Woodgate v Fawcett
[2008] NSWSC 868
•15 August 2008
Reported Decision:
67 ACSR 611
New South Wales
Supreme Court
CITATION: Giles Geoffrey Woodgate v Helen Margaret Fawcett [2008] NSWSC 868
This decision has been amended. Please see the end of the judgment for a list of the amendments.HEARING DATE(S): 13, 14 & 15 August 2008 JUDGMENT OF: Hammerschlag J EX TEMPORE JUDGMENT DATE: 15 August 2008 DECISION: Judgment for the second plaintiff against the defendant in the amount of $45,000.00 together with interest from 15th March 2006 in the sum of $10,522.00.
Judgment for the second plaintiff against the defendant in the amount of $136,500.00 together with interest from 17 November 2006 in the sum of $23,607.00.
Order pursuant to s 588FF(1)(a) that the defendant pay the second plaintiff the amount of $2,593,295.44 together with interest from 17th March 2006 in the sum of $605,066.00.
The order made by the Court on 29th November 2007 extending the operation of Caveats Nos. AC293305 and AC293341 lodged by the second plaintiff over the land in Certificates of Title Folio Identifiers 8/SP2791 and 181/7866 respectively, is vacated.
The defendant is to pay the costs of the plaintiffs of the proceedings including reserved costs, which costs are to be assessed on an indemnity basis from 10th January 2007.CATCHWORDS: CORPORATIONS – Corporations Act 2001 (Cth) claim for an order under s 588FF(1)(a) that defendant pay to the company amount paid by company to discharge monies owed by her to third party creditor on the basis that transaction was an unfair preference under s 588FA(1) and unreasonable director-related transaction under s 588FDA(1) – insolvency - whether company was insolvent - s 588FG(2) - statutory defence raised but not established LEGISLATION CITED: Corporations Act 2001 (Cth)
Law Reform (Miscellaneous Provisions) Act 1965 (NSW)CASES CITED: Re Emanuel (No 14) Pty Ltd (in liq)\
Macks and Anor v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292
Powell v Fryer (2001) 37 ACSR 589
Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187
Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87
Sandell v Porter (1966) 115 CLR 666
Expile Pty Ltd v Jabb’s Excavations Pty Ltd
Bank of Australasia v Hall (1907) 4 CLR 1514
Lewis v Doran (2005) 54 ACSR 410
Rosenberg v Percival (2001) 205 CLR 434
Ellis v Wallsend District Hospital (1989) 17 NSWLR 553
Skouloudis v Planet Enterprises (2002) 41 ACSR 369
McDonald v Hanselmann (1998)28 ACSR 49PARTIES: Giles Geoffrey Woodgate
MGB Chadd Pty Ltd (in liquidation)
Helen Margaret Fawcett
The estate of the late Douglas Richard FawcettFILE NUMBER(S): SC 5869/2006 COUNSEL: B.A. Coles QC with J.T. Johnson (Plaintiffs)
R.G. Forster SC with D.M. Loewenstein (Defendants)SOLICITORS: Sally Nash & Co (Plaintiffs)
Leonard Legal (Defendants)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST
HAMMERSCHLAG J
15 AUGUST 2008
5869/2006 GILES GEOFFREY WOODGATE -V- HELEN MARGARET FAWCETT
EX TEMPORE JUDGMENT
INTRODUCTION
1 HIS HONOUR: The first plaintiff (“the liquidator”) is the liquidator of the second plaintiff company, MGB Chadd Pty Limited (“the Company”). He moves for an order under s 588FF(1) of the Corporations Act 2001 (Cth) (“the Act”) directing the defendant to pay to the Company the sum of $2,593,295.44 paid by the Company on 17 March 2006 pursuant to a transaction which the liquidator asserts is voidable because of s 588FE of the Act.
2 The defendant is cited in these proceedings in her own capacity and as the representative of the deceased estate of her late husband Mr Richard Douglas Fawcett who died on 10 October 2005 (“the deceased”). An order appointing her as representative was made by the Court on 20 November 2006 under pt 7 r 7.6(1) of the Uniform Civil Procedure Rules 2005.
3 I shall refer to the defendant and the deceased together as “the Fawcetts”, with no disrespect intended.
FACTUAL BACKGROUND
4 On 28 March 2006 the liquidator was appointed voluntary administrator of the Company by a secured creditor under s 436C of the Act.
