World Expo Park Pty Ltd v EFG Australia Ltd
[1995] QCA 138
•11/04/1995
IN THE COURT OF APPEAL
| SUPREME COURT OF QUEENSLAND | Appeal No. 51 of 1994 |
Brisbane
[World Expo Park P/L v. EFG Australia Limited & anor.]
BETWEEN:
WORLD EXPO PARK PTY LTD
(Applicant) Appellant
AND:
EFG AUSTRALIA LIMITED and
EFG LEASING LIMITED
(Respondents) Respondents FITZGERALD P.
PINCUS J.A.
DERRINGTON J.
Judgment delivered 11/04/1995
JOINT REASONS FOR JUDGMENT FITZGERALD P. AND DERRINGTON J.,
SEPARATE DISSENTING REASONS OF PINCUS J.A.
APPEAL ALLOWED.
ORDER THAT THE RESPONDENTS PAY THE LIQUIDATOR OF WORLD EXPO
PARK PTY LTD $5,616,794.00, TOGETHER WITH INTEREST AT THE
RATE OF 10 PER CENT PER ANNUM, PLUS THE TAXED COSTS OF THE
PROCEEDINGS, INCLUDING THIS APPEAL.
CATCHWORDS: | DEED OF MORTGAGE - fraudulent disposition of property; s. 121 Bankruptcy Act 1966 (Cth) - whether deed of mortgage was entered into with intent to defraud creditors - whether it was given in good faith and for valuable consideration - whether deed of mortgage void. |
| Counsel: | J. Griffin Q.C. with him M. Bland for the Appellant P.R. Dutney Q.C. with him L.D. Bowden for the Respondent |
| Solicitors: | Bickfords for the Appellant Bowdens for the Respondent |
Date/s of Hearing: 7 October 1994
| IN THE COURT OF APPEAL | [1995] QCA 138 |
| SUPREME COURT OF QUEENSLAND | Appeal No. 51 of 1994 |
| Brisbane | |
| Before | Fitzgerald P. Pincus J.A. Derrington J. |
[World Expo Park P/L v. EFG Australia Limited & anor.]
BETWEEN:
WORLD EXPO PARK PTY LTD
(Applicant) Appellant
AND:
EFG AUSTRALIA LIMITED and
EFG LEASING LIMITED
(Respondents) Respondents
JOINT REASONS FOR JUDGMENT -
FITZGERALD P. AND DERRINGTON J.
Judgment delivered 11/04/1995
This is an appeal from a judgment delivered in the Trial Division on 4 March 1994, dismissing an application by the appellant and ordering him to pay the respondents' taxed costs. The appellant, who is the liquidator of World Expo Park Pty Ltd (in liquidation), seeks orders that the respondents, between which it is unnecessary to distinguish, pay him amounts totalling $5,616,794.00, together with interest at the rate of 10 per cent per annum, plus the taxed costs of the proceedings, including this appeal.
On 5 May 1989, World Expo Park agreed to sell its land at
South Brisbane to the Brisbane Exposition & South Bank
Redevelopment Authority for $33,000,000.00, and to lease the
land back from the Authority until 31 December 1993.
$25,000,000.00 was paid immediately, and was substantially
used by World Expo Park to pay out its initial financier,
Standard Chartered Bank, which held security from World
Expo. The balance, approximately $8,000,000.00, was payable
on 1 May 1993. However, that amount was discounted for
early payment to $4,678,373.00 paid on 31 August 1990 and
$938,421.00 paid on 30 June 1992. These payments were made
by the State of Queensland, which had become liable for the
Authority's obligations.
Further, the payments were made to the respondents, not World Expo Park, in accordance with a deed of mortgage dated 6 June 1990 between World Expo Park as mortgagor and the respondent, EFG Leasing Limited ("Elders"), as mortgagee.
The appellant claims that the deed of mortgage was void as against him because it involved a fraudulent disposition of property within the meaning of s. 121 of the Bankruptcy Act 1966 (Cth): Corporations Law, s. 565. More particularly, the appellant contends that the deed of mortgage was given by World Expo Park "with intent to defraud creditors", that it was not given "for valuable consideration", and that Elders was not "a person who acted in good faith".
World Expo Park had been incorporated on 17 November 1986. It purchased land near the 1988 World Expo site for a fun park, and installed rides which it acquired with funds borrowed from Standard Chartered Bank. Elders subsequently replaced Standard Chartered Bank as World Expo Park's financier in relation to the rides. On about 7 July 1988, World Expo Park sold the rides to Elders for $13,860,297.00, and agreed to lease them back for a term of five years, with quarterly rental payments of $818,284.68. Reacquisition of ownership by World Expo Park required a payment of the "residual value" of approximately $5.6 million. World Expo Park's obligations to Elders were supported by a guarantee from Pennant Holdings Limited.
Leisurecorp Limited, a wholly owned subsidiary of Pennant Holdings, owned 17,600,000 shares in World Expo Park. The other 2,000,000 issued shares in World Expo Park were owned by KFL Investments Pty Ltd. Through companies which they controlled, Mr Brian Godfrey Johnson and his wife, Mrs Kathleen Johnson, owned about 40% of the shares in Pennant Holdings, and KFL Investments was a company associated with Mr K. Lord. Pennant Holdings also owned 49.6% of the shares in Houghton Holdings Ltd (formerly John Holland Holdings Ltd), which in turn owned all the issued capital in John Holland Constructions Pty Ltd, which had constructed the fun park.
These shareholdings were broadly reflected in directorships. For example, Messrs Blood, Pendal and Johnson, the directors of Leisurecorp, were also, with Mr Lord, the
directors of World Expo Park. And Mr Blood, the managing director of World Expo Park, was also a senior executive of Houghton Holdings.
World Expo Park was in financial difficulties by mid-1989. Although its financial statements for the financial year ended 30 June 1989 showed an excess of assets ($26,756.253.00) over liabilities ($21,973,596.00), it had lost $13,475,365.00 that year, bringing its accumulated losses to $14,817,343.00. And it continued to lose heavily until the fun park was closed on or about 25 September 1989.
Even after that closure, losses continued.
As stated earlier, the deed of mortgage over the debt owing by the Government to World Expo Park was dated 6 June 1990.
Notice was given to the Government, which subsequently made the payments totalling $5,617,794.00 to the respondents on 31 August 1990 and 30 June 1992. The respondents also received the net proceeds of sale of the rides, which were completely disposed of by sometime in 1991 or 1992. World Expo Park, and Pennant Holdings as guarantor, remained liable to Elders for the balance of World Expo Park's debt.
But World Expo Park has (and had) no other assets, and Elders has not enforced its claim against Pennant Holdings, which went into receivership in October 1990, after its position had "deteriorated greatly" during 1990, according to a finding made by the primary judge.
World Expo Park's financial position as at 6 June 1990, the date when the deed of mortgage over the Government debt was executed, cannot be precisely identified, but neither party disputed that it approximated the position a little later, as at 30 June 1990, according to the financial statements for the 1989-1990 financial year. World Expo Park was hopelessly insolvent. Trading and other losses that year amounted to $18,595,307.00. Accumulated losses were $33,412,650.00. Assets ($11,417,504.00) were far exceeded by liabilities ($25,230,154.00). As previously noted, the only assets were World Expo Park's interest in the rides (which were owned by Elders) and the Government debt (which was mortgaged to Elders). Current liabilities of $8,181,169.00 included a lease liability to Elders of $6,161,335, a liability to John Holland Constructions of $1,859,052.65, and liabilities to those whom the primary judge described as "various day to day creditors". Non- current liabilities of $17,048,985.00 included a lease liability of $5,245,835.00, a loan from Pennant Holdings of $335,786.00, and loans from Leisurecorp totalling $11,328,975.00. It is not clear whether or not $6,000,000.00 of the amount owed to Leisurecorp continued to "be subordinated to the claims of external creditors present and future" of World Expo Park. A resolution to that effect had been passed on 24 April 1990 by the directors of Leisurecorp, who were also a majority of the directors of World Expo Park, but it is not apparent whether that had any, and if so what, legal or practical effect.
Reference has been made to World Expo Park's financial difficulties by mid-1989, the closure of the fun park on or about 25 September 1989 and the execution of the deed of mortgage on 6 June 1990. It is necessary to see these events in the context of other matters occurring in the same period.
The starting point is a memorandum to the Board (or Australian Board) of Elders Finance Group Ltd, the parent company of the group of which the respondents are members, containing an "Interim Review" of the "Pennant Group". The memorandum, which is dated 6 July 1989, had a number of appendices, including balance sheets as at 30 June 1989 of Pennant Holdings and John Holland Group Ltd.
The memorandum related to four loans. One, to Stolte Group Inc., which was guaranteed by John Holland Holdings Ltd, can be disregarded. The other three were guaranteed by Pennant Holdings. World Expo Park was shown as a borrower of $12.89 million; the other two loans were to different companies, one of which had borrowed $13.1 million and the other of which had borrowed $6.89 million. The latter was unsecured (except by Pennant Holdings' guarantee), and was intended to be repaid from the sale of a specific property if the sale proceeds were sufficient after payment of the mortgages on the property; the other was secured by a registered mortgage (as well as Pennant Holdings' guarantee), and was expected to be repaid by either the borrower refinancing the debt or the sale of the property. The risks in all three cases were seen to include the possible "failure of Pennant Holdings to perform under guarantee".
