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Featherstone v Ashala Model Agency Pty Ltd (in liq)

 

[2017] QCA 260

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor [2017] QCA 260

PARTIES:

DARRELL MORGAN FEATHERSTONE as Trustee under Instrument Number 710924208
(appellant)
v
ASHALA MODEL AGENCY PTY LTD (in liquidation)
ACN 114 423 406
(first respondent)
DAVID JAMES HAMBLETON as Liquidator of Ashala Model Agency Pty Ltd (in liquidation)
(second respondent)

FILE NO/S:

Appeal No 6768 of 2016

SC No 7133 of 2012

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

Supreme Court at Brisbane – [2016] QSC 121 (Jackson J)

DELIVERED ON:

3 November 2017

DELIVERED AT:

Brisbane

HEARING DATE:

18 May 2017

JUDGES:

Sofronoff P and Morrison and McMurdo JJA

ORDERS:

  1. Application to adduce further evidence refused.
  2. Appeal dismissed.
  3. The appellant pay the respondents’ costs of the appeal.

CATCHWORDS:

CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PREFERENCES AND VOIDABLE TRANSACTIONS – UNCOMMERCIAL TRANSACTIONS – where almost the entirety of the cash in the first respondent’s accounts was used for the purchase of a residential apartment where the appellant resided – where the company then ceased to carry on its business and was de-registered in 2008 and re-registered and wound up as an insolvent company in 2012 – where the company at no time paid any GST or income tax – where the appellant claimed that the money used for the purchase of the apartment was in fact due and owing to him as payment for rent under an agreement for lease of the premises that the first respondent used – where the liquidator did not challenge the lease agreement or that the debt to the appellant existed – where the liquidator sought to avoid the transaction as an uncommercial transaction under s 588FB of the Corporations Act 2001 (Cth) rather than an unfair preference under s 588FA – whether the two categories of unfair preference and uncommercial transaction are mutually exclusive – where the appellant alleged that the first respondent received the benefit of a reduction in its indebtedness to him and continued possession of the premises, sufficient to make the transaction a commercial one – whether the appellant’s purpose, in making the transaction, was relevant to whether the transaction was an uncommercial transaction – whether it might be expected that a reasonable person in the company’s circumstances would have entered the transaction – whether the transaction was a voidable transaction within s 588FE(5) because it was entered for the purpose of defeating, delaying, or interfering with, the rights of other creditors – whether the company being aware of an adverse impact upon its creditors is sufficient to prove that its purpose, in making the transaction, was to defeat the rights of other creditors – whether there was sufficient evidence to infer that the company’s purpose was to defeat the rights of other creditors – whether the appellant’s lies, in defending the claim, could support the inference that his purpose was to defeat creditors, by analogy to Edwards v The Queen (1993) 178 CLR 193

BANKRUPTCY – PROCEEDINGS IN CONNECTION WITH SEQUESTRATION – PETITION AND SEQUESTRATION ORDER – EFFECT OF BANKRUPTCY ON PROPERTY AND PROCEEDINGS – ACTIONS BY AND AGAINST BANKRUPT – ACTIONS AGAINST BANKRUPT – EFFECT OF SEQUESTRATION ORDER – where the appellant argued that the claim should have been stayed by operation of s 58(3) of the Bankruptcy Act 1966 (Cth) – where the property was held by the bankrupt on trust for another person – whether the claim should have been stayed – where the appellant further argued that the respondents did not comply with rule 72 of the UCPR because no leave was sought to continue the proceedings after he became a bankrupt – whether the failure to seek leave was an irregularity which affected the court’s jurisdiction

Bankruptcy Act 1966 (Cth), s 58(3)

Corporations Act 2001 (Cth), s 588FA, s 588FB, s 588 FC, s 588FE, s 588FF

Uniform Civil Procedure Rules 1999 (Qld), r 72, r 371

Alderson v Temple (1768) 98 ER 165; [1768] EngR 55, cited

Ashala Model Agency Pty Ltd (in liq) & Anor v Featherstone & Anor [2017] 2 Qd R 1; [2016] QSC 121, related

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 238 FLR 384; [2010] NSWSC 233, cited

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109, cited

Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185, considered

Chan & Ors v First Strategic Development Corporation Limited (in liq) & Anor [2015] QCA 28, cited

