale of business of E Pty Ltd to E6 Pty Ltd; and
iv)Mr De Santis’s payments of fees to B Accountants;
b)whether the applicant is entitled to damages for breach of the 24 October 2013 agreement;
c)whether Mr De Santis should be restrained from departing the Commonwealth of Australia until all money owed to the applicant has been paid; and
d)whether a costs order should be made against one or more of the respondents.
This application
By application in a case filed on 4 December 2018, the applicant sought the relief she pressed in the hearing before me on 23 April 2019 for documentation. The precise terms of her application in a case were as follows (with errors in the original) –
(1)That Ms De Santis (also known as BB De Santis) be joined to these proceedings as the Twelfth Respondent.
(2)That Family Court proceedings MLC 11947 of 2018 between Ms De Santis and the First Respondent herein Mr De Santis be consolidated into and heard together with these proceedings.
(3)That if leave be required, the Applicant be granted leave pursuant to the Corporations Law to join E Pty Ltd (in voluntary liquidation) as a party to these proceedings.
(4)That upon provision of appropriate affidavit evidence by (or on behalf of) the Applicant herein Ms Sigley, the Registrar of the Melbourne Registry of this Honourable Court be authorized and empowered to execute all documents in the name of the First Respondent Mr De Santis necessary to effect the reregistration of Q Pty Ltd with the Australian Securities & Investment Commission.
(5)That paragraph 2 of the Amended Response of the Third Respondent filed 28 November 2018 be struck out.
(6)That paragraphs 2, 3 & 4 of the Amended Response of the Fourth Respondent filed 28 November 2018 be struck out.
(7)That paragraph 2 of the Amended Response of the Ninth Respondent filed 28 November 2018 be struck out.
(8)That paragraph 2 of the Amended Response of the Tenth Respondent filed 28 November 2018 be struck out.
(9)That pursuant to the Family law Act 1975 (as amended) and / or the Corporations Law, the Fifth & Sixth Respondents within 30 days file and serve an affidavit replying to paragraphs 46 – 62 (inclusive) of the affidavit of Mr C sworn 16 May 2018 and, if appropriate, prepare amended accounts and an amended Form 520 properly representing the financial position of E Pty Ltd (In voluntary liquidation).
(10)That the seventh respondent within 7 days provide the documents requested in the letter from Peter Szabo Family Law to Berry Family Law dated 11 October 2018.
(11)Such further or other Order that the Court deems appropriate.
(12)Costs.
On 22 April 2019 Mr Peter Agardy of counsel appeared for the applicant. Dr Anton Trichardt of counsel appeared for the liquidators. No other respondent appeared to express his, her or its opposition to Mr Agardy’s application. Relying on s 90‑5 of sch 2 to the Corporations Act, the applicant contended that, in the circumstances of this case, it was appropriate for me to make an order requiring the liquidators, presently the external administrators, to provide a report in relation to the external administration of the company.
That section was in the following terms –
90‑5 Court may inquire on own initiative
(1)The Court may, on its own initiative during proceedings before the Court, inquire into the external administration of a company.
(2)The Court may, for the purposes of such an inquiry, require a person who is or has at any time been the external administrator of the company to:
(a) give information; or
(b) provide a report; or
(c) produce a document;
to the Court in relation to the external administration of the company.
Section 90‑20 confers power on certain persons to apply for an order under s 90‑15. Under s 90‑20 a person with a financial interest in the external administration of the company is entitled to apply for an order under s 90‑15. Mr Agardy argued that the applicant in this case had a financial interest in the external administration of E Pty Ltd (in liquidation) because she had, so he argued, an interest in which a large sum of money was at stake in obtaining orders setting aside several transactions and for orders under s 106B of the Family Law Act especially the forfeiture of Mr De Santis’s one share in E Pty Ltd and in the events leading to its being placed in voluntary liquidation.
