Verge v Stinson - [2011] WASC 158

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: VERGE -v- STINSON [2011] WASC 158

CORAM: MASTER SANDERSON

HEARD: 9 MAY 2011

DELIVERED : 22 JUNE 2011

FILE NO/S: COR 12 of 2011

MATTER :In the matter of the Corporations Act 2001 (Cth) s 588FF
and
In the matter of DUNSBOROUGH STORAGE PTY LTD (IN LIQ)

BETWEEN: EVAN ROBERT VERGE AND GEORGE AUBREY LOPEZ AS LIQUIDATORS OF DUNSBOROUGH STORAGE PTY LTD (IN LIQ)
Plaintiffs
AND
BRIAN STINSON
Defendant

Catchwords:

Corporations Act - Claim transaction unreasonable director related transaction - Principles

Legislation:

Corporations Act 2001 (Cth), s 588FDA

Result:

Application dismissed

Category: A

Representation:

Counsel:

Plaintiffs: Mr A J Aristei
Defendant: Mr D M Stone

Solicitors:

Plaintiffs: Carles Solicitors
Defendant: Muries Lawyers

Case(s) referred to in judgment(s):

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd (2006) 57 ACSR 693

MASTER SANDERSON: By originating process filed 1 February 2011, the plaintiffs sought the following orders:
1.A declaration that the private loan agreement dated 3 October 2008 between the first defendant and Julian Beetham as amended by the Loan Extension Agreement dated 25 November 2008 between those parties and Stewart Blizzard (collectively 'the Agreement') purporting to confer security in favour of the first defendant over the land of Dunsborough Storage Pty Ltd ('the Company') at Lots 884 and 885 both on Deposited Plan 54282 comprised in Certificates of Title Volume 2656 Folio 925 and Volume 2656 Folio 926 (collectively 'the Land') is an unreasonable director related transaction under s 588FDA of the Corporations Act 2001 (Cth) ('the Act') and is rendered voidable by operation of s 588FE of the Act.
2.A declaration that the defendant has no security over the Land or, further alternatively, no equitable interest in the Land.
3.The defendant do deliver forthwith to the plaintiffs the duplicate Certificates of Title for the Land.
4.The defendant pay the plaintiffs' costs to be fixed or alternatively taxed.
The application is supported by an affidavit of Evan Robert Verge sworn 28 October 2010. Appearing as annexure G to that affidavit is a letter from the defendant's solicitors to the liquidator, written in response to a demand by the liquidators for the defendant to deliver up title deeds to the properties. The letter relevantly reads as follows:
The title deeds were handed to our client as security for a loan of $400,000.00 given by Mr Stinson to Mr Julian Beetham who was a director of DS on 3 October 2008. He pledged and allowed our client to hold the titles as security for the short term loan which was repayable on 24 October 2008.
That loan was extended and signed by both Messrs Stinson and Beetham on 23 November 2008 and countersigned by Mr Stewart Blizzard, the other director of DS, on 25 November 2008.
Attached to that letter are two documents. The first is titled 'Private Loan Agreement between Brian Stinson and Julian Beetham'. It is a short document which reads as follows:
LOAN OUTLINE
This is a private loan agreement between Brian Stinson and Julian Beetham dated the 3rd October 2008 for the purpose of a short term 3 week loan to be repaid on 24th October 2008. The security for the loan is Lots 884 and 885 Commonage Road Dunsborough WA which Julian Beetham (Dunsborough Storage Pty Ltd) owns with no debts.
Julian Beetham is prepared to let Brian Stinson use the lots as security for the short term loan with the understanding that a caveat is not registered over the properties and that Brian Stinson does not use the lots as security for any other loans.
Julian Beetham will repay the loan in full on a repayment day plus interest outlined in the schedule to Brian Stinson and then the lots will no longer be used as security for the short term loan.
If the loan of $400,000 is not repaid on the 24th October 2008 then a penalty of $500 per day will apply until the funds and interest are fully repaid. The maximum penalty period is 30 days from the 24th October 2008. After this date Brian Stinson has the right to sell the secured lots to recover all of the outstanding debt with no legal recourse from Julian Beetham or Dunsborough Storage Pty Ltd.
The second document is a loan extension. There is no need to quote its terms. It is common ground that Mr Beetham did not make repayment of the loan. The defendant now says he is entitled to retain the title deeds to the property and the plaintiffs as liquidators have no right to require the delivery up of the Certificates of Title. It is important to note two things. First, this was a loan agreement between Mr Stinson and Mr Beetham. The Company was not a party to the Agreement. While property owned by the Company was pledged effectively as security for the Agreement, it was not suggested the Company benefitted at all by that transaction. Secondly, the Company did, through its director, hand the Certificate of Title to Mr Stinson. There is no suggestion Mr Stinson came into possession of these Certificates of Title other than in a proper and appropriate fashion.
Section 588FDA of the Act is in the following terms:
(1)A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a)the transaction is:
(i)a payment made by the company; or