Edwards v The Queen (1993) 178 CLR 193; [1993] HCA 63, applied

Freeman v Pope (1870) LR 5 Ch App 538, cited

Gordon v Leon Plant Hire Pty Ltd (in liq) [2015] NSWSC 397, cited

Hardie v Hanson (1959) 105 CLR 451; [1960] HCA 8, cited

Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175, cited

R v Reid [2007] 1 Qd R 64; [2006] QCA 202, cited

Re Patrick and Lyon Ltd [1933] Ch 786, cited

Re Solfire Pty Ltd (in liq) (No 2) [1998] 2 Qd R 92; [1997] QSC 167, considered

Stewart & Walker v White (1907) 5 CLR 110; [1907] HCA 52, cited

Strain v Walsh [2011] QDC 165, doubted

Tosich Construction (in liq) v Tosich (1997) 23 ACSR 466; [1997] FCA 252, considered

Tosich Constructions Pty Ltd v Tosich (1997) 78 FCR 363; [1997] FCA 979, considered

COUNSEL:

The appellant appeared on his own behalf

L Copley for the respondent

SOLICITORS:

The appellant appeared on his own behalf

Irish Bentley for the respondent

  1. SOFRONOFF P:  On 22 October 2003 the appellant, Darrell Morgan Featherstone, incorporated a company that he called Ashala Model Agency Pty Ltd.  By then he had been in business for about 10 years and had operated through numerous company vehicles.  He said in his oral evidence that he had always caused his companies to meet their tax liabilities.  He was the sole shareholder and director of this company.  It traded as a model agency.  Ms Kristy Marks was employed as the manager of the business.  Mr Featherstone managed the money and the accounting as well as marketing.
  2. On 24 May 2005 Mr Featherstone caused another company to be incorporated and gave this new company the same name as his first company, Ashala Model Agency Pty Ltd.  On the same day he changed the first company’s name to Ashala India Pty Ltd.  The sole director and sole shareholder on the record of this new company was Ms Marks.  However, on 28 May 2005 she declared in writing that she held the 100 shares registered in her name on trust for Mr Featherstone and also agreed to transfer the shares to him on his request.  This second company, which was the plaintiff in this action and to which I shall refer as Ashala, continued to carry on the same business and, to all outward appearances, the same company had always carried on that business.
  3. Mr Featherstone, as sole trustee of the Featherstone Family Trust, owned office premises in Albert Street, Brisbane.  He caused a written lease of these premises to be granted to Ashala.  The lease was a concise document which I quote in full:

LEASE AGREEMENT

Between:

Darrell Morgan Featherstone

And

Ashala Model Agency Pty Ltd A.C.N. 114 423 406

WHEREBY IT IS AGREED AS FOLLOWS:

  1. Ashala Model Agency agrees to lease Lot 3, 138 Albert St, Brisbane (the property) from Darrell Morgan Featherstone for the consideration of $450 per square metre per annum.
  2. The commencement date is the 1st July 2005 with the lease ending on the 30 June 2008.
  3. The annual rental will be $166,050 being 569 square metres at $450 per square metre and this will be due and owing in advance at the beginning of each lease year or as otherwise agreed to in writing by Darrell Featherstone.
  4. All outgoings will be paid by Ashala Model Agency Pty Ltd.
  5. This lease includes full use of the fit-out, fixtures, fittings, furniture and equipment currently in place.
  6. Both parties agree to be bound by the Real Estate Institute of Queensland rules and regulations and by the Property Law Act of Queensland and any other laws that may apply to leasing of office premises.

SIGNED THIS 1ST DAY OF JULY 2005 BY:

(signed)                            (signed)                          (signed)               

Kristy Marks (Director)  Darrell Featherstone Mark Surman”

  1. On the same day Mr Featherstone signed a letter addressed to Ms Marks informing her that the rent payable under the lease annually in advance would not be payable unless Mr Featherstone asked for it.  The letter was as follows:

“As per number 3 of the lease agreement dated 1st July 2005 between myself and Ashala Model Agency Pty Ltd I hereby advise that any rent due under the terms of that lease is not payable until such time that I request it in writing which shall be done in the form of an invoice requesting payment delivered to you.  Until such time as I issue you with such an invoice there is no rent owing by Ashala Model Agency Pty Ltd to me under the terms of the lease agreement.”