Dr Trichardt submitted that the applicant lacked standing to bring the application that she made. Dr Trichardt said that any interest the applicant may have had in E Pty Ltd was antecedent in nature to the external administration of the company. He said that the external administration was limited to getting in debts, paying off creditors and bringing about the orderly conclusion of the winding up. Dr Trichardt submitted that this, being a member’s voluntary winding up, was unlike a winding up in insolvency. In the latter, persons who assert a claim as a creditor are entitled to lodge proofs of debt that are considered and paid pari passu to the extent that assets exceed liabilities.
Schedule 2 to the Corporations Act was introduced pursuant to the provisions of the Insolvency Law Reform Act 2016. As the explanatory memorandum that accompanied the bill provided, the legislation amended bankruptcy laws as well as laws relating to corporations in several respects. The new sch 2 amended previous legislation by –
a)removing unnecessary costs in insolvency administrations;
b)aligning the registration and disciplinary frameworks applicable to registered liquidators and registered trustees;
c)aligning certain rules relating to bankruptcies and external administration;
d)enhancing transparency between stakeholders;
e)promoting market competition on price and quality;
f)improving powers available to corporate regulators; and
g)improving confidence in the competence of insolvency practitioners.
The mainstay of the provisions of sch 2 to the Corporations Act commenced operation on 1 March 2017. Other parts commenced in September 2017. A proceeding commenced prior to that date was governed by the provisions of the Corporations Act, unamended by the Insolvency Law Reform Act. That was the purport of s 1617 of the Corporations Act. Therefore, a proceeding commenced prior to 1 March 2017 in relation to the external administration of a company continued to be governed by the provisions of the Corporations Act, unamended by the Insolvency Law Reform Act. In this proceeding the applicant did not rely on s 511 of the Corporations Act and only involved sch 2 in this application that I heard on 23 April 2019.
Neither counsel addressed me on the application of the amendments made to the Corporations Act by the provisions of the Insolvency Law Reform Act. Mr Agardy proceeded on the premise that sch 2 to the Corporations Act applied, irrespective of whether in this proceeding, prior to 1 March 2017, a claim was made in relation to the external administration of E Pty Ltd.
It became necessary to address Dr Trichardt’s contention that a member’s voluntary winding up was different to other forms of windings up. That much remains true. However, it is to put the matter in extremis to say that no overlaps exist in the several forms of liquidation for which the Corporations Act makes provision. Of the different forms of winding up, commentary on McPherson’s Law of Company Liquidation says the following (with citations omitted)[2] –
Juristically speaking, compulsory winding up might be regarded as the act of the court, and voluntary winding up as the act of the members. But a distinction of this kind, though of some relevance to the manner in which winding up is brought about, has little real significance so far as the actual process of liquidation is concerned. It is true that, upon superficial examination, the Corporations Act 2001 appears to invest the court, and the liquidator in a winding up by the court, with rights and powers which are not available in voluntary liquidation. But s 511(1)(b) enables the court in voluntary winding up to exercise all or any of the powers which it might exercise if the company were being wound up by the court. Since prevailing judicial policy now favours a liberal interpretation of the latter provision, the main fundamental practical differences between the two forms of winding up consist of the much more detailed provisions of the rules regulating the handling of funds by liquidators in compulsory windings up, coupled with greater formality in the distribution of surplus assets among the members.
A much more fundamental distinction exists between windings up of solvent and insolvent companies. This by no means corresponds to the division into voluntary and compulsory windings up. Indeed, it was one of the principal defects of the early legislation that it seems to have proceeded on the assumption that a company in voluntary winding up would be solvent. …
[2] Thomson Reuters, McPhersons Law of Company Liquidation (online at 27 April 2019) [2.20].
In a voluntary winding up, ordinarily the court is removed from the process. Yet power in the court does exist. Prior to the enactment of sch 2 to the Corporations Act the power was expressed in s 511 and it was enlivened when an applicant sought an order for the exercise of powers associated with the determination of questions arising in the winding up.