In addition, the risks in respect of the World Expo Park debt were stated to be:
" - Losses resulting in insufficient cash flow to
meet rentals and liquidation.
- State payments diverted to other creditors.
...
- Sale of equipment realizes less than
outstandings."
It was recommended that "facilities for companies within the Pennant Group be approved for a 4 month period pending a further review." The "Rationale" was expressed in the following terms:
"Rationale
Pennant Holdings Ltd. (Pennant) ... and John Holland Holdings Ltd. (John Holland) ... are currently restructuring their operations with the sale of assets in Australia and offshore in the face of increased debt levels and the slowdown in the building and property development industries.
As a result, financial reports at hand do not reflect the true position of the Pennant Group, hence the interim review ... . By this time it is expected that financial reports will be made available reflecting the restructuring enabling a comprehensive review to be conducted. It should be emphasized that to date all payments have been made in an exemplary manner."
Further, the "Assessment" in respect of World Expo Park was as follows:
"Assessment
1. World Expo Park Ltd. (100% owned by Pennant Holdings Ltd)
The property on which the equipment is located has been sold to the Queensland Government for $33 million of which $25 million has been paid and $8 million is due in four years time. World Expo Park leases both the land and buildings from the State Government at a rental of $1 p.a. The first tranche of payments will be applied to the retirement of external debt. It is expected that the second tranche will be applied to the payment of our residual value of $5.6 million, and in order to secure these funds, Paul Sarantis is to seek a fixed and floating charge over the assets of World Expo Park Ltd.
The resale value of the rides leased, although the historical cost was $18 million, is estimated at approximately $10 million.
To date, all monies have been paid in a timely fashion, despite World Expo Park's accumulated losses and negative cash flows. Recent income generating initiatives designed to improve profitability provide comfort to this credit.
These include: charging an admission as opposed to the system of payment for individual rides; development of three entertainment/reception centres; and obtaining a tourist park liquor licence."
Mr Sarantis, who was referred to in the third last paragraph, was a director of Elders.
By 2 August 1989, Elders was closely monitoring the World Expo Park debt, and Mr Sarantis proposed that Elders' security position be improved. In an internal memorandum that day, another Elders' officer, Mr Morcher, stated:
"Whilst the trading losses of this Amusement Park are of concern we are satisfied that the Pennant Group has sufficient financial resources to ensure that all ongoing lease payments to us are promptly met. We plan to ensure that residual payment is adequately secured against the deferred payment obligations of $8 million due from the Queensland Government instrumentality."
Another internal memorandum that day between different Elders' officers revealed concern about one of the other loans, and the possibility that it would be necessary to rely on the Pennant Holdings' guarantee.
By 1 September 1989, Elders had the World Expo Park debt "on
watch" and estimated the possible loss as $2,541,811.00.
However, Pennant Holdings' guarantee was noted.
After a discussion early in September 1989 between Mr Lord and Mr Blood, Pennant Holdings wrote to Elders on 14 September 1989. The letter sought Elders' approval for the fun park to be closed about 27 September 1989 and for about 40% in value of the rides to be sold to the Melbourne Luna Park operator. Elders was also informed that World Expo Park was negotiating for the sale of the remaining rides to other parties.
Elders replied on 3 October 1989, giving its approval but requesting additional security. The letter included the following passage:
"Due to the closure of the Park operation and the relocation of some of the assets subject to the lease, Elders ... is concerned that the security value of the original on-going operation is being reduced. In particular, we feel that much of the remaining rides and associated plant and equipment will either not be saleable or if so, at greatly diminished values. Further, the loss of income to [World Expo Park] is of concern, particularly as rentals have to be maintained during the sale/relocation of rides and equipment.
To maintain acceptable lending/security ratios, [Elders] wishes to establish a Registered Floating Debenture Charge over the assets and undertaking of [World Expo Park] which will include a specific charge over $8 million due to [World Expo Park] from the Queensland Government in 1993. This Debenture, to be executed as soon as possible, will provide a broader security base to reflect the relocation and different income stream."
In the course of subsequent communication, it was pointed out to Elders that World Expo Park had no assets except its interest in the rides and the Government debt.
As has been mentioned, the fun park had closed on about 25 September 1989. However, income and outgoings did not cease. Carpark operations continued, and it was planned to sublease the carpark and develop some other business, perhaps a restaurant, on the site. Outgoings exceeded income. Apart from recurring expenditures associated with the carpark operation, outgoings in relation to the land, such as land tax and rates, and the quarterly rental instalments for the equipment payable to Elders, it was necessary to maintain the rides and ensure the security of the fun park, etc. Leisurecorp continued to lend money to World Expo Park, which had for some time been unable to meet its obligations from its own funds.
On 16 October 1989, Pennant Holdings wrote to Elders with a proposal that the debt due from the Queensland Government be discounted and payment brought forward, with approximately $2,000,000.00 used for the removal, transportation and relocation of some, at least, of the fun park rides to Luna Park in Melbourne.
On 10 November 1989, Pennant Holdings again wrote to Elders, informing it of some problems in the negotiation with Luna Park Melbourne, and again requesting that, nonetheless, Elders agree to the discounting of the debt owed by the Queensland Government. The proposal involved security in favour of Elders over most, at least, of the money expected to be received by World Expo Park from the Government.
An internal Elders memorandum of 20 November 1989, which was copied to Mr Sarantis, referred to the proposal with respect to additional security and stated that Sarantis had "contacted [Pennant Holdings] by telephone and indicated, off the record, that the additional security was acceptable". It was noted that "Pennant are up to date with their lease payments and are under no obligation to provide additional security."
Another internal memorandum of Elders was referred to by the trial judge in the following terms:
"An undated internal Elders' document (probably written in December 1989) notes that the last quarterly rental had been paid on 24 November, 1989, and that Pennant had offered a charge over the discounted proceeds of $7 million of Queensland Government debt, due to the company in May 1993, as additional security. It notes that Elders had security through ownership of the equipment and the guarantee of Pennant Holdings, and that additional security had been requested of a debenture charge over [World Expo Park] and a charge over the discounted proceeds of $7 million of Queensland Government debt. It stated that 'despite this additional security Elfic (Elders) is still likely to have to rely upon the unsecured Pennant guarantee to exit completely without loss'."
It is apparent that there was still no default under World
Expo Park's lease.
A further internal Elders' memorandum, signed by one C.J.
Morcher, but undated, while cautiously optimistic concerning
the need to long-term prospects of the "Pennant Group",
noted the need for the loans, including the World Expo Park
debt, to be "closely monitored". One paragraph provided:
"4. Paul Sarantis is closely monitoring the A$14 million World Expo Park lease ... . He proposes that our security position be improved ... , which can be implemented following the profitable sale of the associated real estate to a Queensland Government instrumentality. Whilst the trading losses of this Amusement Park are of concern, we are satisfied that the Pennant Group has sufficient financial resources to ensure that all ongoing lease payments to us are promptly met. We plan to ensure that residual payment is adequately secured against the deferred payment obligations of $8 million due from the Queensland Government instrumentality."
As has been stated above, the trial judge found that "In the course of 1990 the position of Pennant Holdings deteriorated greatly". As will be seen, Elders were aware that all was not well with Pennant Holdings by, at the latest, 4 April 1990.
Early in 1990, negotiations took place between World Expo Park and the National Mutual Royal Bank with respect to the proposed discounting of the debt, and between World Expo Park and Sanders International Ventures concerning the sale of the rides, but no agreement resulted. Both sets of negotiations had been approved at a meeting of the directors of World Expo Park on 23 February 1990, over Mr Lord's dissent. It was said that Pennant Holdings considered that Mr Lord was attempting to bring pressure to bear to produce a purchase of his shares in World Expo Park by Leisurecorp.
As will be seen, there was a point at which such a
transaction was contemplated.
While the negotiations with third parties were proceeding,
discussions continued between Pennant Holdings and Elders
and the position of World Expo Park continued to be watched
by Elders. It is not necessary to refer to all the
communications or internal memoranda, but it is desirable
that some be mentioned for the attitudes they reveal.
An Elders' memorandum of 29 March 1990 to Mr Sarantis and others referred to discussions the previous day "with Tim Blood from [Houghton] Holdings Limited to discuss the status of the sale of the World Expo Park shares/equipment. Blood has been requested by the Board of Pennant Holdings to complete the disposal of Pennant's interest in the venture and ensure repayment of Elders' exposure by the end of June 1990." The memorandum then discussed the state of Pennant Holdings' "negotiations ... with Sanders International Ventures who hold an option over the shares in World Expo Park until March 31 1990", and indicated that the "deal actually being negotiated", which involved payment by Sanders International Ventures of "$5.0 million cash for all the shares in World Expo Park", was different from Elders' "understanding". The "impact" on Elders was said to be as follows:
"1. Elders retains the guarantee from Pennant until our exposure is paid out.
2. Pennant is to seek a new lease financier to assume Elders' role as lessor.
3. No part of the $5.0 million cash consideration comes to Elders; this is used to pay out the minority shareholder in World Expo Park, to partially repay World Expo Park debts to Leisure Corporation (a Pennant Group company), and to repay small creditors.