  1. On 1 July 2005 Mr Featherstone and Ms Marks executed yet another document.  By this document, which was executed as a deed, Mr Featherstone indemnified Ashala against “all costs, claims and expenses” to which it might be subject.  The indemnity was executed by Mr Featherstone expressly as trustee of the trust who had leased the premises to Ashala.
  2. The result of these transactions, the reality and commerciality of which was not in issue, was that while Ashala had a right to exclusive possession under the lease with a corresponding liability to pay rent, Ashala had been indemnified against that liability by the party that had the right to call for payment.
  3. On the same day that he incorporated Ashala, Mr Featherstone opened a bank account for it at the ANZ Bank.  By 29 May 2006, the balance in that account was $176,586.91.  On that day, Mr Featherstone opened a second account for Ashala at the bank.  He transferred $170,127.20 from the first account into the second account.  By 16 August 2007 the balance in the second account was $440,133.81.
  4. During this period, Ashala lodged no BAS statements, no income tax returns, paid over none of the GST it had collected in respect of its agency services and paid no tax.  Nor did Mr Featherstone.
  5. In June or July 2007 Mr Featherstone decided to buy himself an apartment.  By then, one Mal Marshall had replaced Ms Marks as the company’s director but Ms Marks was the sole signatory on Ashala’s bank account.  Mr Featherstone told these two of his intention.
  6. On 1 July 2007 Mr Featherstone’s solicitor settled a nominal sum upon Ms Marks as trustee of a new trust, the “KJM Family Trust”.  KJM are Ms Marks’s initials.  However, the primary beneficiaries of this discretionary trust were Mr Featherstone and members of his family.  The class of secondary beneficiaries included employees of any company in which Mr Featherstone had a share or in respect of which a share was held on his behalf.  Consequently, Ms Marks was a member of a class of beneficiaries. By clause 18 of this trust, Mr Featherstone, as “principal”, had the power to remove and to appoint trustees – but could not appoint himself.  By clause 15, Mr Featherstone, together with the trustee, also had the power to vary the terms of the trust.
  7. Mr Featherstone agreed to buy an apartment at Quay Central in Alice Street in Brisbane from its owner, Ms Lynette Teulan, for $460,000.  On 1 August 2007 he caused Ashala to pay $23,000 to Ms Teulan by way of deposit.
  8. By a written agreement dated 4 August 2007, Mr Featherstone agreed to accept from Ashala $460,000 “as full and final payment” for the rent owing from the inception of the lease to the end of the term on 30 June 2008 which then totalled $498,150.  This agreement provided that the money was to be paid by Ashala directly to Ms Teulan, the vendor of the apartment, “on behalf of Darrell Featherstone”.
  9. On 21 August 2007 the contract for the purchase of the apartment was settled.  The source of the money to pay Ms Teulan was Ashala’s bank account.  Ms Marks, and not Mr Featherstone, was registered as the owner of the apartment but it was Mr Featherstone who began to live there and he continues to do so.  It was common ground that she held the property as trustee of the KJM Family Trust.  The effect of these transactions was that the company’s money was reduced to $3,744.21.
  10. Mr Featherstone agreed in oral evidence that he made the decision that Ashala cease trading by the end of the year or early in 2008.  It was de-registered by ASIC in October 2008.
  11. By 6 April 2011, the Australian Taxation Office had completed its audit of Mr Featherstone.  Pursuant to the power he had jointly with the trustee, his employee Ms Marks, to vary the terms of the trust, Mr Featherstone then executed a deed by which he, first, varied the deed of trust to remove the prohibition against the principal’s appointment of himself as trustee and, second, removed Ms Marks as the trustee.  He then appointed himself as trustee and caused himself to be registered as the owner of the apartment.  An audit of his personal tax affairs by the Australian Taxation Office had by then been completed.
  12. According to Mr Featherstone’s oral evidence, from 2008 another company, also using the name “Ashala”, continued the same business (but with some additional elements of business).
  13. On 24 July 2012 Ashala was reinstated by order of the Court and the second respondent, Mr Hambleton, was appointed liquidator.  On 19 February 2014 the Deputy Commissioner of Taxation lodged a proof of debt in the sum of $315,103.61 for income tax and a Running Balance Account deficit debt in respect of BAS amounts.
  14. The learned trial judge, Jackson J found that the liquidator did not have sufficient company records to prepare reconstructed accounts upon an accruals basis.  He therefore prepared them on a cash basis.  This showed an income tax liability in the sum of $163,228.75.  The balance sheet of the company prepared by the liquidator showed a deficit of $217,098.49.
  15. At trial, where he had legal representation, Mr Featherstone contended that had the accounts been prepared upon an accruals basis, then the company’s liability for rent would have reduced its taxation liability for 2006.  As his Honour found, even doing this still resulted in deficit of $86,993.34.
  16. Jackson J found that, having regard to the company’s likely tax liabilities, the payment of $460,000 by way of rent made the company insolvent.
  17. Ground 10 of the appellant’s grounds of appeal in his “Further Further Amended Notice of Appeal” contends that his Honour was wrong in this conclusion.  That ground is said to be supported by two matters.  First, it is said that his Honour’s failure to consider the difference that would result in the company’s position if the statements had been prepared upon an accruals basis led his Honour to conclude wrongly that the company was insolvent.  As I have said, his Honour took that argument into account and the calculations have not been challenged.  Even so, there would have been a deficit rendering the company insolvent.  Second, it is said that a payment due from one Mark Surman in the sum of $500 per week for a sub-tenancy of the premises had not been taken into account.  That sum would only alter the resulting deficit by $26,000, a sum that would not be enough to alter the conclusion.  I would reject this ground.
  18. By ground 2 of his notice of appeal, Mr Featherstone contends that in December 2009 he had settled his own tax liability with the Commissioner of Taxation.  He contends that this settlement included any liability of the company.  There was no evidence to support this contention and I would reject this ground.
  19. By ground 4 the appellant complains that Jackson J was wrong in his conclusion that Mr Featherstone did not intend to honour the indemnity that he had given to Ashala.  Although the ground of appeal does not say so, the implication is that the existence of the indemnity meant that, by recourse to funds of Mr Featherstone that he would pay, the company could have paid any tax liability in full.
  20. There is nothing in this ground for several reasons.  First, the time to honour the indemnity had long passed when the trial began and it has certainly passed by now.  However, the value of the indemnity and of Mr Featherstone’s granting of it can be assessed, as his Honour rightly did, not only by Mr Featherstone’s failure to honour it in a timely way.  It can also be assessed by the fact that Mr Featherstone is an undischarged bankrupt, having been made bankrupt on 11 March 2015.  In addition, it is significant that, having given the company his indemnity, Mr Featherstone then himself rendered the company insolvent by calling for the rent due to him which, on a natural reading of the indemnity, was a liability against which he had indemnified the company.  His decision to take the company’s money by way of rent, despite the indemnity he had given in his capacity as landlord and in circumstances that left the company bereft of an ability to pay its tax liabilities, is inconsistent with a conclusion that Mr Featherstone ever intended to honour it or to cause Ashala to enforce it.  I would reject this ground.
  21. By grounds 18 and 20, the appellant challenges Jackson J’s finding that the payment by the company of the money which was used by the appellant to pay for the apartment was an unfair preference.  He does so upon two bases.  First, he contends that whether the payments constituted unfair preferences was not an issue that had been raised on the pleadings.  Second, it is said that the finding that the payments constituted unfair preferences was made without taking into account the benefit that the company received by way of a right to continue to occupy the premises.  For the reasons which follow, I respectfully agree with Jackson J’s rejection of those arguments.
  22. It is necessary to state the relevant statutory provisions.  Section 588FA(1) of the Corporations Act 2001 (Cth) provides as follows:

Unfair preferences

  1. A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
  1. the company and the creditor are parties to the transaction (even if someone else is also a party); and
  1. 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.”

  1. Section 588FB of the Act provides:

Uncommercial transactions

  1. A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
  1. the benefits (if any) to the company of entering into the transaction; and
  1. the detriment to the company of entering into the transaction; and
  1. the respective benefits to other parties to the transaction of entering into it; and
  1. any other relevant matter.
  1. A transaction may be an uncommercial transaction of a company because of subsection (1):
  1. whether or not a creditor of the company is a party to the transaction; and
  1. even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”
  1. Section 588FC provides:

Insolvent transactions

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:

  1. any of the following happens at a time when the company is insolvent:
  1. the transaction is entered into; or
  1. an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
  1. the company becomes insolvent because of, or because of matters including:
  1. entering into the transaction; or
  1. a person doing an act, or making an omission, for the purpose of giving effect to the transaction.”
  1. Section 588FE renders certain transactions by a company that fall within the preceding sections voidable at the suit of a liquidator of a company.  Section 588FF confers power upon the Court to grant certain remedies to a liquidator upon proof that a transaction falls within s 588FE.  Section 588FG provides defences to a liquidator’s application for relief.  It will be necessary to refer to these in more detail later.
  2. It is convenient to deal first with the appellant’s submission that the company’s right to continue to occupy the leased premises was a benefit that, if taken into account, would have resulted in a conclusion that the transactions were not unfair preferences.  The contention only has to be stated to see that it is without foundation.  An unfair preference is constituted by a payment by a company to a creditor that results in that creditor receiving more than would be received in a winding up of the company.  There is no statutory requirement to consider the benefit gained by the company in making the payment because the section assumes that the payment has been made for a debt that is actually owed by the company.  I would reject this argument.
  3. The appellant’s other argument has more substance.  By paragraph 18 of the Second Further Amended Statement of Claim, the liquidator sought relief under s 588FF upon the basis that the payments of money were:
    1. transactions of the company that it would be expected that a reasonable person would not have entered into; and
    2. transactions entered into by the company for the purpose of defeating, delaying or interfering with the creditors of the company within the meaning of s 588FE(5) of the Act.
  4. This was an allegation that the payments constituted uncommercial transactions made for the proscribed purpose, invoking s 588FE(5).  That subsection provides:

“(5) The transaction is voidable if:

  1. it is an insolvent transaction of the company; and
  1. the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
  1. the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.”
  1. For some reason, the liquidator did not allege that the payments also constituted unfair preferences.  Nevertheless, his Honour found that they did.  Having made that finding, his Honour considered whether the payments could nevertheless also constitute uncommercial transactions within the meaning of s 588FB.  His Honour concluded that they could and that they were uncommercial transactions.  Jackson J also held that the payments had been made for the proscribed purpose.  By this path, his Honour decided that the payments were voidable under s 588FE(5) notwithstanding that the liquidator had not alleged that the payments were unfair preferences.
  2. It is now said that that was an error because the liquidator had not alleged in his pleading that the transaction fell within s 588FA.  This really amounts to an argument that the trial was unfair insofar as his Honour based his decision upon a matter that had not been pleaded and to which the appellant, accordingly, did not have an opportunity to respond.
  3. However, that is not what happened in this case.  In this case the nature of the proven transaction, the payment by the company of a creditor’s debt almost in full thereby leaving the company with a substantial liability that it could not meet, necessarily leads to the conclusion that the payment was an unfair preference.  However, his Honour did not decide the case on that basis although, in my respectful opinion, there would have been no unfairness in his so doing.  The facts could have led to no other conclusion about the legal character of the payments and the defendant was denied no defence or opportunity to meet that case.  His Honour instead decided the case upon the answer to the question whether the making of the payments in the circumstances in which they were made rendered them uncommercial transactions.  The case having been conducted and decided upon that basis, I will approach it in that same narrow way.
  4. The relevant question is not whether a transaction that is alleged to be an uncommercial transaction within the meaning of s 588FB is or is not also an unfair preference within the meaning of s 588FA.  The question is solely whether the impugned transaction, whatever other statutory character it might bear, satisfies the definition of uncommercial transaction in s 588FB.  If it does, then it is an uncommercial transaction even if it constitutes some other kind of transaction defined in Part 5.7B of the Act.  The language of the statute gives no justification for concluding that it would be a defence to a claim by a liquidator who relies on s 588FB for a respondent to prove the relevant transaction was an unfair preference within the meaning of s 588FA.
  5. A consideration of the history of these provisions illuminates the nature of the distinctions between the various categories of transactions that the Act renders voidable and shows that there is no mutual exclusivity in the provision.
  6. Until relatively recently, provisions that allowed liquidators to recover money relied upon the adoption of bankruptcy laws.  Section 293 of the Companies Act 1961 (Qld) provided as follows:

293. Undue preference.

  1. Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable shall in the event of the company being wound up be void or voidable in like manner.
  1. For the purposes of this section the date which corresponds with the date of presentation of the bankruptcy petition in the case of an individual shall be –
  1. in the case of a winding up by the Court –
  1. the date of the presentation of the petition; or
  1. where before the presentation of the petition a resolution has been passed by the company for voluntary winding up the date upon which the resolution to wind up the company voluntarily is passed,

whichever is the earlier; and

  1. in the case of a voluntary winding up the date upon which the resolution to wind up the company voluntarily is passed.
  1. Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.”
  1. Other States had identical legislation.
  2. Section 293 picked up s 121 and s 122 of the Bankruptcy Act 1966 (Cth) which, when first enacted, provided relevantly:

121.

  1. Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
  1. Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.
  1. In this section, “disposition of property” includes a mortgage of property or a charge on or in respect of property.”

122.

  1. A conveyance or transfer of property, a charge on property, a payment made or an obligation incurred by a person who is unable to pay his debts as they become due from his own money (in this section referred to as “the debtor”), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred
  1. within six months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or
  1. after the presentation of a petition on which the debtor becomes a bankrupt and before the debtor becomes a bankrupt,

is void as against the trustee in the bankruptcy.

  1. Nothing in this section affects
  1. the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business; or
  1. the rights of a person making title in good faith and for valuable consideration through or under a creditor of the bankrupt.
  1. The burden of proving the matters referred to in the last preceding sub-section lies upon the person claiming to have the benefit of that sub-section.”
  1. It can be seen that the fundamental distinction between s 121 and s 122 was that the former required proof of a state of mind amounting to mala fides while s 122 required proof only that the objective effect of the payment was to give a preference to the creditor who has been paid over the company’s other creditors.  It was not always so.  In England, from the earliest times, the word “preference” was taken to imply mala fides because a choice had been made by the company to prefer one creditor over others.  To prove that a payment had been a preferential one, a liquidator had to prove that the relevant controlling mind of the company had been actuated by such an intention to prefer.[1]
  2. Mala fides had been the criterion for recovery since the earliest times.  The first bankruptcy act was passed in 1542 during the reign of Henry VIII.[2]  Section 1 of that Act provided, relevantly:

“WHERE divers and sundry persons craftily obtaining into their hands great substance of other mens [sic] goods, do suddenly flee to parts unknown, or keep their houses, not minding to pay or restore to any their creditors, their debts and duties, but at their own wills and pleasures consume the substance obtained by credit of other men, for their own pleasure and delicate living, against all reason, equity, and good conscience: …”

  1. Section 1 went on to empower certain officials, upon the commission by a person of what was now called an act of bankruptcy, to take a bankrupt’s property, to sell it and, from the proceeds, to pay the bankrupt’s creditors “a portion rate and rate like, according to the quantity of their debts”.  Section 4 provided for the relevant officials to “call before them” persons suspected of having “suffered” any person to “recover against him or them any debts, goods, chattels, wares, or merchandises”, and upon proof of “fraud, deceit, covin or collusion”, empowered those officials to recover that money or property for the benefit of creditors.  This Act established the principles, which still to a large extent informs modern insolvency legislation in Australia, that the status of bankruptcy is conditioned upon the commission of an act of bankruptcy, that the property of a bankrupt should be available to meet the debts of unsecured creditors rateably and that such property includes that which has been fraudulently transferred by the bankrupt to others, including creditors, after the commission of an act of bankruptcy.
  2. The emphasis upon fraudulent conveyances of property was reinforced by the enactment in 1571 of what has come to be called the Statute of Elizabeth[3] which rendered void any alienation of property made with an intention to defraud creditors.
  3. The earliest, as well as the most modern, insolvency statutes had to deal with the inconsistency between, on the one hand, the need to recover property of the bankrupt that had been alienated before the status of bankruptcy had been imposed and, on the other hand, the need to maintain the integrity of transactions entered into by third parties who had had no notice of insolvency.  From the earliest times fraud was the criterion that was settled upon to resolve this conflict and fraud in the context of insolvency meant an intention to prevent creditors getting what was their due in a rateable division of the bankrupt’s property.
  4. In Alderson v Temple[4] Lord Mansfield explained the rationale for the avoidance of antecedent transactions as follows:[5]

“All acts to defraud creditors or the public laws of the land are void; and if the nature of the act be a conveyance or grant, ‘tis not only void, but an act of bankruptcy.  It has been determined “that a conveyance by a trader, of all his effects, for the payment of one or more bona fide creditors of the most meritorious kind, though his effects do not amount to half what is due, is void; because it is not an act in the ordinary course of business; it is not such an act as a man could do, but it must be followed by an immediate act of bankruptcy, and it is defeating the equality that is introduced by the Statutes of Bankruptcy, and the criminal (for the bankrupt is considered as a criminal) is taking upon himself to prefer whom he pleases.”  But suppose he leaves out a considerable part of his effects:  if it appears to be only colourable, that don’t vary the case; it is fraudulent.  Suppose a trader makes a conveyance of all his estate, for the payment of all his creditors except one, (which was the case of Gayner cited in Dematto’s case,) it is void.  Suppose it was “to pay all his creditors rateably:” if there were no assent of his creditors, or composition, it would be void:  for, it would be rescinding the whole system of the bankrupt laws, and instead of applying to the Great Seal, he would choose his own trustees.  If this is a fraudulent act, it is void.”

(footnote omitted)