Conventional jurisprudence speaks of two forms of winding up. Those are windings up made voluntarily or those ordered compulsorily. In the first are two subsets, depending on the solvency of the company. In the case of a solvent voluntary winding up, the liquidation is effected by a member’s voluntary winding up. In the case of an insolvent voluntary winding up, the insolvency is effected by a creditors’ voluntary winding up. Winding up by the court – that is to say, compulsory winding up – is very much under the control of the court.
A liquidator in a voluntary winding up is not an officer of the court, a point made in Re Hills Waterfall Estate & Goldmining Co.[3] Instead, a liquidator in a voluntary winding up is an agent of the company, as was held in Knowles v Scott.[4] Yet for practical purposes the difference is more apparent than real because the court may supervise liquidators of every description, a matter canvassed in Magarditch v Australia and New Zealand Building Group Ltd.[5]
[3] [1896] 1 Ch 947.
[4] [1891] 1 Ch 717.
[5] (1999) 32 ACSR 367.
Returning to s 90‑20 of sch 2 of the Corporations Act, in my view the applicant had the requisite standing to seek the order under s 90. She had a financial interest in the external administration. She not only was affected by the fact of E Pty Ltd being under external administration. She was also financially interested in orders reversing aspects of the external administration.
The scope of s 90
In the passages above I have examined the legislative genesis of sch 2 to the Corporations Act. To a large extent, the learning grounded in s 511 of the Corporations Act, now repealed, informs the application of principles currently set out in s 90‑15. That said, almost no authority in relation to s 90‑15 currently exists yet the authors of McPherson’s Law of Company Liquidation have stated[6] that s 90‑15 is wider than was s 511 so the wide range of matters capable of being brought before the court under s 511 would be broader still.
[6] Thomson Reuters (n 2) [8.1630].
One of the first issues in my consideration of this present application is whether the applicant has standing to bring this application, a point stringently pressed by Dr Trichardt.
In my view the applicant does possess the necessary standing.
Section 90‑15 enables certain persons to apply to the court. In the first specific category is a liquidator, a creditor or a contributory. The applicant self‑evidently was not a liquidator. The company did not owe her a sum of money so she was not a creditor. She was also not a person who was liable to contributor (say, for the unpaid value of shares) so she was not a contributory. On those grounds she had no standing.
However, the section did not provide that applicants were limited to those. The section further provided that an applicant could be any other “person with a financial interest in the external administration”. As mentioned earlier, Mr Agardy contended that the applicant in this case had a financial interest in the external administration as she had at risk her claim in this litigation. Conversely, Dr Trichardt said that any such claim was antecedent to the external administration as it related to claims that preceded the date of the appointment of the liquidators.
At first blush Dr Trichardt’s submissions had superficial attraction. However, on examining cases under the legislative forerunner to s 90‑15, that is to say, upon examining cases under s 511 a very liberal construction was given to the types of cases that could be brought under that section. Upon considering the breadth of those cases it was abundantly plain that they were not limited to persons who asserted a financial interest in the external administration of the company. They included –
a)a dispute about whether a particular disposition amounted to a preference, as was canvassed in Re Jackson & Bassford Ltd,[7] Re Marquette Motors Ltd[8] and Re Evers Motor Co Ltd;[9]
b)whether a liability under a contact of insurance entered into by an insurance company enjoyed a statutory priority, as was canvassed in Re Dominion Insurance Co of Australia Ltd & Companies Act;[10]
c)whether a debenture had been validly given by a company, as was canvassed in Re Alfred Priestman & Co,[11] Re Anglo‑Australian Investment Co (No 2)[12] and Re Evers Motor Co Ltd;[13]
d)questions about a deed of compromise of litigation, as was canvassed in Re OneTel Ltd (in Liq);[14]
e)questions of procedure, as was canvassed in Re Union Bank of Kingston‑upon‑Hull;[15] and
f)questions about the admissibility of evidence, as was canvassed in Re L.G. Batten Pty Ltd.[16]
[7] [1906] 2 Ch 467.