5 The Company was placed under a creditors’ voluntary winding up on 2 May 2006.
6 Under s 513B(b) of the Act, the winding up of the Company is taken to have begun or commenced on 28 March 2006.
7 Mark Douglas Fawcett (to whom I shall refer as “Mark” also with no disrespect intended), the son of the Fawcetts, was at all material times the sole director and shareholder of the Company and of Herd Bars & Bodies Pty Ltd (“Herd”) which was also wound up on 2 May 2006.
8 On 18 May 2006 Mark was made bankrupt following the filing of a debtor’s petition. His trustee has lodged a proof of debt for $596,439.00 in the winding up of the Company in respect of a loan which Mark made to the Company under a loan agreement dated 22 June 2005. Under that agreement the principal was repayable twelve months after the date of the agreement.
9 Herd carried on the business of manufacturing armoured vehicles and bull bars from premises owned by the Company at 233 Shellharbour Road, Kemblawarra, near Wollongong (“the Kemblawarra property”).
10 In addition to the Kemblawarra property the Company also owned a property at 16 Milperra Road, Revesby (“the Revesby property”).
11 Over a period of some years the Company borrowed monies from Challenger Managed Investments Ltd (“Challenger”) as the responsible entity and Permanent Trustee Company Limited as custodian on behalf of Howard Mortgage Trust. The role of Permanent Trustee Company Limited was subsequently assumed by Perpetual Trustee Company Limited (“Perpetual”).
12 The Company’s borrowings were secured by mortgages given by it to Perpetual over the Kemblawarra property and the Revesby property.
13 I will refer to Challenger and Perpetual together as “the lender”. Both were acting for the benefit of the Howard Mortgage Trust.
14 As at 17 March 2006 the Company owed $3,360,498.24 to the lender secured by those mortgages.
15 The Fawcetts owned two properties, one at 7 Daisy Street, Revesby (“the Fawcett Revesby property”) and the other at 1/30-32 Walton Crescent, Abbottsford (“the Abbottsford property”).
16 Over a period of some years from 2002, they too borrowed from the lender. They signed acceptance of various facility letters and executed various Deeds of Loan. They had the assistance of a solicitor with regard to these transactions.
17 As security for the loans they gave mortgages over the Fawcett Revesby property and the Abbottsford property.
18 The funds which they borrowed were on lent by them to the Company. The Company paid the interest on the loans directly to the lender.
19 As at 17 March 2006 the Fawcetts owed the lender (and the Company correspondingly owed them) the following sums:
a $1,307,231.99 secured by mortgage to the lender over the Fawcett Revesby property;
b $1,286,003.45 secured by the mortgage to the lender over the Abbottsford property
20 By deeds of guarantee the Fawcetts guaranteed the Company’s obligations to the lender and the Company guaranteed the Fawcetts’ obligations to the lender. Their respective obligations were thus fully “cross collateralised”. The Fawcetts signed various acknowledgments of legal and financial advice received in relation to the obligations they undertook.
21 Very shortly before 17 March 2006 Mark decided to close down the Company’s business and that of Herd and to sell the Revesby property and the Kemblawarra property. I shall refer to those two properties together as “the Company’s properties”.
22 With leave, the defendant gave oral evidence-in-chief to the following effect: during the week before the week of 17 March 2006, Mark asked her to go down to Kemblawarra to help him because he needed support; he had decided to “close down the business”; he told her that she did not have to “worry about the debt” (meaning the various loans from the lender) “because the sale of the property will pay out the loans”.
23 The defendant’s evidence was further that she was not aware of the Company’s financial situation at any time prior to 17 March 2006 and did not become aware of its financial position at all on that date or shortly thereafter. According to her, Mark never gave her any impression other than that the business was going well and she did not see any other indication that the Company was having financial difficulties.
24 In evidence were two questionnaires signed by Mark; one for directors and other officers in relation to the appointment of the administrator and the other in relation to the Company being placed under a creditor’s voluntary winding-up.
25 In the first questionnaire the following question appeared: “When did you first realise that the Company was facing financial problems?” The answer given was: “I think between January to March 2006”.
