Sparks v Berry
[2001] QSC 251
•19 July 2001
SUPREME COURT OF QUEENSLAND
CITATION: Sparks & Anor v Berry & Anor [2001] QSC 251 PARTIES: GRANT DENE SPARKS as LIQUIDATOR OF LABJOY PTY LTD (IN LIQUIDATION) (ACN 010 699 564)
(first plaintiff/applicant)
LABJOY PTY LTD (IN LIQUIDATION) (ACN 010 699 564)
(second plaintiff/applicant)
v
LEWIS ANTHONY BERRY
(first defendant/respondent)
JOYCE MARY BERRY
(second defendant/respondent)FILE NO: S 1084 of 2001 DIVISION: Trial Division DELIVERED ON: 19 July 2001 DELIVERED AT: Brisbane HEARING DATE: 30 May 2001 JUDGE: Chesterman J ORDER: 1. The resolution of 15 January 1997 forgiving the first respondent’s liability to the second applicant is declared void
2. The first respondent pay the sum of $332,814.00 to the second applicant
3. That the respondent pay the applicant’s costs of and incidental to the application to be assessed on the standard basis
CATCHWORDS: CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF LIQUIDATION – EFFECT OF WINDING UP ON OTHER TRANSACTIONS - where only asset of company is a debt owed to it by a director – where director is released from debt – where the release was not binding against the company - whether release is an uncommercial transaction – whether release was an insolvent transaction
Corporations Law s9, s127, s588FB, s588FC, s588FE, s588FF
Limitation of Actions Act 1974 (Qld)
Uniform Civil Procedure Rules 1999 (Qld) r 292COUNSEL: Mr C D Coulson for the applicants
Mr R Dickson for the respondentsSOLICITORS: Jones King for the applicants
Standish Partners as town agents for Shaw McDonald for the respondents
CHESTERMAN J: The applicant plaintiff seeks summary judgment pursuant to rule 292 of the Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”) claiming inter alia that a resolution made by the directors of the second applicant (“Labjoy”) is voidable under the Corporations Law.
Labjoy is a “family company” having as its directors and shareholders the first and second respondents, Mr and Mrs Berry. It was incorporated in 1987 and appears to have had, as its only substantial asset, shares in an insurance broking company, Sedgwick MacDermott Pty Ltd. Labjoy last lodged a tax return in June 1991, when it was assessed at having an income tax debt of $146,692.22. Payment of $88,869.69 on 22 May 1996 reduced the debt to $58,822.53.
Late in 1991 or early 1992, Labjoy sold its shares in Sedgwicks MacDermott Pty Ltd for approximately $378,000. From the proceeds of sale, $360,000 was lent to Mr Berry on the condition that it be repaid by 1 March 1997. The company’s business then stagnated, no doubt due to the company lending approximately all its capital to Mr Berry.
This application relates to a resolution made at a directors’ meeting held on 15 January 1997. The minutes of the meeting note that Mr Berry had “severe financial difficulties” and that he would not be in a position to repay the loan. It was resolved that “Mr Berry be absolved from his obligation to pay the debt” which was “waived forthwith”. The decision is evidenced in a minute of the meeting signed by Mrs Berry. At all times prior to liquidation the relevant parties treated the resolution as binding.
Immediately before the resolution Labjoy’s assets (ignoring intangible property not identified said to be worth $173) were $1,196 standing to its credit in a bank account and the debt owed by Mr Berry of $332,814. Immediately after, and as a result of the resolution, its only asset was the sum of $592 standing to its credit in the bank account. Its overall position had changed from having a surplus of assets over liabilities of $274,821 to a net deficiency of $58,057. Its only liability was the sum of $58,822 owed to the Australian Tax Office. It had no business and no cash flow. It had given up its only asset and had no means of satisfying its liability. It was insolvent.
In or around 2000, the debt owed to the Australian Tax Office had increased to $113,494.28, and following an application dated 27 January 2000 brought by the Deputy Commissioner of Taxation, this Court ordered Labjoy be wound up on 25 February 2000. Mr Sparks brings this application as liquidator seeking the repayment of the debt owed to Labjoy by Mr Berry on the ground that the resolution forgiving the debt was voidable under s 588FE of the Corporations Law. In the alternative a claim for equitable damages is sought for breach of fiduciary duties.