4. Of the discounted proceeds ($4.3 million) of the Queensland Government receivable over which we are to take a registered charge, it is proposed that $1.1 million be directed to the payout of that portion of the Elders Finance lease agreement with World Expo Park that does not relate to rides equipment."
The memorandum continued:
"Prior to finalisation of this deal, Pennant requires our consent for the disposal of the World Expo Park shares. Blood will put a formal proposal to us early next week once negotiations have been completed with Sanders. The problem we face in agreeing to this proposal is that the preferred option of a straight cash sale is dispensed with and as with the position of our other exposure with Pennant (18 St Georges Terrace, Perth), we wait until Pennant is able to produce a new financier. A new financier to World Expo Park would assume the risk of failure of a venture that has already failed and been closed down, this time operated by a consortium led by Sanders with unknown financial resources. ...
Pennant's guarantee would cease once Elders was
paid out.
Alternatives
There is still some possibility that the deal with
Sanders will fall over, leaving no alternatives
for Pennant other than to dispose of the equipment
on a piecemeal basis. Although the sale of all
the equipment could be completed within three
months, prices obtained may fall short of
Pennant's expectations. As each piece of
equipment was disposed of, the difference between
the sale price and the obligation to Elders
Finance with respect to that equipment would be
paid to us by Pennant.Although Pennant's own position might be enhanced by the deal with Sanders, we may prefer the alternative."
There is a note on that memorandum by a senior officer of Elders that he did not "support this proposal", but, in any event, it was soon overtaken by events. The following memorandum dated 4 April 1990 was sent to Mr Sarantis by another officer of Elders:
"Contrary to what I understand Pennant said to us only a month ago regarding their expected financial result for the December year end, they have reported a loss of $73m. Given that the company told us only a matter of weeks ago that they expected to do a little better than break even and putting this together with the fact that we have been told on numerous occasions that various lenders have approved facilities to take us out of the Birds Building, it seems to me that it is now very hard for us to accept at face value anything that the Pennant management tell us.
Given this, I think the appropriate course or action is to do whatever is necessary in order to get our money back immediately. Before we embark on whatever it takes to do this, we need to do a number of things:
1. Paul Sarantis is to immediately get the additional security on the World Expo Park Facility in place.
2. I have asked Shaun Dooley to review all the documents in order to find any areas where the agreement may have been breached.
3. Jeff Price and Paul Sarantis will ring the company in order to ascertain how we could have been so badly misinformed as to the outcome in the current financial year.
Once the additional security is in place and assuming that no decent explanation for the sudden unexpected downturn in the fortunes of the company can be found, I would suggest we move post haste to recover our funds."
On 4 May 1990, the Board of World Expo Park met and resolved, over Mr Lord's dissent, to grant the deed of mortgage over the Government debt to Elders.
An Elders' internal memorandum dated 7 May 1990 is in the following terms:
"RE: PENNANT HOLDINGS LTD
"Tim Blood from John Holland telephoned this morning to advise on the outcome of the Board Meeting of World Expo Park held on May 4th.
Minority shareholder, Ken Lord, was in attendance and voted against each and every resolution put to a vote. It was resolved, however, that a charge over the Queensland Government receivable be given directly to Elders Finance.
It was agreed the following day (verbally) between Lord and Tim Blood that Lord's 10% interest would be sold to Pennant for $250,000 subject to the National Mutual deal proceeding and a further $250,000 subject to the deal with Sanders Ventures proceeding. A new share sale document based on the above will be prepared for Lord's signature by tomorrow. A charge to be given to Elders will therefore be our 'fall back' position if Lord declines to sign this latest document by close of business Wednesday.
I then discussed with John Gardner the mechanics of Elders Finance directly taking a charge over the receivable. We will use as a starting point the documentation finalised between Pennant and National Mutual which will be sent over today and passed on to our Solicitors for review."
Elders wrote to Pennant Holdings on 5 June 1990, stating in relation to World Expo Park:
"1. We agree to release rides equipment owned by [Elders] to purchasers of the equipment including sales at prices insufficient to cover the applicable lease payout figure.
2. The release agreed to in 1. above is subject to the World Expo Park debt not exceeding the deemed value of security provided by it. For the purpose of valuing the security:
(a) Each piece of equipment owned by [Elders] is to be valued at 60% of cost, and;
(b) The Queensland Government debt is to be valued at the present value from time to time of $7.5 million at a discount rate calculated by reference to a margin of 1% over the 180 day bank bill rate.
(c) If the Queensland Government debt is discounted in the market, the security value will be treated as the actual sum placed on deposit with Elders Finance Group.
(d) Rental repayments by World Expo Park are to remain unchanged throughout until complete repayment of the facility. The residual value of the goods described in the Finance Lease Agreement is to be changed to zero.
(e) Elders Finance Group will give due consideration to any proposals put to it for the disposal of Pennant's equity interest in World Expo Park."
On the following day, 6 June 1990, World Expo Park executed the deed of mortgage over the Government debt in favour of Elders. On the same day, a memorandum was sent to the"Elders Finance Group" Board Credit Committee, each member of which approved it that day or the following day, except for one member, Mr J.D. Elliott, who approved it on 11 June. That memorandum provided:
"Pennant Group
Our exposure to the above comprises of the
following:1) $12.09m to World Expo Park. This is, as you know, a lease of funfair equipment to this non operating Pennant Subsidiary. In addition, we have now completed the charge over the $7m Queensland Government receivable which is due in 1992. All lease payments have been kept current by the Parent which also guarantees the facility and the equipment is presently being marketed for sale.
2) $13.03m to Permanent Trustees, a subsidiary of Pennant which is secured by a first mortgage over 18 St. Georges Terrace, Perth which is valued at $13.3m and a Parent company guarantee. Again this facility is current and the principal is due for repayment on 8 June 1990.
These facilities are not cross collateralised.
You will recall that this account was discussed at the Board Meeting held on 10 May and it was decided to adopt a strong approach and call the guarantee should the loan not be repaid on 8 June.
We met with Pennant last week to ascertain the latest information and whilst they continue to discuss a sale of this site to Jennings, they are clearly not in a position to repay the loan on the due date. When pressed on this issue they introduced into the discussion a suggestion that they had only bought this piece of land because Elders had agreed to enter into a joint venture with them and that we pulled out after they were committed. An examination of our files indicated that a joint venture was in fact discussed but there is no suggestion that we induced them to purchase.
If we press ahead and call a default, we take the following risks:
1) Pennant refuses to pay and cites the joint venture arrangement. We could then put them into liquidation and face possible litigation.
2) Pennant are unable to pay. In their precarious financial state, pending the sale of John Holland and South Blackwater mine, this is a very real possibility as I do not believe they would be able to find $13m. We would then have to realise our security, which is unlikely in a mortgagee sale, to realise sufficient to repay us. We would rank as unsecured in the liquidation for any shortfall.
Additionally, we would crystallize the liability on World Expo and would need to appoint a receiver to sell on our behalf the funfair equipment, the value of which is questionable, and put at risk the additional security which we completed today which could be clawed back as preferential security in the event of a liquidation.
I would therefore recommend that we extend the facility for a further six months to December 1990 conditional upon the following:
1) An immediate paydown of the loan of $1m.
2) An additional paydown of at least $5m in September.
3) An increase of 1% in the interest rate increasing by a further 1% in September.
4) A renegotiation fee of 1.5% flat ($195,000).
5) Cross collateralisation of the World Expo and St. Georges Terrace facilities.
6) All claims concerning a joint venture being dropped.
To summarise, our information suggests that Pennant is suffering severe cash flow problems which will be relieved upon the sale of John Holland and South Blackwater Mine. It would not be in our best interest to force them into a default at this time as we improve and perfect our security cover. Should Pennant be put into liquidation before December, we would be in no worse position than we are today. By agreeing to a short extension, we substantially improve our coverage ratio, avoid any preference claims, collateralise our facilities, continue to receive lease payments and preserve the cooperation and involvement of Pennant as the funfair equipment is marketed and sold.
This proposal has the support of John Crosby. It would be appreciated if you could respond by midday 7th June. Should you require clarification of any of the above issues I will be contactable at home after 7.00 pm this evening (I am currently in Sydney) on 585-0573 or at the office on Thursday, on 618-7419."
At the outset, it was indicated that there are three questions; was the deed of mortgage given by World Expo Park to defraud creditors; if yes, (i) was it given "for valuable consideration" and (ii) did Elders act "in good faith"? For the appellant to succeed, the first question must be answered in the affirmative and one of the other two questions in the negative.
Intent to Defraud
The primary judge held that the deed of mortgage was entered into by World Expo Park with intent to defraud KFL Investments but not other creditors. Both appellant and respondents challenged that finding. The respondents contended that it had not been established that World Expo Park intended to defraud KFL Investments or that KFL Investments was a creditor. The appellant argued that World Expo Park's intention was to defraud not only KFL Investments but also other creditors.
The primary judge made a number of findings, some of which are not clearly related to others or to his final conclusion that the deed of mortgage was entered into by World Expo Park with intent to defraud KFL Investments but not other creditors.
One finding was that, when its Board resolved to grant the deed of mortgage to Elders on 4 May 1990, World Expo Park "was genuinely hopeful of clearing the Elders liability in full and still have a surplus of funds left over for disposal among the other creditors of the park". Properly understood, that finding, even if correct, would not support his Honour's conclusion as to World Expo Park's intent.