26 A further question was: “”What caused you to realise this?” The answer given was: “Some jobs not coming through”.
27 In the second questionnaire the question was asked: “When did you first realise that the Company was facing financial problems?” The answer given was: “January to March 2006”.
28 A further question was: “What caused you to realise this?” The answer given was: “Not enough work coming through the door”.
29 Mark, however, was not called to give evidence.
30 The defendant stayed down at Helensburgh (near Kemblawarra) for the week leading up to the closure during which time she answered the phone and conducted herself as a receptionist.
31 On 15 March 2006 the defendant’s solicitor, Mr Leonard, signed a statutory declaration in support of a caveat by the defendant to be lodged over a property at Helensburgh belonging to Mark and his wife. The interest claimed was an equitable interest by virtue of an instrument described as an agreement of 1 January 2006 between her and Mark. No such agreement has ever been produced.
32 The defendant never ascertained from Mark why if the business was going well he determined to shut it rather than sell it.
33 On 17 March 2006 the Company sold the Revesby property for $2.8 million exclusive of GST and the Kemblawarra property for $3.2 million exclusive of GST and the sales were completed that day. The purchaser of both was a company called Abroclown Pty Ltd.
34 The Company duly shut its doors. At that time it had eight employees including Mark, his wife and sister-in-law. On the day it closed, the employees were paid amounts for wages, annual leave and long service leave.
35 Also on the same day the defendant handed out to the employees claim forms for the purposes of the Commonwealth General Employee Entitlements and Redundancy Scheme. Each form contained a question as follows: “Who terminated your employment?”. The form gave three optional answers one of which was “Employer”. In each form that answer was selected by the circling of that word in black pen. The evidence established that the circling was done by the defendant. The form then contained a question: “What was the reason given for termination? OR Why did you resign?”. In answer to this question the defendant wrote the words “Unable to pay wages”.
36 The proceeds of $6 million received on completion of the sale of the Company’s properties (which also took place on 17 March 2006) were disbursed as follows:
a to Challenger in discharge of the Company’s loan $3,360,498.24
b to Challenger in discharge of the Fawcett’s loan $2,593,295.44
c to Deacons Solicitors $ 2,169.42
- Total $5,955,963.10
37 The remaining amount of $44,036.90 was paid to Wollongong Council in part payment of rates and charges of $134,294.39 owing to that body. The balance of the rates and charges was paid by the purchaser of the Company’s properties.
38 On payment to the lender of the amounts owing to it, the Fawcetts obtained discharges of the mortgages over the Fawcett Revesby property and the Abbottsford property. Unencumbered title to the properties is registered solely in the name of the defendant as a consequence of the passing of the deceased.
THE RELEVANT STATUTORY ENACTMENTS
39 Section 9 of the Act defines “transaction” as follows:
- transaction , in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
- (a) a conveyance, transfer or other disposition by the body of property of the body; and
(b) a charge created by the body on property of the body; and
(d) a payment made by the body; and
(e) an obligation incurred by the body; and
(f) a release or waiver by the body; and
(g) a loan to the body;
and includes such a transaction that has been completed or given effect to, or that has terminated.
40 Under s 95A(1) of the Act a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
41 Under s 95A(2) of the Act a person who is not solvent is insolvent.
42 Section 286(1) and (2) of the Act provide relevantly as follows:
- (1) A company, registered scheme or disclosing entity must keep written financial records that:
- (a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited.
43 Section 588E(4) is in the following terms:
(4) Subject to subsections (5) to (7), if it is proved that the company:
- (a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
44 Section 588FA(1) of the Act is in the following terms:
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
- (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, 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.
45 Section 588FC of the Act is in the following terms:
(i) the transaction is entered into; or
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:(i) entering into the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.
46 Section 588FDA(1) 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
- (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and
- (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
- (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
- The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.