(ii)a conveyance, transfer or other disposition by the company of property of the company; or
(iii)the issue of securities by the company; or
(iv)the incurring by the company of an obligation to make such a payment, disposition or issue; and
(b)the payment, disposition or issue is, or is to be, made to:
(i)a director of the company; or
(ii)a close associate of a director of the company; or
(iii)a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
(c)it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i)the benefits (if any) to the company of entering into the transaction; and
(ii)the detriment to the company of entering into the transaction; and
(iii)the respective benefits to other parties to the transaction of entering into it; and
(iv)any other relevant matter.
The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.
Note: Subparagraph (a)(iv)--This would include, for example, granting options over shares in the company.
(2)To avoid doubt, if:
(a)the transaction is a payment, disposition or issue; and
(b)the transaction is entered into for the purpose of meeting an obligation the company has incurred;
the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).
(3)A transaction may be an unreasonable director-related transaction because of subsection (1):
(a)whether or not a creditor of the company is a party to the transaction; and
(b)even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
It was common ground between the parties s 588FDA(1)(a) was satisfied. It was also common ground between the parties the defendant did not fall within either s 588FDA (1)(b)(i) or s 588FDA(1)(b)(ii). It was the plaintiffs' contention the defendant fell within s 588FDA(1)(b)(iii). The defendant said that subs (1)(b)(iii) did not apply to this case.
The arguments were in fact quite simple. The plaintiffs say the transaction - that is to say, the pledging of the Company's Land - was for the benefit of Mr Beetham and therefore the subsection was satisfied. The defendant said the pledging of the Land was for the benefit of Mr Stinson and therefore the subsection did not apply.
In support of his argument, counsel for the defendant relied on three matters. First, the position of s 588FDA in the scheme of this part of the Act. The section falls within pt 5.7B of the Act. That is headed 'Recovering Property Or Compensation For the Benefit of Creditors of Insolvent Company'. The section is found in div 2 of that part titled 'Voidable transactions'. Section 588FA deals with unfair preferences. Section 588FB deals with uncommercial transactions. Section 588FC deals with insolvency. Section 588FD deals with unfair loans to a company. There then appears s 588FDA. Section 588FE deals with voidable transactions. It is this section which gives the bite to what are the definition sections to which I have referred. Counsel made the point that these sections are anti‑avoidance provisions, but unlike the other sections they do not offer any protection to a third party such as the defendant. For instance, under s 588FB, in determining whether a transaction is uncommercial, the benefits to the Company of entering into the transaction are to be considered. That is not the case with s 588FDA. Counsel submitted that, as s 588FDA is placed in the voidable transaction part, the benefit to the director must be a direct benefit. Here the benefit to the defendant which indirectly benefits the director is not caught by the section.
Counsel also relied upon what was said by the then Treasurer, Mr Costello, in his Second Reading Speech in the House of Representatives, 16 October 2002, on the Bill which inserted s 588FDA into the Act. The then Treasurer said, at 7677:
The focus of the bill is transactions entered into by the company with its directors, and accordingly the recipients covered by it include directors of the company.
The bill covers two further categories of person. It includes company transaction with close associates of a director. A 'close associate' is defined under the bill to mean a relative or de facto spouse of a director, as well as a relative of a director's spouse or de facto spouse.
It will also apply to transactions entered into with third parties, where they are made on behalf of, or for the benefit of, either a director or close associate. This will prevent people avoiding the new provisions through restructuring or redirecting transactions.
Counsel submitted this was not a case where there was any restructuring or redirecting of a transaction. It was his submission the second reading speech made it plain a transaction such as the present was not covered by the section. Counsel also referred to the explanatory memorandum to the Act which refers to reclaiming unreasonable payments 'made to directors by companies' prior to liquidation.
Finally, counsel relied upon the decision of Justice Gzell in Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd (2006) 57 ACSR 693. The facts in that case taken from the head note were as follows:
Ziade Investments Pty Ltd (the company) was a company whose sole director and shareholder was Neaf Ziade (the son). On 12 March 2004, the company granted mortgages over two of its properties to Welcome Homes Real Estate Pty Ltd (Welcome Homes), Ritz Cinema Pty Ltd (Ritz Cinema), Jalnz Constructions Pty Ltd (Jalnz Constructions), Jack Ziade (the father) and his wife Mrs Jean Ziade (the mother) who were the parents of the son. The mother and the father were sole shareholders of Welcome Homes and Ritz Cinema and, together with Ziade Holdings Pty Ltd (in which the son and his siblings were also shareholders), were shareholders of Jalnz Constructions.