The basis for the finding emerges from what was next said:
"There is included in papers for the meeting of the directors of [World Expo Park] on 4 May 1990 a report on the anticipated returns from asset sales. It gives a summary of the potential sale cash effects (at present values) of the sale of assets [some of the rides] to Sanders International Venturers and the discounting of the Government debt, amounting to $9.05 million, and payments of $4.47 million, leaving a net cash amount of $4.58 million."
His Honour spoke of only Elders being paid in full, with other creditors merely participating in a hoped-for "surplus" after Elders was paid. World Expo Park had no possibility of selling its assets for an amount sufficient to satisfy both Elders and its unsecured creditors in full; at best, if Elders was paid in full, other creditors might receive a proportion of any surplus. The mortgage over the Government debt in favour of Elders inevitably and deliberately preferred it to other creditors (except Pennant Holdings). Indeed, shortly after the passage last quoted, the primary judge expressed himself as "satisfied, having regard to the assets and liabilities of [World Expo Park] on 6 June 1990, that it would be a necessary consequence of the disposition that some creditors would remain unpaid."
In these circumstances, it is unnecessary to consider in detail the "report on the anticipated returns from asset sales" which was before the directors of World Expo Park on 4 May 1990, on which his Honour relied. It is sufficient to observe that he must have misunderstood the report. The "surplus" to which he referred was based on a number of assumptions which were inconsistent with the course adopted by World Expo Park on granting the mortgage to Elders,
including:
(i) payment of only some of the rental instalments to Elders,
(ii) receipt of the Government debt by World Expo Park, not Elders, and
(iii) the sale of some of the rides to Sanders International Venturers, notwithstanding that the minutes of the Board meeting record acceptance "that Sanders International Venturers was not likely to perform".
The primary judge also held that Leisurecorp and John Holland Constructions approved World Expo Park's mortgage over the Government debt in favour of Elders. The basis for that, in the case of Leisurecorp, was that its directors were also directors of World Expo Park and, according to evidence from one of them, "Leisurecorp was aware of the intention to give the security to Elders, and had no problems with it." This was hardly surprising, since Leisurecorp was a wholly owned subsidiary of Pennant Holdings, which was the principal (indirect) beneficiary of the deed of mortgage, along with Elders. Leisurecorp was disadvantaged by the deed of mortgage, and so were any creditors which it had or to which it became liable. Its approval cannot properly be regarded as an independent decision taken in its own interests.
Similar comments apply to John Holland Constructions which was, as has been stated, a subsidiary of Houghton Holdings, of which one of the directors of World Expo Park, Mr Blood, was a senior employee. Another director of World Expo Park, Mr Pendal, gave evidence, which the primary judge apparently accepted, "that the Board of [Houghton Holdings] was informed by him of everything that was happening at [World Expo Park], that there was discussion of the giving of the security at Board level, and that the Board had no objection to the giving of the security". His Honour was "satisfied that in the case of John Holland Constructions also the resolution was adopted with the knowledge and approval of the Board". However, Houghton Holdings (John Holland Holdings) was effectively controlled by Pennant Holdings. The deed of mortgage benefited Pennant Holdings and disadvantaged John Holland Constructions (which as a building company presumably had creditors) and, indirectly, Houghton Holdings (and any creditors).
At the date of the deed of mortgage (6 June 1990), World Expo Park's "day to day creditors" totalled $23,640.18. At that time, they were, and continued to be, paid on a 45 day basis with funds provided by Leisurecorp, although, ultimately, two amounts were not paid. Group tax of $7,511.62, in respect of the months of January and February 1990, was overlooked, and a decision was later made not to pay rates of $66,171.00 to the Brisbane City Council in respect of a period immediately preceding the winding up of World Expo Park. In practical terms, the "day to day creditors" paid in full by Leisurecorp were benefited. But payment by Leisurecorp was neither certain nor accepted by the "day to day creditors", whose views were not sought.
The "day to day creditors", who earlier had a legal entitlement to share in the debt owed by the Government when it was paid to World Expo Park, were left after the deed of mortgage dependent on gratuitous payments by Leisurecorp. The significance of this is emphasised by the later decision not to pay a large sum owing for rates.
The primary judge described the position in relation to KFL
Investments as "more complex".
World Expo Park had engaged KFL Investments under a management agreement dated 15 June 1987, which was terminated prior to the closure of the fun park in September 1989. Prior to, and after, that time, there had been discussions concerning the sale of KFL Investments' shares in World Expo Park to Leisurecorp. In these discussions, which Leisurecorp broke off on 17 October 1989, KFL Investments sought a price which took account of a variety of factors, including claims for a large amount (on some occasions, at least, $1,500,000.00) for termination of the management agreement and another amount related to "the subsequent mismanagement" of World Expo Park. It is difficult to perceive how the latter claim could have been made against World Expo Park, but that is of little present consequence.
Evidence that the management agreement had been consensually terminated in June 1988, and that an amount agreed to be paid to KFL Investments in respect of costs which it had incurred had been paid by World Expo Park, was relied on by the respondents. However, in the course of a solicitor's letter dated 16 October 1989, the day before the discussions concerning a possible sale of KFL Investments' shares in World Expo Park to Leisurecorp were discontinued, KFL Investments had asserted its claims in relation to wrongful termination of the management agreement and "subsequent mismanagement". The primary judge held that, although it believed that such a claim was not sustainable, World Expo Park had knowledge, when the deed of mortgage was executed on 6 June 1990, that KFL Investments "was asserting that it may have a claim in breach of the management agreement".
World Expo Park was also then engaged in litigation with KFL Investments and must have been aware that costs might be ordered against it, as subsequently occurred. On 20 October 1989, shortly after KFL Investments' threat to seek an order for its winding up and some months before the deed of mortgage was executed on 6 June 1990, World Expo Park commenced an action to restrain KFL Investments from filing a winding up application. Costs were awarded against World Expo Park in that action on 3 October 1990. These costs were neither taxed nor paid. While it is understandable that no attempt was made to enforce the costs order after World Expo Park became a wholly owned subsidiary of KFL Investments, World Expo Park had no means of paying the amount in question in any event.
The primary judge also noted that, when the deed of mortgage over the Government debt was executed, there seemed to be a dispute between World Expo Park and KFL Investments over its loan account, and that there might also have been a further dispute concerning amounts which Mr Lord claimed World Expo Park had agreed to pay on his (or KFL Investments') behalf.
It is unnecessary to distinguish between Mr Lord and his
company, KFL Investments, for this purpose. It is evident
that KFL Investments, and perhaps Mr Lord, was known by
World Expo Park to be at least a prospective creditor when
World Expo Park executed the deed of mortgage over the
Government debt. Further, as the primary judge found, KFL
Investments opposed that mortgage.
Subject to what is discussed below, the deed of mortgage preferred Elders and Pennant Holdings over World Expo Park's other present and prospective creditors. Elders became entitled to the full amount payable to World Expo Park by the Government instead of a proportional share, and the amount for which Pennant Holdings was contingently liable as guarantor was reduced accordingly. On the other hand, World Expo Park's other creditors lost the entitlement to share in the Government debt when it was received by World Expo Park.
These consequences must have been obvious to World Expo
Park.
The respondents argued that the deed of mortgage was of no, or little, benefit to Pennant Holdings, because it was not only a creditor of World Expo Park but also the sole shareholder in Leisurecorp, and Leisurecorp and Elders (for the balance after receipt of the proceeds of sale of the rides) were or would be World Expo Park's largest unsecured creditors if it received payment of the Government debt.
Thus, if the Government debt had been paid to World Expo Park and distributed among its unsecured creditors, most of the amount not distributed to Elders would have been distributed to Leisurecorp. Pennant Holdings' liability as guarantor would have been reduced by the amount received by Elders, and the amount received by Leisurecorp would have been available to Pennant Holdings as Leisurecorp's sole shareholder.
This argument assumes that Leisurecorp had no debts; unless it had other assets, any creditors would have had to be paid before Pennant Holdings out of whatever amount Leisurecorp received from a distribution by World Expo Park to its unsecured creditors.
Further, World Expo Park had at least one other substantial unsecured creditor in addition to Elders and Leisurecorp; a large amount was owed to John Holland Constructions. And, as is discussed above, KFL Investments also had a claim which might mature into a liability by World Expo Park. If the Government debt had been paid to World Expo Park and distributed pro rata among its unsecured creditors, Pennant Holdings would not have indirectly received credit for the full amount of the Government debt. And even a comparatively small proportion of the amount of the Government debt, $5-6 million, is significant. Obviously, the respondents' argument is further weakened if approximately half of Leisurecorp's debt from World Expo Park is "subordinated to the claims of external creditors".
The respondents also relied on evidence, which the primary judge accepted, that World Expo Park entered into the deed of mortgage over the Government debt in order to maximise the proceeds from the sale of the rides; it was considered that more would be received from an orderly sale by World Expo Park than a "fire sale" by Elders. While that was probably correct, there is nothing to indicate that the deed of mortgage was needed to ensure that the rides would not be sold at an undervalue. But, in any event, there was no possibility that World Expo Park would benefit from an orderly sale of the rides; it was hopelessly insolvent.