  1. Because the state of mind of the payee was immaterial to the determination of the fraud of the bankrupt, third parties who were innocent of any collusion with the bankrupt might be caught.  Such transactions became the subject of nice distinctions in order to exempt them.[6]  In England an Act passed in 1825[7] repealed all previous bankruptcy statutes and legislated for this issue by excepting from the operation of its avoidance provisions transactions made with a “person who is or shall be really and bona fide a creditor of the Bankrupt” if the transaction had been entered into by the third party “in the usual and ordinary course of trade or dealing”.  This rendered the state of mind of the payee potentially relevant if a defence was raised based upon the new provision.
  2. This element of fraud on the part of the bankrupt was reflected in Queensland in the Insolvency Act 1874 (Qld).[8]  That Actused an expression which strongly implied a requirement to prove an intention to prefer on the part of the debtor.  Section 107 of the Act rendered void payments made by a person unable to pay his or her debts “in favour of any creditor… with a view of giving such creditor a preference over the other creditors [my emphasis]” if made within six months of the presentation of a bankruptcy petition.  Section 108 of the same Act rendered void alienations made by such a person “not being for a reasonable and sufficient consideration given at the time” within the same time frame.  Such an alienation was “deemed a fraudulent preference”.  Section 109 of the Act also avoided alienations of property “the effect whereof is to defeat or delay the creditors of such debtor or to diminish the property to be divided amongst his creditors” and also deemed such alienations to be “fraudulent and void”.  The “fraudulent” intention of the debtor was, therefore, the heart of the matter.[9]
  3. The Act exempted transactions entered into by third parties in good faith, for value and without notice of insolvency.
  4. Meanwhile, an insolvency statute passed in New South Wales in 1841 had, in that colony, effected a change in this emphasis upon fraudulent intent.[10]  Section 8 of this Act rendered a payment made to a creditor at a time when the debtor was insolvent (or was on notice) void if it merely had “the effect of preferring any then existing creditor to another”.  No longer was any inquiry into the debtor’s state of mind necessary.[11]  The Privy Council in Harris v Bank of Australasia[12] nevertheless decided that proof of intention to prefer was still required under this provision, but the New South Wales Supreme Court never followed that decision.[13]  However, the Act was interpreted so that payments that had a preferential effect were protected if received in good faith.[14]
  5. In 1924 the Bankruptcy Act 1924 (Cth) was passed, coming into effect in 1928.  Section 95 of that Act, dealing with preferences, followed the New South Wales model.  Payments that were preferential in effect were void unless the creditor proved that the money had been received in good faith, for valuable consideration and in the ordinary course of business.  An attempt to reintroduce a mental element based upon Harris v Bank of Australasia failed in S. Richards and Co Ltd v Lloyd.[15]
  6. Thereafter, the Bankruptcy Act 1966 (Cth) maintained that policy which distinguished between payments that, objectively, satisfied certain tests and those which required proof of the state of mind of the debtor or the creditor.  Section 120 avoided voluntary settlements of property.  There was a five year relation-back period unless a donee could prove that the donor remained solvent after the transaction, in which case the relation-back period was two years.  The disponee could make state of mind a relevant issue because settlements made in good faith and for valuable consideration were exempt.[16]  Section 122 avoided payments that had the effect of giving a preference; it was a defence to prove that the payee took in good faith, for valuable consideration and in the ordinary course of business.  Section 121 avoided dispositions of property made with intent to defraud creditors.  The state of mind of the debtor was crucial but the exclusion of payments made in good faith and for valuable consideration made the intention of the creditor or payee also relevant.  This remains, in substance, the modern position.
  7. These provisions, when engaged by companies’ legislation, did not accommodate the problems raised by the unique features of companies, such as the position of advantage enjoyed by directors or shareholders with inside knowledge.  Nor did it take into account the position of companies who are “related” to an insolvent company.
  8. The Harmer Report[17] recommended that bankruptcy legislation and company legislation should contain separate provisions to regulate transactions antecedent to insolvency administration.[18]
  9. Some of the same elements nevertheless continued to be relevant, namely, proof that the impugned transactions diminished the available property of the company, proof of insolvency, proof of notice of insolvency, the presence or absence of valuable consideration and the debtor’s intention to defeat the interests of other creditors.  To this was now added the potential relevance of the relationship of the company and the payee or transferee.[19]  The relation-back date in company legislation had to be amended to take into account the various ways in which a company might begin the process of insolvency administration.
  10. There was to be a single defence to an application to avoid voidable payments namely, proof of a lack of reason to suspect insolvency (and therefore no reason to think that the payment was preferential).  In particular, the company’s intention to prefer the creditor remained immaterial in the case of payees unrelated to the company.[20]  Related payees, however, would have to prove not only that they had no reason to suspect insolvency but also that the company had no intention to prefer.[21]
  11. As to “settlements”, the Harmer Report recommended that that archaic expression be discarded in favour of “transaction”.  “Undervalue” was to include a gift, and also any transaction for no consideration or a transaction for consideration ‘significantly’ less than the consideration provided by the company.[22]  The Report pointed out that a provision that strikes merely at undervalue would be insufficient because it is possible to dispose of property in a way that defeats the interests of creditors by a transaction that appears to be made for full value.[23]
  12. The Report also recommended abandoning the notion of fraud[24] in favour of the substantial concept that had always been at the heart of voidability, namely the insolvent’s ‘intention of defeating, delaying of obstructing one or more of the creditors of the company’.  Further, the transaction must be shown to have had the intended effect.[25]