47 Section 588FE(1)(a) is in the following terms:
(1) If a company is being wound up:
(a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993;
48 Section 588FE(2) of the Act is in the following terms:
The transaction is voidable if:
(a) it is an insolvent transaction of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
49 Section 588FF(1)(a) of the Act is in the following terms:
- (1) Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
- (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
50 Section 588FG(2) of the Act is in the following terms:
- (2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
- (a) the person became a party to the transaction in good faith; and
- (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
THE PROCEEDINGS
51 The liquidator seeks an order directing the defendant (in both capacities) to pay to the Company an amount equal to the amounts paid by the Company to the lender which discharged the Fawcetts’ loans, and, correspondingly discharged the mortgages which secured the loans over the Fawcett Revesby property and the Abbotsford property on the basis that the transaction was a voidable transaction within the meaning of s 588FE of the Act, either because it was an unfair preference given by the Company to the Fawcetts as creditors within the meaning of s 588FA(1) of the Act or because it was an unreasonable director-related transaction within the meaning of s 588FDA(1) of the Act.
52 Under s 588FC of the Act (as opposed to s 588FDA) an element of the unfair preference claim (which must be established by the liquidator) is that the Company was insolvent at the time the transaction was entered into or an act was done or an omission made for the purpose of giving effect to the transaction or the Company became insolvent because of, or because of matters including the entering into of the transaction or because of a person doing an act or making an omission for the purpose of giving effect to the transaction.
53 A claim for declaratory relief that as a consequence of the payment by the Company of a debt in respect of which it and the Fawcetts were co-debtors (because of the suretyships) the Company was entitled to the security which the lender had and to stand in its place with its claim against the Fawcetts, under s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW), was abandoned during submissions.
54 The defendant put insolvency in issue.
55 In addition, the defendant raised the defence to the unfair preference claim provided for under s 588FG(2) of the Act.
56 The Company brought two further separate claims against the defendant.
57 The first was a claim against the defendant in her personal capacity that she had failed to account to the plaintiff for the sum of $45,000 which she received on 15 March 2006 on the sale by the Company of a demountable building (“the demountable building claim”).
58 The second was a claim against the defendant in her personal capacity for $136,500 in respect of moneys lent and advanced by the Company to her which liability was reflected in the Company’s books and records and in particular its financial statements for the year ended 30 June 2004 (“the loan account claim”).
59 During the hearing the defendant accepted liability for both the demountable building claim and the loan account claim. There will accordingly be judgment for the Company on both claims together with interest in the case of the demountable building claim from 15 March 2006 when the defendant received the money and from the commencement of the proceedings in the case of the loan account claim.
60 I turn now to the remaining claims.
THE UNFAIR PREFERENCE CLAIM
61 It was not put in issue that the Company and the Fawcetts were parties to the transaction as is required by s 588FA(1): see Re Emanuel (No 14) Pty Ltd (in liq); Macks and Anor v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292.
62 The defendant did not put in issue that the transaction resulted in the Fawcetts receiving from the Company in respect of their unsecured debt more than they would receive if the transaction were set aside and they were to prove for their debt in the winding up of the Company.
Insolvency – the legal principles
63 It suffices to set out only briefly the relevant legal principles.
64 Whether a company is insolvent at a particular point in time is a question of fact, to be determined by a proper consideration of the company’s financial position, in its entirety, based on commercial reality: Powell v Fryer (2001) 37 ACSR 589 at 600 [75].
65 Regard should be had not only to the Company’s cash resources immediately available, but also to moneys which it can procure by realisation by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of it: Powell v Fryer at 600 [75].
66 The predominant test is a cash flow one, although the state of a Company’s balance sheet is still relevant: Melbase Corporation Pty Ltd v Segenhoe Ltd at 198; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87.
67 It is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as and when they fall due which indicates insolvency: Powell v Fryer at 600 [75].
68 Lindgren J said in Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 198;
“The words “as and when they become due and payable” make it clear that although the issue of prima facie insolvency must be determined as at a particular time, the determination calls for a degree of “forward looking”.”
69 Consideration is given to the immediate future. How far into the future depends on the circumstances including the nature of the Company’s business and if known, its future liabilities; Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528; Lewis v Doran (2005) 54 ACSR 410 at 433.
70 Applying a cash flow test for solvency does not mean that the extent of the company’s assets are irrelevant to the inquiry. The credit resources available must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671; Expile Pty Ltd v Jabb’s Excavations Pty Ltd at 719.
Insolvency – the evidence
71 The liquidator deposed to a number of affidavits which exhibited reports which were admitted without objection.
72 His most recent affidavit was sworn on 6 August 2008 and his report which went into evidence via that affidavit contained an analysis of the debt position of the Company at 17 March 2006 as follows.