Although his Honour accepted evidence from Elders' employees that, if World Expo Park had not provided the deed of mortgage, Elders "would have declined [the] request to move and sell the equipment", Elders was vitally interested in the sale of the rides at the best possible price, as was Pennant Holdings, because the more Elders received from the sale of the rides the less Pennant Holdings' liability as guarantor. Whether any other creditor of World Expo Park was interested in an orderly sale of the rides once the mortgage in favour of Elders was executed is much more speculative.
Unless the amount received by Elders under the deed of mortgage would or might reduce the amount which it was owed by World Expo Park to less than the entire proceeds of sale of the rides (and there is no rational basis for such a possibility), there would be no balance for other creditors of World Expo Park to share. A consequence of the deed of mortgage was that other creditors of World Expo Park would receive nothing, or only such amount as Leisurecorp or some other entity associated with World Expo Park voluntarily provided. However, but for the deed of mortgage, the entire Government debt would have been available, pro rata, to all unsecured creditors, including Elders, for any shortfall after the sale of the rides. There is no basis for a finding that the creditors other than Elders (and Pennant Holdings) were benefited by the deed of mortgage, or that World Expo Park believed that they would or might be benefited or had a rational basis for doing so. The finding which the primary judge made "that it was in the interests of all parties (including Elders) that the rides should be sold in an orderly manner" is correct only in a theoretical sense; there was no practical benefit for the other creditors.
The primary judge said that he was "not satisfied that the decision to grant the additional security was taken in order to reduce the liability of Pennant Holdings to Elders pursuant to the guarantee, though that would be consequential upon the grant". That conclusion is not supported by his earlier finding that the deed of mortgage was given to ensure that the sale of the rides was carried out in an orderly manner, which leaves unidentified any objective that an orderly sale was intended to secure other than maximisation of Elders' receipts from the sale and the consequential reduction of Pennant Holdings' liability as guarantor to Elders.
Nor is his Honour's conclusion that he was "not satisfied that the decision to grant the deed of mortgage was taken in order to reduce the liability of Pennant Holdings to Elders" supported by the immediately preceding paragraph in his reasons, in which he said:
"I regard it as a matter of considerable importance that the correspondence relating to the grant of additional security was conducted by Elders with the guarantor Pennant Holdings rather than directly with [World Expo Park]. That was a consideration which was heavily pressed on behalf of the applicant to show that [World Expo Park] was acting primarily in the interests of Pennant Holdings. It can properly be said, in my opinion, that the directors of [World Expo Park] failed to ensure that decisions affecting their company would be seen to be made by them rather than by the directors and agents of an associated company, but I have concluded that they knew and approved of the negotiations conducted between Pennant Holdings and Elders, and the resolution to grant the additional security was adopted by them."
Finally, his Honour considered it important "whether the transaction was one which it could be said was entered into as a reasonable commercial arrangement in the circumstances, putting aside the existence of the guarantee. If it was, this would be evidence that would go far to avoid any inference being drawn that the intent of [World Expo Park] was to defraud creditors". Even if the latter statement is correct, the transaction cannot be satisfactorily explained but for its benefit to Elders and, in consequence, Pennant Holdings as World Expo Park's guarantor.
In arriving at his decision that World Expo Park had an intention to defraud KFL Investments, the primary judge said:
"The position in relation to KFL [Investments] is different. In my opinion it was a necessary consequence of the disposition that any claims present or future which KFL [Investments] was able to establish against [World Expo Park] would remain unpaid in a situation where there was reason to anticipate that KFL [Investments] might make such claims. In these circumstances, I consider that it should be inferred that the deed was given by [World Expo Park] with intent to defraud its creditor KFL [Investments] and any future creditors of the company which was at the time seeking to restrain KFL [Investments} and Mr Lord from applying for an order that [World Expo Park] be wound up."
Although, as the primary judge identified, there were differences between World Expo Park's various creditors and its plans for their payment (in whole or part) or non- payment, and its possible future liability to KFL Investments was the debt most overtly disregarded, the deed of mortgage which World Expo Park granted in favour of Elders gave it and Pennant Holdings a preference over all other creditors, which were thereby excluded from participation in the distribution, pro rata, of the large amount which World Expo Park was entitled to receive from the Government.
The respondents submitted that, nonetheless, the "intent to defraud creditors" required by s. 121 of the Bankruptcy Act was not established. Although they accepted that there is no need for an intention to defraud creditors as a class, and that an intention to defraud one or more creditors, even a potential future creditor, may suffice (P T Garuda Indonesia Ltd v. Grellman (1992) 35 F.C.R. 515, 525-526), they asserted that no such intention had been established in relation to either creditors generally, all but some one or more creditors, or any creditor or prospective creditor of World Expo Park. It was submitted that there must be an "actual" or "real" intent to defraud (Williams v. Lloyd (1934) 50 C.L.R. 341, 373; Re Barnes [1962] Qd.R. 231; Wickham v. Autingo Pty Ltd (1993) 8 W.A.R. 376; c.f. Hardie v. Hanson (1960) 105 C.L.R. 451), and that this requires an intent which is deceitful or dishonest (Lloyds Bank Ltd v. Marcan [1973] 1 W.L.R. 1387, 1392; c.f. Electrical Enterprises Retail Pty Ltd v. Rodgers (1988) 15 N.S.W.L.R. 473, 497). The primary judge was wrong, it was said, in holding to the contrary, and that error affected his conclusion that World Expo Park had had an intention to defraud KFL Investments, which was not shown to have been in contemplation as a creditor; World Expo Park had considered that there was no substance in KFL Investments' complaints and claims (c.f. Ex p Mercer; In re Wise (1886) 17 Q.B.D. 290, 301). Reference has been made above to the points made by the respondents in relation to Leisurecorp and John Holland Constructions - their approval to the mortgage - and the "day to day creditors" - an intention that they should be paid by Leisurecorp.
At most what was established, according to the respondents, was an intention to prefer some creditors over others, and this is insufficient (Glegg v. Bromley [1912] 3 K.B. 474, 484; In re Sarflex Ltd [1979] 1 Ch. 592, 602; Re Hyams (1971) 19 F.L.R. 232, 260-261; Re Nimbus Trawling Co Ltd [1986] 2 N.Z.L.R. 308). Further, the submission was made that the contrary conclusion would make s. 122 of the Bankruptcy Act wholly or largely otiose, as every preference would be fraudulent and void under s. 121 unless the creditor preferred had given valuable consideration and acted in good faith.
The appellant had little to say on these matters, apparently being content to rely upon the primary judge's opinion that an intent to defraud for the purposes of s. 121 of the Bankruptcy Act does not connote "deceit or dishonesty". His Honour went on to "accept as correct the passage stated in Lewis' Australian Bankruptcy Law (4th ed., 1955) at pp. 45- 46, which is cited in Garuda Indonesia v. Grellman at p. 523:
"... The word 'fraudulent' .. has received an interpretation in bankruptcy matters somewhat wider than its ordinary use, and it may be defined as equivalent to 'with an intention to deprive creditors of recourse against all or any of his assets.' "
For reasons discussed above, I do not think that the respondents' attempt to justify the effect of the mortgage upon Leisurecorp, John Holland Constructions and the "day to day creditors" should be accepted. Nor do I agree with their basis for seeking to dismiss KFL Investments from consideration; World Expo Park had instituted an action against KFL Investments, and however confident World Expo Park was as to the outcome, the real possibility of at least an order for costs against World Expo Park could not realistically be ignored, and in fact eventuated.
These considerations provide some of the circumstances from which World Expo Park's intention in granting the deed of mortgage in favour of Elder is to be inferred. Even taking account of such testimony as might be relied on to support a subjective intention not to defraud (Wickham, at p. 379), the compelling inference from the circumstances (Noakes v. Harvey Holmes & Son (1979) 26 A.L.R. 297, 303; P T Garuda 523-524) is that World Expo Park's intention was that its only asset in addition to the rides (which were already secured to Elders) should be entirely applied to the benefit of Elders and to the ultimate benefit of Pennant Holdings.
It is of critical significance that Pennant Holdings, the guarantor of Elders' debt, was, through its subsidiary Leisurecorp, the majority shareholder in World Expo Park and in effective control of not only World Expo Park but also Leisurecorp and John Holland Constructions.
Further, Pennant Holdings gave no consideration of substance. Despite the primary judge's conclusion that Elders gave "valuable consideration ... through the agreement ... to permit [World Expo Park] to close the park, relocate the rides and sell them", that consideration had no "real and substantial value" in the circumstances: In re Abbott (1983) 1 Ch. 45, 57; Rimar Pty Ltd v. Pappas (1986) 160 C.L.R. 133; Barton v. Official Receiver (1986) 161 C.L.R. 75; Re Pacific Projects Pty Ltd [1990] 2 Qd.R. 541, 544; Official Trustee v. Mitchell (1992) 38 F.C.R. 364, 369-370. The primary judge was again influenced by his earlier conclusion that the mortgage was "a reasonable commercial transaction in the circumstances, putting aside the existence of the guarantee". Thus, in discussing consideration, he spoke of an "arm's length commercial situation". As I have already indicated, I do not share this view.