Each mortgage secured past loans said to be owed by the company. There was no evidence that the company entered into the mortgages in consideration for forbearance to sue for recovery of existing debts or in consideration for future advances. The father recorded minimal features for each loan. The records made no mention of an interest rate, a term or of security. Other documentation recorded that the loans were made to the son, some amounts of which had been transferred by him to the company.
The company was wound up in insolvency. The liquidator of the company brought proceedings seeking orders that the mortgages were unenforceable and that he be paid moneys received on a discharge of them. The liquidator alleged that entry into the mortgages constituted insolvent and uncommercial transactions, insolvent transactions for the purpose of defeating creditors and unreasonable director-related transactions. At trial, the liquidator did not press the argument concerning insolvent transactions for the purpose of defeating creditors.
His Honour held the grant of the mortgages were insolvent transactions under the terms of s 588FB(1). That was the end of the matter. However, submissions had been made that transactions could be set aside under s 588FDA. His Honour dealt with the submissions in what are clearly obiter remarks. His Honour said:
The basis for this argument [that s 588FDA(1)(b)(iii) applied] was that Jack and Jean Ziade were the sole shareholders of Welcome Homes and Ritz Cinema and they, together with Ziade Holdings Pty Ltd, were the only shareholders of Janlz Constructions.
Mr Ziade maintained that he and his wife were the only shareholders of Ziade Holdings, but an Australian Securities and Investments Commission company extract showed that a change to members' shareholdings was lodged on 7 March 2005 indicating that Mr and Mrs Ziade held 5 A and B class shares respectively and Neaf Ziade and his siblings, Leo Ziade and Antoinette Ziade, held 400 C, D and E class shares.
Each of Welcome Homes, Ritz Cinema and Janlz Constructions held a quarter share in each of the mortgages.
So far as Welcome Homes and Ritz Cinema are concerned, I doubt that it could be said that their interests in the mortgages were created on behalf of, or for the benefit of, Mr and Mrs Ziade as the sole shareholders of those companies. In my view, the companies as separate legal entities gained the benefit of the grants of the mortgages in their own right and not for the benefit of their shareholders.
I would not have thought that it was the intention of the legislature to include derivative interests constituted by value increases in shares of a company or trust benefited by the transaction. Had that been the intended result of the provision, one would expect the definition of a 'close associate of a director' to have been expanded.
…
In my view, the benefit held by a third person that will bring a close associate of a director within the statutory provision must be a direct benefit and not a derivative benefit constituted by an increase in value of shares in a company or units in a trust [83] ‑ [89].
So far as the plaintiffs were concerned, counsel was content to rely upon what he said was the clear meaning of the section. It was his submission that this was a disposition made for the benefit of Mr Beetham. It may also have benefitted Mr Stinson but that was not to the point. The fact that it benefitted a director of the company was enough to bring the transaction within the section.
In support of his submission, counsel for the plaintiffs relied upon what was said by the learned authors of Fords Principles of Corporations Law (14th ed, 2010) [27.335]. The authors say:
A payment, disposition or issue to a trustee holding property on a trust under which a director of the company or a close associate could benefit as a beneficiary would be one for the benefit of the director or close associate.
The giving by the company of a guarantee of a liability of a director or close associate to a third person could be the incurring of a contingent obligation to make payment, disposition or issue for the benefit of the director or close associate in that it provides the possibility of the liability to the third person being discharged otherwise than by the director or close associate.
No authority is quoted in support of that statement. Moreover, earlier in the same part, reference is made to the Ziade decision but without comment. Counsel for the defendant criticised the paragraph as being entirely speculative.
On balance, I am satisfied the defendant's arguments should be accepted. In my view, to be caught by this section a transaction must be for the direct benefit of a director or close associate of the director. Here the transaction was for the direct benefit of Mr Stinson. It may well be that there was an indirect benefit to Mr Beetham. However, the indirect benefit is not, in my view, sufficient to bring the transaction within the scope of s 588FDA.
I would dismiss the plaintiffs' application. I will hear the parties as to costs.