[8] (1928) 29 SR (NSW) 193.
[9] [1962] QWN 6.
[10] [1980] 1 NSWLR 271.
[11] [1936] 2 All ER 1340.
[12] (1893) 14 LR (NSW) Eq 110.
[13] [1962] QWN 6.
[14] (2014) 99 ACSR 247.
[15] (1880) LR 13 Ch D 808.
[16] [1962] QWN 2.
From that survey it is readily apparent that a very wide range of issues have been brought before the court under sections equivalent or largely analogous to s 90‑15 and that a very large number of those issues concerned questions that chronologically pre‑dated the external administration of the company. Accordingly, it seems to me that this provision is not restricted in its operation in the way Dr Trichardt contended.
In the course of argument the decision of the Court of Appeal of the Supreme Court in Hall v Poolman[17] was cited. It seemed to me that the Court of Appeal’s decision in this context is to be construed so that s 90‑15 is applied equally to court‑appointed and non‑court‑appointed liquidators so that there should be no lesser degree of supervision of liquidators who were not appointed by the court.
[17] (2009) 75 NSWLR 99.
On behalf of the applicant Mr Agardy submitted that a report was appropriately ordered. The contents of the report was urged as follows –
(a)Details of the accounts of E Pty Ltd (in liquidation) (Company) on which the purchase price of the business of the Company was based in the sale of that business to E6 Pty Ltd, together with supporting documentation. (The sale of business agreement is exhibit 12 to the affidavit of Mr C.)
(b)The breakdown of the loans and advances set out in the form 520 dated 4 October 2016 (exhibit 11) and details of the loans and advances estimated to be unrealisable, together with supporting documentation.
(c)Details of the accounts on which the assets and liabilities statement (exhibit 13) is based, together with supporting documentation.
(d)The correct amounts of the loan accounts between the company and:
(1)Mr De Santis
(2)R Pty Ltd as trustee of The De Santis Family Trust;
(3)E7 Pty Ltd; and
(4)E4 Pty Ltd.
(e)An explanation of the movements in the loan accounts referred to in sub-paragraph 1(d) hereof since 30 June 2015, together with supporting documentation.
(3)The Applicant also submits that it is appropriate for this Honourable Court to require Liquidators to prepare accounts for the Company that correctly recorded the financial position of the Company. The Applicant submits that it would be appropriate for the Liquidators to be paid their remuneration from the assets of the Company.
Dr Trichardt resisted the making of orders sought on the basis set out in paragraph 3 of these reasons. Of those Dr Trichardt contended the person who is more closely connected to the documentation in this case had assiduously searched for documentation and information of the sort canvassed in the proposed report, being unsuccessful thus far. He said there was little point in ordering a report from the liquidators as they were unable to illuminate the various issues about the $400 000 loan, about the third directorship and the forfeiture of the charged share. In debate I asked Dr Trichardt whether liquidators under a member’s voluntary winding up possessed the same powers that liquidators under a compulsory winding up possessed to conduct liquidator’s examinations or to require persons to attend before the liquidator for interview. Dr Trichardt’s answer was punctuated by his overall thesis of impracticality or purposelessness. He said little point existed in that. Of course, I accept that those are his instructions. However, persons beyond Mr De Santis are likely to have a good deal of knowledge about the surrounding circumstances of the $400 000 alleged loan. It was, after all, an inter‑family arrangement. Mr L may well have advised about it. Mr AA De Santis is likely to have knowledge about it.