Nor does the evidence of Mr Price, an asset manager of Elders, and Mr Benskin, the credit director of the Elders group, demonstrate either an "arm's length commercial transaction" or that Elders gave consideration of "real and substantial value". At most, what Elders did was (i) permit World Export Park to "move and sell the equipment", which was in Elders' and Pennant Holdings' interest and (ii) refrain from proceeding against World Expo Park, and Pennant Holdings. It is not even obvious that Elders was in a position to sue. While Mr Price seemed to accept this, Mr Benskin gave evidence, described by the primary judges as "mystifying", which his Honour interpreted as indicating an opinion "that by 3 October 1989 [World Expo Park] had permitted a breach of the agreement with Elders which would have entitled Elders to call up the money owed". That opinion finds no support in the contemporaneous documents.
For example, the Elders' memorandum of 4 April 1990 refers to a request to an employee "to review all the documents in order to find any areas where the agreement may have been breached". And the memorandum to the Elders Finance Group Board Credit Committee on 6 June 1990, the day Elders was granted the deed of mortgage, noted that "All lease payments have been kept current by the Parent ...". In any event, there was plainly no point in proceeding against World Expo Park, which was not only insolvent but also had no assets except its interest in the rides and the Government debt, or in Elders itself being involved in the sale of the rides.
And World Expo Park received no benefit from Elders not proceeding against Pennant Holdings, especially when there is no suggestion that Elders committed itself not to do so.
Shortly stated, Elders' "agreement" subjected it to no practical detriment (as is apparent from its memorandum of 6 June 1990), and provided World Expo Park with no practical benefit. Neither party had any practical alternative to the disposal of the rides for the best possible price; World Expo Park's incentive to do so arose from the interests of its majority shareholder, as Elders' guarantor, rather than any advantage to World Expo Park itself or its creditors other than Elders and Pennant Holdings.
In any event, it is unnecessary for present purposes to conclude that Elders gave no consideration. In dealing with consideration in connection with World Expo Park's intent, it is sufficient to conclude that any consideration given by Elders, even if "valuable", was grossly inadequate for the mortgage given to Elders, which benefited Elders, and more significantly Pennant Holdings, by more than $5 million.
In what has been said so far, Pennant Holdings and World Expo Park have been treated as separate entities with separate interests and, of fundamental importance, different creditors. Any attempt by the respondents to justify what had been done by reference to the interests of Pennant Holdings or the interests of the corporate group of which World Expo Park and Pennant Holdings were members would merely have served to highlight the impropriety of that conduct. It sacrificed the interests of the general body of creditors of a company in a group in favour of the one creditor which had a guarantee from another group member to the benefit of both that creditor and the other member of the group: cf. Walker v. Wimborne (1976) 137 C.L.R. 1. For the sake of completeness, it should be added that, in considering whether or not the transaction was fraudulent, the proper approach, in our opinion, is to consider it in its entirety, with its benefits for Elders and for Pennant Holdings.
Further, we do not regard it as critical that the first approach for additional security came from Elders. What is of significance is that between then and the execution of the security, mutual benefits to Elders and Pennant Holdings, to the detriment of World Expo Park's creditors, provided the explanation for what occurred.
Finally, although we are differing from certain critical factual findings of the trial judge, the differences do not concern primary findings or findings with respect to credibility but ultimate factual conclusions based on those findings and the documentation.
In the circumstances which have been described, we are satisfied that World Expo Park's effective disposition of the Government debt to the benefit of its majority shareholder and the detriment of other creditors (except Elders) was dishonest in the material sense, and that, accordingly, even if dishonesty is the test for the purpose of s. 121 of the Bankruptcy Act, World Expo Park had the requisite "intent to defraud".
The deed of mortgage was therefore void, and the orders sought by the appellant should be made, unless Elders "acted in good faith" and gave "valuable consideration" for the mortgage. It was for the appellant to negative "good faith" and "valuable consideration": P T Garuda at pp. 527-528.
Good faith
The primary judge accepted that Elders acted in good faith. He rejected the proposition that "an unsecured creditor [which] takes steps to get itself into the position of a
secured creditor ... is to be taken as lacking in good faith in the sense of s. 121 of the Bankruptcy Act." Insofar as that is a statement that a finding of an absence of good faith is not an inevitable consequence whatever the circumstances, wherever an unsecured creditor obtains security, it seems likely to be correct. However, his Honour went on to say, in what was probably the critical finding on this aspect of the case:
"The evidence does not ... establish that at the time when the additional security was granted, Elders had any notice that any fraud or preference contrary to the Bankruptcy Act was intended."
Earlier, he had asserted that it would be sufficient for the appellant to establish that Elders had notice of either "fraud or preference contrary to the statute", citing Hyams at p. 256 and P T Garuda at p. 527.
The appellant accepted that the correct test had been applied, but submitted that his Honour's factual conclusion was erroneous. The respondents argued that it was insufficient for the appellant to prove that Elders knew that the deed of mortgage was a preference; it had to have notice of World Park Expo's intention to defraud. It was submitted that the "facts necessary to establish a lack of good faith in a fraud case (s. 121) must necessarily be different from those necessary to establish a lack of good faith in a preference action (s. 122) or in a settlement action (s. 120). ... it is irrelevant to refer ... to evidence ... that Elders were concerned about preferences."
Reliance was placed on a statement in P T Garuda at 527-529 as authority for the proposition that, in considering good faith for the purpose of s. 121, the question is whether the disponee was "privy to or party to the fraud".
The advantage of substituting another formula, such as whether a party is "privy to or party to ... fraud", for the statutory test of "good faith" is not obvious to us, and we do not accept either of the respondents' submissions in the passage quoted above: evidence of a party's concern "about preferences" may be relevant to whether the party acted in "good faith", and the "facts necessary to establish a lack of good faith" are not "necessarily ... different" in a "fraud case", "preference action" and "settlement action".
In any event, Elders' knowledge and intent when the deed of mortgage was granted is plainly material, if not critical.
It is not easy to understand the primary judge's approach to this question.
One matter which influenced him was his finding that Elders gave "valuable consideration", a point on which we have already commented.
Further, after noting the passage in the Elders' memorandum of 6 June 1990 which referred to the "risk" that the deed of mortgage could be "clawed back as preferential security in the event of a liquidation", he said that the "reference appears to be to the avoidance of preferences under s. 122 of the Bankruptcy Act". Assuming that to be so, it cannot support his conclusion that the "passage has no bearing on the question whether Elders acted in good faith in the sense of s. 121 of the Bankruptcy Act". It cannot be correct that an intention to gain a voidable preference has "no bearing on ... good faith" in the context of deciding whether the preference was fraudulent.
His Honour also held that there was "no evidence that Elders was aware of any claim by Mr Lord or KFL [Investments}", that Elders "was aware of the debts owing to Leisurecorp and John Holland [Constructions]" but "assumed, based on ... knowledge of the relationship of Mr Blood and Mr Pendal to John Holland and to Leisurecorp, that these companies were happy for Elders to have the additional security", "was aware of the existence of small creditors", and, "in seeking the additional security, was acting to improve its position, to the possible disadvantage of other existing or future creditors of [World Expo Park]", but that the deed of mortgage did not have "the necessary consequences that other creditors were disadvantaged". We disagree. The whole purpose of the deed of mortgage was to advantage Elders and thereby necessarily disadvantage other creditors of World Expo Park. As the primary judge himself said, "Elders, in seeking the additional security, was acting to improve its position". Elders knew that other creditors, except Pennant Holdings, would certainly be disadvantaged; there is no suggestion that Elders knew of any plan to pay "small creditors", and it must have been obvious that the assumed happiness of Leisurecorp and John Holland Constructions "for Elders to have the additional security" was related to the benefit to their "parent", Pennant Holdings, despite the disadvantage to them and any creditors which they had. No other reason existed to explain why they were "happy".
We do not propose to recanvass the various communications between Pennant Holdings and Elders, or Elders' internal memoranda. It was agreed between, and intended by, Pennant Holdings and Elders that World Expo Park, which Pennant Holdings controlled and materially had guaranteed, would, in effect, give to Elders its only valuable asset which was not already owned by, or secured to, Elders, to the mutual benefit of Pennant Holdings and Elders and the disadvantage of all others affected. Read against the background of the events of the preceding 12 months, Elders' memorandum to the Board Credit Committee, on the day the deed of mortgage was granted by World Expo Park, leaves little room for any other conclusion.
In our opinion, these conclusions require a conclusion that Elders did not act in good faith for the purpose of s. 121 of the Bankruptcy Act.
Valuable consideration
We doubt whether there was valuable consideration in the material sense, but, in the circumstances, a concluded opinion is not required.
The appeal should be allowed with costs, and the orders sought by the appellant should be made.
IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND
Appeal No. 51 of 1994.
Brisbane
| Before | Fitzgerald P Pincus J.A. Derrington J. |
[World Expo Park P/L v. EFG Aust. Ltd & Anor.]
BETWEEN:
WORLD EXPO PARK PTY LTD
Appellant
AND:
EFG AUSTRALIA LIMITED and
EFG LEASING LIMITED
Respondents
REASONS FOR JUDGMENT - PINCUS J.A.