Wages and termination payments as at 17.03/06 Wages paid on 17/3/06 Annual leave paid on 17/03/06 Long service leave paid on 17/3/06 Less: PAYG Withholding not paid Less: other deductions not paid On settlement as at 17/3/06 Challenger Financial services – MGB Chadd Pty Ltd loan Challenger Financial Services – Douglas & Helen Fawcett loans Deacons legal fees Other debts due as at 17/3/06 Preferred superannuation Sep-05 & Dec-05 qrts Non-preferred superannuation Sep-05 & Dec-05 qrts GEERS advance – annual leave loading GEERS advance – payment in lieu of notice Office of State Revenue – land tax M & E Equipment Traders Pty Ltd Integral Energy Australian Taxation Office Office of State Revenue – payroll tax Wollongong City Council Sub-total Due on 22/3/06 OneSteel Trading Pty Ltd Macquarie Leasing Pty Ltd HBABPL Pty Ltd (formerly Herd Bars & Bodies Pty Ltd) Due after 22/3/06 Office of State Revenue – land tax Australian Taxation Office (excluding superannuation) Westpac Banking Corporation Office of State Revenue – payroll tax Office of State Revenue – land tax Australian Taxation Office (excluding superannuation) Superannuation – preferred employees Mar-06 qtr Superannuation – non-preferred employees Mar-06 qtr Wollongong City Council Trustee of the bankrupt estate of Mark Douglas Fawcett Redundancy calculated by company but not paid (gross) Integral Energy Hunt Specialised Transport Pty Ltd
73 Under cross-examination the liquidator accepted that the amount of $5,759.80 in respect of non-preferred superannuation was a duplication and should be disregarded. He also accepted that the amount of $101,274.10 was part of a larger amount of $134,294 payable to the Wollongong Council and that the full amount was paid to the Council on 21 March 2005 by the Company having paid $44,036.90 out of the settlement monies and the purchaser of the Company’s properties having paid the balance.
74 He also accepted that the amount of $19,402 reflected as being owed to the Office of State Revenue for land tax was not due on 17 March 2006 but rather on 20 March 2006.
75 He was challenged with respect to the amount of $4,516.05 to M&E Equipment Traders Pty Ltd on the basis that the invoices from that supplier were addressed to “MGB Chadd (Herd Bars & Bodies)” and that the amount was owed to Herd rather than the Company. His evidence was that he had ascertained that the items in the invoices were not things that Herd would have used in its armoured vehicle and bull bar business. They were predominantly products for electrical or computer installations and more likely to have been used by the Company as the owner of the business premises. The challenge accordingly did not succeed.
76 In his reports the liquidator opined, on the financial material available to him, that the Company was insolvent as at 17 March 2006 immediately after the transactions.
77 Immediately after the transactions the Company’s position was that it had entirely disposed of the proceeds of the sale of its properties by paying the lender and the Wollongong Council.
78 That left the various debts due as at 17 March 2006 which (subject to the concessions which the liquidator made) the Company had no cash or other readily available resources available to pay. Leaving the Wollongong Council aside those debts amounted to $100,000.
79 Moreover further amounts totalling $1.5 million were due six days later and further significant amounts were due a few weeks or months after that.
80 The only assets which it was put the Company had were the demountable building claim and the loan account claim against the defendant. On no realistic view were those assets available to pay the Company’s creditors.
81 Up until the date of the hearing the defendant was disputing liability in verified Notice of Grounds of Defence (including those filed on 13 August 2008) in which she was claiming part ownership with the deceased of the demountable building and was claiming that the liquidator had failed to account to her for moneys paid by the purchaser, and she was denying having ever borrowed any money from the Company and rather was asserting that the books and records of the Company evidencing the liability were not true and correct.
82 Evidence not previously the subject of affidavits by the defendant was elicited in chief from her to the effect that if on 17 March 2006 Mark had asked her to make available the sum of, say $200,000, given a little bit of notice and a request from him as the Company’s director, she would have been able to seek funds on the basis that the Fawcett Revesby property and the Abbottsford property were unencumbered, and would have done so.
83 It was put that this represented a resource available to the Company which should be taken into account in assessing its ability to pay its debts as and when they fell due and that it meant that the Company was not insolvent.