A defendant can no longer avoid summary judgment by simply identifying a question in dispute; it must now identify a plausible defence. UCPR 292(2) states:
“(2) The court may give judgment for the plaintiff for all or part of the relief claimed in the application if the court is satisfied –
(a) the plaintiff has complied with this part and is entitled to all or part of the relief sought in the statement of claim; and
(b) the defendant has no defence other than in relation to the amount of the claim; and
(c) there is no need for a trial of the proceeding.”
I am satisfied that the plaintiff has complied with Part 2 of Chapter 9 of the UCPR and that there are no factual matters so in dispute or evidence required to warrant a trial on the issue of whether the absolution was void under the Corporations Law. I turn to consider the matters upon which the respondents seek to rely by way of defence.
Section 588FB of the Corporations Law provides that:
“A transaction of a company is an uncommercial transaction . . . if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(a)the benefits (if any) to the company of entering into the transaction; and
(b)the detriment to the company of entering into the transaction; and
(c)the respective benefits to other parties to the transaction of entering into it; and
(d)any other relevant matter.”
Section 588FC relevantly provides:
“A transaction of a company is an insolvent transaction . . . if, and only if, it is . . . an uncommercial transaction . . . and;
(a). . .
(b)the company becomes insolvent because of, or because of matters including;
(i)entering into the transaction; or
(ii). . .”
Section 588FE provides:
“(1)Where a company is being wound up, a transaction . . . may be voidable because of any one or more of the following subsections.
(2). . .
(3). . .
(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 . . . during the four years ending on the relation-back day”.
The principal point taken by the defendants is that the provisions of the Corporations Law are inapplicable because there was no “transaction” for the purposes of the sections. The basis for the contention is that Labjoy’s resolution absolving Mr Berry from his indebtedness to it was unenforceable. The release, for that is the effect of the company’s act of 15 January 1997, was not supported by any consideration nor was it under seal. Had Labjoy’s common seal been affixed to the resolution the release would have been binding notwithstanding the absence of consideration. Section 127 of the Corporations Law would have treated the common seal as, in effect, creating a deed. As it is the release is not under seal and is unsupported by consideration.
Counsel for the respondents therefore submitted that the forgiveness was neither an insolvent transaction nor an uncommercial transaction because it was not legally binding and therefore not a “transaction” for the purpose of the Corporations Law.
A “transaction” is defined under the Corporations Law as being “(but without limitation) … (f) a release or waiver; and includes such a transaction that has been completed or given effect to, or that has terminated”. Notwithstanding, Mr Dickson submitted that when a release is not legally enforceable it is not a release under the Corporations Law because it was not effective in law. This philosophical question need not be answered. The definition given to “transaction” in s 9 Corporations Law includes “a release … given effect to”. As all parties treated the release as binding it was “given effect to” and is a “transaction” under s 9 Corporations Law.
Quite apart from the statutory definition I do not accept that the ordinary meaning of the word “transaction” for the purposes of these provisions of the Corporations Law is limited to a “legally enforceable transaction”. The ordinary definitions of the word do not support such a restriction. The Shorter Oxford English Dictionary defines it thus:
“To carry through negotiations; to have dealings, do business; to treat; also, to manage or settle affairs . . . to carry on, do business.”
The Macquarie Dictionary defines the word as “an affair; a piece of business.”
The emphasis is on commercial activity or the conducting of business. It is not concerned with the legal formalities of the activity. An unlawful transaction is still a transaction (putting to one side the question whether such a transaction should be the subject of an order pursuant to s 588FF).
By way of illustration should the directors of a company orally authorise one of its officers to sell land owned by it and the officer agreed orally to such a sale would not the executory agreement be a transaction? If one presupposes the directors were honourable and declined to break their agreement by relying upon s 59 of the Property Law Act would not the company have transacted business though there was no enforceable contract in existence? I think the answer is affirmative.
I am satisfied that the transaction, the release of Mr Berry’s debt, was uncommercial for the purposes of s 588FB. The point needs no elaboration. Labjoy received nothing from the business. It lost (or at least it intended to lose) its only substantial asset. It became incapable of discharging its obligation to the Australian Tax Office. That no doubt was its purpose.
Similarly I am satisfied that the transaction was an insolvent one for the purposes of s 588FC. By giving up its right to recover the debt the company’s balance sheet went from a position of substantial surplus to one of significant deficit.