Judgment delivered 11/04/1995
I have read the reasons of the President and do not repeat his Honour's
explanation of the issues which arise in this appeal. When the security which is in issue
was given, the respondent, EFG Leasing Ltd (Elders), was plainly in the position that it
was unlikely to recover from World Expo Park Pty Ltd (WEP), the mortgagor, the sum
owed by WEP. The security substantially improved Elders position to the detriment of
WEP's other creditors. But it is not the obvious advantage of the mortgage to the
mortgagee, Elders, which is said to show fraud, but rather the consequence of that
advantage for WEP's parent Pennant Holdings Ltd ("Pennant" or "the parent"): the
argument is that WEP's purpose was to improve the financial position of the parent
company and that this was a fraudulent purpose. The primary judge rejected that argument, which depended on the proposition that relieving Pennant of its liability as
guarantor of WEP's debt to Elders was the purpose of the mortgage. The case involves
an issue of some importance, at least for bankruptcy law; as to companies, see now
Part 5.7B of the Corporations Law.
It is desirable to review some of the events leading up to the execution of the
mortgage which is in question. In July 1989 a memorandum within the respondents'
group emphasised that all payments due to Elders had been made "in an exemplary
manner". On 2 August 1989 an Elders memorandum said that "we are satisfied that the
Pennant Group has sufficient financial resources to ensure that all ongoing lease
payments to us are promptly met." On 14 September 1989 the parent wrote to Elders
asking for approval to close the fun park and sell 40% in value of the rides, lease
payments on which created the obligation of WEP to Elders, to a Melbourne operator.
Elders response was to agree, but ask for more security:
"Due to the closure of the Park operation and the relocation of some of the assets subject to the lease, Elders Finance is concerned that the security value of the original on-going operation is being reduced. In particular, we feel that much of the remaining rides and associated plant and equipment will either not be saleable or if so, at greatly diminished values".
It appears that this was the origin of the negotiations which led to the execution of
the impugned mortgage: a request from Elders expressing concern about its security.
There is no suggestion that it was WEP or the parent which raised the question.
On 10 November 1989 the parent wrote to Elders referring to Elders request for
"additional security in the form of a charge over World Expo Park Pty Ltd and a specific
charge over the $8 million". The letter suggested that Elders agree to the discounting of $7M of the $8M debt, so as to raise about $4M, over which Elders would be given a
charge. It suggested that the arrangement would produce security cover of around 90%
and that, as rides were sold and Elders partially repaid, there would be partial releases
of the security offered.
On 20 November 1989 an internal Elders memorandum referred to the parent's
letter and said that the parent had been told "off the record" that the additional security
was acceptable, with the reservation that Elders desired a different arrangement for
partial releases. A further internal Elders memorandum a few days later referred to the
fact that Elders had "little, if any, leverage over Pennant to squeeze additional
concessions from them". A subsequent memorandum, undated, but found to have been
written, probably, in December 1989, consisted of a review of Elders connection to "the
Pennant group". This disclosed that the last annual review had listed liabilities from
companies in the group exceeding $46M and that the current liabilities were about
$25M. The financial analysis showed group shareholders' equity at last balance date to
be in excess of $113M.
Up to this point, and a little beyond it, the documents - only a sampling of which
has been discussed - show that Elders was keen to obtain a further security. They also
suggest, to me, that although Pennant was willing to give such security, it was not
particularly anxious to do so; matters progressed rather slowly and there was delay due
to the parties entertaining other possibilities, such as a transaction with an organisation
called Sanders International Ventures. It would, in my view, be difficult to draw from the
documents any confident inference that the reason for Pennant's desire to satisfy
Elders' request for additional security was not to placate Elders and to ensure their co-
operation in whatever arrangements might ensue, but rather to avoid the result that, on the winding up of WEP, a residual liability would fall on Pennant as guarantor. The
proposition that the purpose of the mortgage, from the point of view of the mortgagor,
was to improve Pennant's position would gain support if there were any sign of anxiety
on Pennant's part to effect the grant of extra security. That grant was suggested by
Elders, as has been pointed out, in October 1989, but nothing concrete had been done
by March 1990, when representatives of the Pennant group and of Elders were still
discussing the possibility of a deal with the Sanders group. There was no sign of
urgency, as regards the provision of extra security, until 4 April 1990.
On that date an internal Elders memorandum shows that the author expressed
great concern about an apparent sudden turn for the worse in the Pennant group's
fortunes, and suggested that Elders should do whatever was necessary "in order to get
our money back immediately". Further, it was said that the additional security from
WEP should be got immediately. Pennant wrote to Elders on 3 May 1990, talking about
the Sanders negotiations and about difficulties in achieving the discounting of the
government debt. On 7 May 1990 Pennant sent Elders a letter saying, among other
things, that it was understood that Elders would instruct solicitors to prepare a charge
over the money owing by the government. On 8 May Elders wrote to Pennant saying
that Elders understood that "Elders taking a charge over the debt is a fall back position
for Pennant".] The point of that remark was that an alternative possibility, involving re-
financing of the group by a bank, was still a matter of interest. On 5 June 1990 Elders
wrote to Pennant agreeing to the sale of the rides, discussed earlier, on conditions as
to security, and requiring cross-collateralisation of certain securities and the provision of
further guarantees.
On 6 June 1990 an internal Elders memorandum referred to a discussion about the Pennant group on 10 May at a board meeting, at which "it was decided to adopt a
strong approach and call the guarantee should the loan not be repaid on 8 June". The
memorandum said that Pennant could not pay on the due date; that was a reference to
a liability of a Pennant subsidiary other than WEP to Elders, in an amount of over $13M.
The memorandum suggested that for a number of reasons Pennant should not be
forced into a default at that stage; one of the reasons, and one might reasonably
deduce, the most important one, was to "improve and perfect our security cover". This
was a reference not only to the charge over the money due to WEP, but to other steps
including cross-collateralisation of securities. The mortgage was executed on 6 June
1990, the same date as this memorandum, and the subsequent documents do not
appear to me to shed much light upon WEP's intention or purpose on that date. It is
worthy of note, however, that on the date of execution Mr Blood, an executive within the
Pennant group, asked Elders for advice on the lease payout figure, as Pennant was "in
discussion with a US group on a possible ride package acquisition and we need to
assess our position". This and other events illustrate the point that there was from time
to time a hope that it might be possible to pay Elders out in some way.
The proper inference from these documents is that the decision to give the
security was not one made by the board of WEP acting independently, but was made
by Pennant; in commercial terms, it can reasonably be described as a decision of the
Pennant group. There is a lack of internal memoranda within that group which might
have thrown light upon its motives, but there is no good reason to conclude that what
moved the Pennant group, in agreeing to give the security, was a desire to advantage
the parent company and its creditors, at the expense of the subsidiary WEP and its
creditors. The biggest WEP creditors were within the Pennant group and as the
primary judge points out, by far the largest sum was due to a Pennant group company, Leisurecorp Ltd. It is true that an effect of the mortgage was to improve Pennant's
position, reducing the amount it was likely to have to pay under its guarantee, and no
doubt that would have been an attraction of the deal from Pennant's point of view. But
as the correspondence shows, Pennant was in much bigger and more immediate
trouble than that due to the WEP financial collapse; there was $13M due to Elders by
another Pennant subsidiary two days after the date of execution of the mortgage and
Elders did not think that this sum could be paid. It appears likely that it was Elders'
anxiety about the likelihood of default in payment of the $13M due on 8 June 1990 which
was the immediate cause of the, apparently rather sudden, execution of a mortgage on
6 June.
So far I have dealt with some of the more important documents but have
mentioned none of the oral evidence. There were called at the trial people on both
sides of the transaction, who explained their view of events leading up to it. This is not a
case in which the proper factual conclusion to be drawn rests solely on the documents.
The primary judge accepted oral evidence that after WEP "ceased to operate the Park
in September 1989, it was fundamental to be able to carry out the sale of assets in a
controlled manner. Without Elders' support such a program would have been
impossible." The view the judge took was that:
"If the intent which should be ascribed to WEP was not one to benefit the company and its creditors by an arrangement with Elders designed to obtain that benefit, but rather to benefit Elders and thereby Pennant Holdings through a reduction of its liability under the guarantee it had given to Elders, then in my opinion it would be proper to conclude that the disposition was one made to defraud the creditors of WEP".
The judge declined to ascribe to WEP the intention just mentioned.
Intent to Defraud
It is a legal curiosity that after 400 years of judicial exposition of the Fraudulent
Conveyances Act, enacted in 1570 in the reign of Elizabeth I, and the statutes which
have reproduced part or all of its substance, there remains room for argument as to the
nature of the fraud which must be proved, under such provisions, in order to set aside a
transaction. The primary judge held that the word "fraud" in s. 121 of the Bankruptcy
Act 1966 does not connote deceit or dishonesty, and applied a passage from Lewis'
Australian Bankruptcy Law, the critical parts of which are references to "any dealing with
property...made with the object of putting it beyond the reach of present or future
creditors..." and the suggestion that "fraudulent" is in this context equivalent to "with an
intention to deprive creditors of recourse against all or any of his assets". The passage
from Lewis does not make it absolutely clear whether the author intended to cover by
these expressions the ordinary case in which a debtor, who turns out to be insolvent,
pays a debt or gives security under pressure from a creditor in a way which constitutes
a preference; then the effect of what is done is to put the money or property dealt with
beyond the reach of other creditors. But it cannot have been intended that every dealing
with the debtor's property which constitutes a preference under s. 122 of the Bankruptcy
Act is also caught by s. 121, as a disposition with intent to defraud creditors.