84 That submission is not accepted for the reasons which follow.
85 Firstly, I do not accept the defendant’s evidence that she would have done so. The evidence was not the subject of any affidavit despite directions having been made and was elicited from the defendant orally in chief two years after the event. Apart from the fact that an ex post assertion of what she would have done should in any event be treated with circumspection (see eg. Rosenberg v Percival (2001) 205 CLR 434 and Ellis v WallsendDistrict Hospital (1989) 17 NSWLR 553 at 581), I found the defendant to be an unsatisfactory witness and I do not accept her evidence as to what she would have done.
86 Her evidence was unsatisfactory in a number of significant respects including the following: under cross-examination she sought to recant from her evidence-in-chief that Mark had told her she did not have to worry about the debt because the sale of the property would pay out the loans; she gave unconvincing evidence that she had not borrowed money from the lender even though she accepted she was advised by solicitors as to her obligations as a borrower; she gave an unconvincing explanation for why it became necessary three days before the Company closed its doors to lodge a caveat on the property of her son and his wife; her evidence that she did not know that the Company was in any financial difficulty cannot stand with her completion of the forms which responded that the employees had been terminated because the Company was unable to pay them; and she gave implausible evidence of not having asked Mark why the business was being closed rather than being sold (if it was profitable) when, according to her, he had been offered $6 million for it just twelve months before.
87 Secondly, even if such an amount was available it was far exceeded by amounts which would become due only a few days later and which must in the present circumstances be taken into account in assessing the Company’s ability to pay its debts as and when they fell due.
88 Thirdly, her subsequent conduct in refusing to pay the demountable building claim and the loan account claim when the Company demanded them, even via these proceedings, (which amounts she now accepts were payable) is hard to reconcile with her avowed willingness to have lent money to the Company to pay its creditors if Mark had asked.
89 Fourthly, as a matter of commercial reality, such a resource would only be available if there was a realistic possibility that the Company would ask for it. That was a matter for Mark and he never asked. Rather, he was the steward of a transaction which had the effect of discharging his parents’ obligations leaving unsecured creditors without any prospect of payment.
90 On any commercially realistic view of things no such resource was available to the Company on 17 March 2006 and in any event, the Company became insolvent because of the transaction or because of the payments it made including the transaction on 17 March 2006.
91 Further, and in any event, the liquidator gave evidence which was not challenged that the Company failed to keep books and records. In addition the plaintiffs read paragraph 48 of an affidavit sworn by Mark on 22 February 2008 to the following effect:
- “I am aware that the financial documents that Giles Woodgate has in his possession and control are not an accurate reflection of the financial state of MGB Chadd. Until 2004, MGB Chadd’s financial accounts were prepared by its internal accountant, Ian Heggie. Ian Heggie’s employment was later terminated as a consequence of misappropriation of funds and failing to keep accurate financial reports and recording and general incompetence. I then engaged Eldridge & Co to find out what amount Ian Heggie had misappropriate and what amounts he had fabricated on the financial records of MGB Chadd. I also engaged an accounting firm by the name of Mortimer & Co to reconstruct several years of accounting due to Ian Heggie’s incompetence.”
92 In the circumstances and in any event the Company is deemed to have been insolvent by reason of s 588E(4) of the Act.
The statutory defence
93 The defence under s 588FG(2) of the Act has, relevantly, two elements in respect of both of which the defendant bears the onus. The first is that at the time she became a party to the transaction she had no reasonable grounds for suspecting that the Company was insolvent at that time or would become insolvent by reason of entering into the transaction or a person doing an act for the purposes of giving effect to it. The second is that a reasonable person in her circumstances would have had no such grounds for so suspecting.
94 In my view, the defendant established neither element. I do not accept her evidence that she did not suspect that the Company was or would become insolvent and I consider that she had reasonable grounds for so suspecting. In addition, any reasonable person in her circumstances would, in my view, have had grounds to so suspect having regard to the following facts all of which she knew:
a the Company was being closed down rather than being sold;
b its staff including family members were being let go in circumstances where the Company was unable to pay them;
c she had lodged a caveat on her son’s property two days before to protect her position under an agreement which has never been produced.