Mr Dickson argued against a finding that the transaction was uncommercial. He submitted that it was not unreasonable for Labjoy to write off Mr Berry’s debt because he could not repay it, its value as an asset was worthless or, at best, doubtful and for the company to delete it from its accounts as an asset of value brought the accounts into line with reality. In summary it was said that the resolution had the result that the accounts gave a “true and fair picture” of Labjoy’s affairs.
The problem with the submission is that the company could have achieved that proper objective without giving up its right to recover the debt or part of it from Mr Berry. To indicate that a debt was of doubtful value because of difficulties of recovery is altogether different from formally releasing the debtor from his obligation to pay.
Insolvent transactions may be declared void under s588FE(4) Corporations Law if there is an insolvent transaction to which a “related entity of the company is a party” and where the transaction “was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending the relation back day”. Mr Berry is a “related entity” defined in s 9 Corporations Law as including “a director … of the public company” and “spouse … of … a director”. The insolvent transaction occurred on the 15 January 1997 which is within 4 years of the relation back day, the 27 January 2000. Section 588FE(4) satisfied, there is a discretion granted under s588FF(c) to make an order that Mr Berry repay the “benefit” received.
Mr Dickson next argued that the court should not make an order pursuant to s 588FF even if satisfied that the resolution amounted to an insolvent transaction. His first ground was that Mr Berry’s debt might have become statute barred and that the possibility of a defence pursuant to the Limitation of Actions Act 1974 should be examined at trial. It does appear that the loan was made by Labjoy to Mr Berry in 1991. It is not clear whether it was repayable on demand but no later than 1 March 1997 so that time would commence to run upon the advance, or whether it was to be repaid on the fixed date of 1 March 1997. Mr Coulson’s quick response was that the point did not matter because Mr Berry acknowledged the debt in writing on 15 January 1997 so that pursuant to s 35(3) of the Limitation of Actions Act the six year limitation period began to run from that date. The document in question is a statement of position provided by Mr Berry to Labjoy to persuade it to release him from the debt. The document dated 15 January 1997 and signed by Mr Berry includes as a liability the debt to Labjoy. Mr Berry may therefore be sued for it until 15 January 2003.
Mr Dickson’s next ground raised discretionary considerations. He argued that because the release is ineffective Labjoy, controlled by the liquidator, can bring proceedings in the ordinary course to recover the debt. There is no need to have recourse to the Corporations Law. It does not seem to me that the court should necessarily decline to exercise the jurisdiction conferred by s 588FF because the liquidator may bring alternative proceedings. The section is intended to provide prompt and economical relief in appropriate cases. Where the preconditions to the section are satisfied I would think that ordinarily the court should grant the relief claimed in an endeavour to reduce delay and minimise cost.
Mr Dickson lastly submitted that summary judgment should not be given under s 588FF(c) because the “benefit” accruing to Mr Berry under the release was something to be examined at trial. No other paragraph of s 588FF is apposite. Section 9 Corporations Law defines “benefit” as being “any benefit, whether by way of payment of cash or otherwise”. Under s588FF(c) the court may make “an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction”.
In my opinion the benefit received by Mr Berry was the whole of the amount of his debt purportedly forgiven by Labjoy. Mr Dickson’s argument is that the benefit he received was equivalent to the amount that could have been obtained from his estate had execution been enforced or he had been made bankrupt. The matter is said to require investigation at trial. I think this confuses the benefit with the capacity to restore the benefit. I see no injustice in ordering Mr Berry to pay the amount of the debt. The order will take effect as a civil judgment to the same effect as though the liquidator had sued on the debt itself. Mr Berry will be obliged to pay as much as his assets allow but will suffer no other sanction. It would be inefficient and costly to require the liquidator to commence further proceedings when Labjoy’s entitlement to be paid has been established.
I am satisfied that the respondent has no defence to the claim made for recovery under the Corporations Law and make the following orders:
(a)The resolution of 15 January 1997 absolving the first respondent of liability to the second applicant is void;
(b)The first respondent pay the sum of $332,814.00 to the second applicant in satisfaction of the debt owed; and
(c)The first respondent pay the applicant’s costs of and incidental to the application to be assessed on the standard basis
An alternative claim for damages in equity for the breach of fiduciary duties must, it was accepted, go to trial.
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