Section 122 contemplates that a disposition by an insolvent which advantages one
creditor over others will ordinarily be perfectly good; it is only if the debtor becomes
bankrupt on a petition presented within 6 months that it is subject to attack. Section
121, on the other hand, has no time limit and this alone, quite apart from the reference
to intent to defraud, shows that s. 121 was intended to deal with a narrower category of
dispositions than those caught by s. 122.
The difficulty of discriminating between dealings caught by the one section and those caught by the other is illustrated by the primary judge's treatment of the present
case. His Honour held that there was an intent to defraud one of the creditors, KFL
Investments Pty Ltd. What distinguished KFL from the other creditors (apart from
Elders) was that it was not in the Pennant group. KFL was asserting, according to the
judge's finding, "that it may have a claim in respect to breach of" a management
agreement between itself and WEP. His Honour was satisfied that Pennant personnel
thought the claim unsustainable, but also held that WEP "was aware that KFL was
claiming to be a contingent creditor of WEP...". That was, as I understand the reasons,
principally on the basis of the claim based on the management agreement, but there
were other issues between the parties. His Honour held that there was no evidence
which "affirmatively establishes that the security was created with an intent to defraud
present or future creditors, including KFL", but nevertheless inferred that there was an
intent to defraud KFL. The reason for that appears to be set out in the preceding
sentence:
"...it was a necessary consequence of the disposition that any claims present or future which KFL was able to establish against WEP would remain unpaid in a situation where there was reason to anticipate that KFL might make such claims".
It is perhaps implicit in this that s. 121 applies wherever the impugned
disposition not only prefers the creditor in whose favour it is made, but gives such a
preference as will leave the other creditors bereft of any dividend. So that, for example,
a mortgage of the whole of the debtor's available property will be caught by s. 121 if
there are any other creditors at the time, or even, as I understand his Honour's reasons,
if there are likely to be any future creditors.
An interpretation of s. 121 which would render ineffective a disposition by an insolvent which places not some but all of the available property beyond the reach of all creditors but one has some attractions, not the least of which is that it provides a
precise criterion of operation of s. 121. But it is not easy to adopt, if one gives any
force to the expression "with intent to defraud creditors". The intent of a mortgagor such
as WEP, in giving one creditor security over the only available asset, may be much the
same as that of a debtor giving a security which still leaves something available for the
unsecured creditors; in each case there will commonly be a purpose of gaining more
time to resolve what is, perhaps optimistically, regarded as a crisis which may be
temporary.
Further, the interpretation given to the expression "intent to defraud" in Hardie v.
Hanson (1960) 105 C.L.R. 451 provides discouragement to those who would take s.
121 to use the phrase in some limited or technical sense. Hardie v. Hanson concerned
the effect of a provision of the then West Australian companies legislation
corresponding in general effect to Div. 3 of Ch. 5 of the present Corporations Law; the
W.A. provision made company directors liable if they were knowingly parties to the
carrying on of a company's business with intent to defraud creditors. Dixon CJ took the
view that "proof of actual fraudulent intent" was necessary (460). Kitto J said that "An
actual purpose, consciously pursued, of swindling creditors out of their money had to be
established..." (463). This case - Hardie v. Hanson - appears to be the only High Court
decision in which the notion of "intent to defraud" has in a context rather like the present
been considered from the point of view of determining whether an element of
dishonesty is necessary. In Williams v. Lloyd (1933) 50 C.L.R. 341 the Court had to
consider the effect of the then New South Wales equivalent of the Statute of Elizabeth.
That has not been incorporated in s. 121, in that the old statute makes reference to
intent to defeat or delay, as well as intent to defraud. It does not appear to me that the
effect of s. 6 of the Bankruptcy Act is to require one to read s. 121 as if it encompassed intent to defeat or delay. Despite this important difference between the statute being
considered in Williams v. Lloyd and that which is relevant here, it is my view that the
decision assists in resolving the question whether what might be called theoretical fraud
is enough for the purposes of s. 121. In the principal judgment, that of Dixon J, one
finds:
"The conduct of the bankrupt in failing to pay over the income of the property, and in dealing with it as his own, does not, to my mind, establish that there was any dishonesty in the making of the dispositions...A real intent to defeat or delay creditors must exist..."
That was a case in which Starke J dissented, but his Honour remarked that "fraud...is
not to be presumed..." (361) and looked for "badges of fraud" (362).
Looking further afield, there is certainly a body of authority, referred to in the
reasons of the President, in favour of the view that the intent must be really, and not
merely notionally, fraudulent: see especially Lloyds Bank Ltd v. Marcan [1973] 1 W.L.R.
1387 at 1392. The leading case suggesting the contrary is Freeman v. Pope (1870) 5
Ch.App. 538, but the passage commonly quoted from that case - e.g. in P T Garuda
Indonesia Ltd v. Grellman (1992) 35 F.C.R. 515 at 524 is an authority on the meaning of
the reference in the Statute of Elizabeth to intent to defeat and delay; it is not directly
concerned with proof of fraud. The result is, then, that the decisions in the High Court do
not support the view that there can for this purpose be fraud without dishonesty, and
decisions other than in that Court by no means give clear support to the view that it is
proper to give an artificial construction to "intent to defraud" in s. 121. Lastly, and I think
most importantly, there is the section itself and the ordinary rule that the court is obliged
to give words in a statute their ordinary meaning.
In my opinion, for the purposes of s. 121, the required intent to defraud must be an intent to do something dishonest and it must be an "actual" intent to do that. There
was no finding that in giving the impugned security WEP acted with any dishonest
intention.
The Group
The essence of the main argument for the appellant, which was rejected below,
is that there was an intent to defraud, because the intent was to advantage Elders, and
hence Pennant, to the disadvantage of the creditors other than Elders. The point of the
contention is that if Elders had security, it would be more likely to be paid out or at least
largely paid out, reducing the liability of Pennant under its guarantee, so that there was a
dishonest intention to advantage the parent at the expense of the creditors, including
creditors outside the group. It emerges from the documents that the security was
negotiated and effected without any consideration of the distinct interests of WEP and
its creditors on the one hand, and Pennant and its creditors on the other; the
assumption underlying the transaction was that it was proper for Pennant to cause the
board of WEP to give the security in the interests of the Pennant group regarded as a
whole. The propriety of doing this is a problem which arises only in a limited sense -
that is, in the sense of determining whether the intention of the mortgagor was one to
defraud, within the meaning of the relevant section. An intention to do something which
is contrary to the rules of law governing the affairs of corporations is not necessarily a
fraudulent one.
In the present case what is in question is, broadly speaking, the propriety of the
giving of a security by an insolvent company in a group in such a way as to benefit
another company in the group. The security may provide a benefit to a company in the
group other than the mortgagor because that other company is the principal debtor or because that other company is a guarantor, or no doubt in other ways. In practical
affairs there may be a tendency of those in the control of the group to enter into
transactions of this kind having regard to the welfare of the group as a whole, whereas
the law requires that the directors of each company in the group "consult its interests
and its interests alone in deciding" whether particular transactions should be entered
into: Walker v. Wimborne (1976) 137 C.L.R. 1. But in Charterbridge Corporation Ltd v.
Lloyds Bank Ltd [1970] Ch. 62, a mortgage given by a company in a group, looking only
to the interests of the group as a whole, was held good. And see Reid Murray Holdings
Limited (in Liquidation) v. David Murray Holdings Pty Ltd (1972) 5 S.A.S.R. 386.
In ANZ Executors & Trustee Company Limited v. Qintex Australia Limited [1991]
2 Qd.R. 360, a covenant by a parent company to procure execution of guarantees by its
subsidiaries was held unenforceable, on the basis that in the circumstances then
existing the execution of the guarantees could not possibly be for the benefit of the
subsidiaries. The principle which was applied there was not relied on in the present
case; that is, we are not invited to determine whether, apart from s. 121 of the
Bankruptcy Act 1966, the impugned mortgage is good. But the legal rules apart from
that section which bear upon the validity of steps taken by the board of a subsidiary in
aid of its parent or other companies in a group are close to the line of argument relied
on by the appellant, which is that WEP should not have given Elders a mortgage which
could not help WEP (whose position was hopeless), but might save its parent, Pennant
Holdings Ltd.
There is a distinction between actions taken by a board which are honest, though
legally wrong and ineffective, and those which are fraudulent. It is by no means
necessarily fraudulent for directors of a subsidiary company in a group to take a step which on proper analysis can be seen to provide no likely or even possible benefit to
that subsidiary, but only to prop up other companies in the group.
Summary
In my opinion:
1. The appellants had to demonstrate that the giving of the mortgage was an act
affected by dishonesty.
2. It was not proved that WEP's directors decided to give the mortgage
substantially for the purpose of helping Pennant; they appear to have acted in
response to a requirement of the creditor, Elders.
3. Neither the circumstance that the mortgage assisted Pennant, nor the
circumstance that it adversely affected the interests of KFL Investments, justifies
a conclusion of intent to defraud on WEP's part.
4. Hence, the deed of mortgage executed in favour of Elders is not void as against
the liquidator.
5. The appeal should be dismissed.
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