95 Her statutory defence fails.
THE UNREASONABLE DIRECTOR-RELATED TRANSACTION CLAIM
96 It was not put in issue that the transaction met the requirements of ss 588FDA(1)(a) and (b). Clearly there was a payment made by the Company to a close associate, or for the benefit of a close associate, of Mark (the Company’s only director) namely his mother.
97 The only issue is whether, as contemplated by s 588FDA(1)(c) 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 the other parties to the transaction of entering into it; and
d any other relevant matter.
98 The primary submission put on behalf of the defendant was that the Court should infer that in order for the Company to have been in a position to sell its properties it would have had to have discharged the Fawcett loans from the lender. This, it was put, was because the lender would not (in circumstances where the defendant had an annual income of only $165,000) have agreed to the discharge of its mortgages over the Company’s properties on payment to it of the amount secured only over them, leaving it with a debt owed by the Fawcetts of over $2.5 million secured only over their properties. It was put that the Court should infer that this would necessarily have been the lender’s position.
99 I do not consider that it is open to make a finding that the lender would have behaved as the defendant submits given that:
a it was accepted that there was no evidence of the value of the Fawcett’s properties;
b it was also accepted that there was no evidence that Mark, who would have been the person in charge of the transaction from the Company’s perspective had ever asked the lender. He was not called;
c a reasonable person in the position of the Company would have asked the lender in any event;
d no one from the lender was called as to its policy or the position it would have taken and no documentary evidence proffered on that subject even though the Company (and presumably Mark) had had a relationship with the lender spanning some years;
e there was no evidence of the financial position of the estate of the deceased.
100 The benefit to the Company was that it was able to sell its properties and discharge its debts both to the lender and to the Fawcetts (by discharging their obligations to the lender).
101 The detriment to the Company was that it was left in a position where it was unable to satisfy its other non-secured creditors.
102 The benefit to the Fawcetts was that they received payment of their unsecured obligation in full in preference to the claims of other unsecured creditors.
103 Apart from the benefits and detriments referred to, the Court is to have regard to any other relevant matter.
104 In Skouloudis v Planet Enterprises (2002) 41 ACSR 369 Windeyer J considered s 588FB(1) of the Act (which is in the same terms as s 588FDA(1)(c)). At p 374 [14] His Honour referred to s 109H of the Act which requires a purposive approach to be taken and to the explanatory memorandum to the Corporate Law Reform Bill 1992 which, with respect to s 588FB(1), said
- “The provision is specifically aimed at preventing companies disposing of their assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice.”
105 His Honour also referred to what Young J had said in McDonald v Hanselmann (1998)28 ACSR 49 at 56 to the following effect:
- “Where the purchaser is a related entity in the corporate sense or a relation by blood or by law in the individual sense, then the Court should look at the transaction far more closely and be less inclined to excuse the sale at an undervalue because of some commercial factor.”
106 Similar considerations apply here where the transaction was by a company under the control of a son, and it inured to the substantial benefit of his parents and to the prejudice of unsecured creditors.
107 This is not a case of a sale at an undervalue. It is, however, a case of the Company under the stewardship of the son having conferred a benefit on his mother (and the estate of his father) in circumstances where legitimate unsecured creditors have been prejudiced. The Company disposed of its most significant assets. The beneficiaries were a secured lender to it, the Council for rates (as to part) and his parents. Significantly, although he swore an affidavit in the proceedings, Mark was not called as a witness. It may be inferred that his evidence would not have assisted the defendant.
108 There is no evidence that the Company took any steps to obtain from any source, including the defendant (with whom Mark undoubtedly had a close relationship at the time), any funds to alleviate the position of the other unsecured creditors who were left hanging out to dry.
109 In my view, no reasonable person in the Company’s circumstances would have entered into the transaction. It was an unreasonable director-related transaction within the provisions of s 588FDA(1) of the Act.
CONCLUSION
110 There will be an order pursuant to s 588FF(1)(a) that the defendant is to pay to the Company the amount of $2,593,295.44 together with interest calculated from 17 March 2006.
111 There will be judgment for the Company against the defendant in the amounts of:
a $45,000 together with interest from 15 March 2006 to the date of judgment; and
b $136,500 together with interest from 17 November 2006 to the date of judgment.
112 The parties are to bring in Short Minutes reflecting this result.
113 I will hear the parties on costs.
114 The exhibits are to be returned.
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