Further, so far as the loan accounts were concerned the liquidators are best placed to conclude whether or not E Pty Ltd was in fact and in law solvent when placed in voluntary liquidation. Their examination of various loan accounts involving E Pty Ltd is likely to bear that out. Of course, it is possible that the liquidators will be unable to go beyond the many journal entries by which loans have been forgiven. Yet those journal entries must be underpinned by known factual matters by which the loans were properly forgiven, at least according to Mr C. Unless the liquidator’s report reaches a similar conclusion then serious doubts will be raised about the validity of the loan forgiveness and possibility about the veracity of those professionals who said those loans were valid and were allegedly properly forgiven.
In my view it is both necessary and desirable to require the liquidators to prepare a report under s 90‑5(2)(b) of sch 2 in the manner sought.
Dr Trichardt told me that the liquidators hold cash reserves in the approximate sum of $250 000. They should have their fees for the preparation of the report, but not until they provide the report. At a later stage I will examine claims for remuneration for appropriateness.
One share
Dr Trichardt developed a submission about the legal nature of the single share Mr De Santis once held in E Pty Ltd. Dr Trichardt contended that the share did not confer upon Mr De Santis a proprietary interest in the assets of the company. He relied on an extract from David Milman, The Company Share (2018) in which the learned author wrote the following –
Acquiring a share in a company, as a general rule, offers no guarantee to the shareholder about future income or even having a proprietary interest in the company’s assets.
Naturally, a company’s financial future cannot be gainsaid but shareholding signifies matters unconnected with the future profitability of the company. As mentioned in debate with Dr Trichardt, a share does not confer upon the owner a proprietary right enforceable against the world. Rather, a shareholder acquires through ownership of the share a bundle of rights of an obligatory nature, enforceable inter partes against the company among which is the right to demand payment of a dividend or to claim part of the company’s assets in proportion to members’ shareholdings upon liquidation of the company. More conventionally, a share has been analysed at law as being a chose in action of a category explained by Channel J in Torkington v Magee.[18] Being a chose in action, a company share is a right enforceable by action including a right to recover ownership of property real or personal. One of the most comprehensive early examinations of the legal conception of the chose in action emerged from the scholarly piece by W. S. Holdsworth.[19] There, the history of the chose in action was traced to the House of Lords decision in Colonial Bank v Whinney[20] itself a case involving shares and whether ownership of shares stood outside of provisions of the Bankruptcy Act 1883.
[18] [1902] 2 KB 427.
[19] W. S. Holdsworth, ‘The History of the Treatment of Choses in Action by the Common Law’ (1920) 33 Harvard Law Review 997.
[20] [1886] 11 AC 426.
Returning to the relevance of Mr De Santis’s share in E Pty Ltd, that share was a right then held by Mr De Santis. He was entitled to charge his ownership of the share (as he did). If he so elected, he was entitled to sell it. If he choose to obtain the best price available for the share he was entitled to ascertain the net shareholders’ equity of the company and to divide that amount by the proportion of the shares he held, here two. Of course, that was not the only method by which the proper value of his share in E Pty Ltd could be ascertained as various methods can be utilised to value company shares most of which are recorded by the author Wayne Lonergan.[21]
[21] Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003).
In this case, the best evidence of the net shareholders’ equity of E Pty Ltd was given as at 30 June 2015. As at that date, the net shareholders’ equity was $1 000 000. Thereafter, the assets of E Pty Ltd were allegedly written down and loans were allegedly forgiven all of which lead to a very different net shareholders’ equity position. One of the major factual problems in this case flowed from the difficulties in ascertaining the true financial position of E Pty Ltd between 30 June 2015 and 30 June 2016 (the following financial year close date) and 4 October 2016 being the date on which the shareholders of the company voted to place the company in liquidation.
While Dr Trichardt’s submission was true, namely, that Mr De Santis’s shareholding did not confer upon him a proprietary interest in the assets of E Pty Ltd, Mr De Santis’s single share in the company entitled him to half of the net shareholders’ equity in the company upon which Mr De Santis could have insisted in a commercially regular, properly orchestrated member’s voluntary winding up. For that matter, according to one of the lead textbooks on corporate insolvency,[22] in a winding up of a solvent company the liquidator’s role will include –
a)winding up the affairs of a company;
b)ensuring that the company’s assets and their proceeds are used to pay proper debts; and
c)sharing any surplus appropriately among the contributories according to their respective entitlement.
[22] Roy Goode, Principles of Corporate Insolvency (Sweet & Maxwell, 3rd ed, 2005).
In this case, the very reason for the applicant’s application before me was to enable a better understanding to be acquired of the true financial position of E Pty Ltd in two periods, namely –
a)1 July 2015 to 30 June 2016; and
b)1 July 2016 to 4 October 2016.
That seemed to me to be entirely proper.
Relief under s 106B of the Family Law Act
The operation of s 106B of the Family Law Act is very wide. It applies irrespective of intention. It empowers the court to set aside or restrain the making of an instrument or disposition made or proposed to defeat an existing or anticipated order in the proceeding. It operates even if the party who acquires title as purchaser does so as a bona fide purchaser for value, a point highlighted by Nygh J in In the Marriage of Whitaker.[23] Classically, this section has been enlivened where parties separate and, for example, the husband wishes to prevent the wife from obtaining a share in his property so he transfers his property to his new partner so that he will have no property available to the wife in an application for the division of property under s 79.
[23] (1980) 5 Fam LR 769.
In ANZ Banking Group v Harper[24] the court held that the onus is on the applicant to prove an entitlement to relief under s 106B.
[24] (1988) 11 Fam LR 649.
In various decisions of this court, it has been held that a “disposition” of which the section speaks is any form of alienation and is not limited to assignments, sales or gifts of property. Those authorities include In the Marriage of Bassola (No 2),[25] In the Marriage of Hudson[26] and Re Bassi and KD Sales Force Specialists Pty Ltd.[27] In the specific context of a transaction involving the allotment of shares in a family company said to be a sham, the section applied, as was held in In the Marriage of Turnbull.[28] Forgiveness of a debt for the payment of that debt may attract the operation of the section, as was held in In the Marriage of Hudson. Yet, the section’s operation is not confined to sham transactions, a point passed upon in In the Marriage of Gould.[29]
[25] (1985) 10 Fam LR 413.
[26] (1986) 11 Fam LR 189.
[27] (1999) 25 Fam LR 678.
[28] (1990) 15 Fam LR 81.
[29] (1993) 17 Fam LR 156.
From the foregoing it will be observed that the ultimate relief sought by the applicant under s 106B very directly raises matters germane to the report I have considered. I do not share the enthusiasm that Dr Trichardt submitted prevailed in contending that the activity of preparing the relevant report was purposeless. It was likely to address matters that squarely fell for consideration in the assessment of the claim in this case under s 106B.
Upshot of this application
In my view this application succeeded.
In view of the foregoing, in my judgment it is appropriate to make the orders the applicant sought. Precisely when the liquidators must report should be the subject of discussion between counsel, which should be held within seven days with a view to the parties bringing a minute that gives effect to these reasons. The minute should also make provision for the further conduct of this case. The minute should be brought in within 14 days.
Further conduct of the proceeding
Naturally, the liquidators must be given a sensible amount of time to provide the report contemplated by these orders. To the extent that ongoing discovery issues might arise I point out that ch 13 of the Family Law Rules imposes on the parties ongoing disclosure obligations and the parties must comply with those obligations.
The parties are to confer and then to appear before me for a case management conference with a view to fixing this case for trial in the month of October. That is five months from now. In the context of litigation that has been on foot for over four years, that is more than enough time.
Within seven days I direct that the parties to bring in minutes that give effects to these reasons including a suggested date for the case management conference.
I propose to reserve the costs of this application. That said, the wife succeeded in it. At the appropriate juncture debate will be held concerning costs if Mr Agardy applies for his costs of and incidental to this application.
I certify that the preceding eighty‑three (83) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Wilson delivered on 3 May 2019.
Associate:
Date: 3 May 2019
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