  13. The Commission recommended draft legislation.  Legislation of that kind would have distinguished between:
    1. Preferential transactions;
    2. Transactions at an undervalue;
    3. Transactions made with intent to defeat, delay or obstruct creditors.
  14. The provisions as they were enacted in 1992 by the Corporate Law Reform Act were directed at the types of transaction that the Report had recommended but the legislation differed materially from the recommended draft.
  15. Section 588FA continued to make provision for the avoidance of payments that merely had a preferential effect (subject to an irrelevant exception) and thus continued the legislative policy that began in New South Wales in 1841.  These were now termed “unfair preferences”, avoiding the old expression “fraudulent preferences”.
  16. However, rather than providing for “transactions at an undervalue” as recommended by the Harman Report, the Act provided in s 588FB for a new species of voidable transaction termed “uncommercial transactions”.  Transactions of this kind were not defined by reference to the presence or absence of valuable consideration but by reference to whether a ‘reasonable person in the company’s circumstances would not have entered into the transaction” having regard to four matters.  These factors were the benefits to the company, the detriments to the company, the benefits to other parties to the transaction and “any other relevant matter”.  The ‘reasonable person’ test and its accompanying relevant matters widened the scope of operation beyond that which would be encompassed by a provision based merely upon the concept of undervalue.
  17. Neither of these two sets of provisions required proof of moral turpitude upon anyone’s part.  They merely required a liquidator to prove facts that satisfied objective criteria, one of which involved the familiar legal yardstick of the reasonable person.
  18. Relevantly, proof merely that a payment had a preferential effect would render the payment voidable if it was made at a time measured from the relation-back day until the company resolved to be wound up or the court ordered it to be wound up.[26]  Connoting no moral turpitude on the part of the company or the payee, the Act provided for the shortest period of time within which a transaction might be avoided.
  19. The Act introduced another concept, that of the “insolvent transaction”.  This caught unfair preferences as well as uncommercial transactions provided it was proved that the company was insolvent when the company entered into the transaction or that the transaction rendered the company insolvent.[27]  Proof that a transaction was an “insolvent transaction” stretches the relation-back period to a time beginning six months before the relation-back day.[28]
  20. In the case of uncommercial transactions (but not unfair preferences) carried out when the company was actually insolvent, s 588FE(3) extends the relation-back period even further to two years before the relation-back day.  This specific provision, which seemingly renders idle the inclusion of uncommercial transactions within the sphere of operation of s 588FE(2), connotes that there is a distinction between unfair preferences, as a species of transaction, and uncommercial transactions as another species.  There is undoubtedly a difference.  One requires that a transaction be shown merely to have an effect as a preference.  The other measures the act of the company against a standard of conduct, that of a reasonable person.  The former confines its scope to creditors as payees; the latter includes payees whether or not they are creditors.
  21. The extension of time from six months to two years can be seen to be justified because it catches transactions made not only when the company was insolvent, or transactions that rendered it insolvent, but which were also transactions that no reasonable person would have entered into.  Preference payments as defined involve no unreasonable behaviour as a necessary element.
  22. That is not to say that circumstances can never exist in which a preferential payment is one that a reasonable person would not have made.  The payment may, to the knowledge of the company, change a company from one that could survive a period of insolvency into one that cannot.  It may leave the company without liquidity.  Moreover, it may also be a payment made by the use of confidential information about the company’s affairs for the purpose of benefiting a director or other person with an interest in the company, or a relative of such a person.  It may be a transaction knowingly entered into in breach of duty.  Many examples can the imagined.
  23. The point is that while the Act distinguishes between unfair preferences and uncommercial transactions, there is nothing in the Act that would justify a conclusion that the two categories could never overlap.
  24. Other categories of voidable transactions also overlap.
  25. In 2003, s 588FDA was inserted into the Act.  That section took the “reasonable person” element of the definition of an uncommercial transaction and coupled it with the element of the identity of the payee as a director or a director’s “close associate”.  It expressly recognised that the company’s counterparty in the transaction might be an existing creditor by providing that the time for testing reasonableness is to be the date of the payment and not the date on which the obligation was incurred that has been satisfied by the transaction.  In short, an unreasonable director-related transaction might be constituted by a payment to a director who is a creditor in respect of an obligation undertaken at a time before any relationback period began and at a time when the company was solvent.  If the payment also constitutes a preference, the fact that the six month period for unwinding simple preferences has passed will not matter.  Upon proof of the additional elements contained in s 588FDA(1) the payment will be voidable if made within four years of the relation-back day.[29]  These provisions were inserted by the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth).  They were directed at payments made to directors in circumstances in which it appeared that full knowledge of the financial affairs of the company showed that no reasonable person would have made the payment.  The rationale for extending the relationback period to four years lies in the connection that the payee has with the company and the position of advantage that it can be presumed that that person (or the person’s associate within the company) enjoyed.
  26. Section 588FF(4) also expressly recognises that an unreasonable director-related transaction might also be voidable upon multiple grounds.  It makes provision for orders that can be made by a court “if the transaction is a voidable transaction solely because it is an unreasonable director-related transaction”.  (emphasis added)
  27. Sections 588FE(4) and (6A) extend the relation-back period for certain voidable transactions to four years.  In addition to showing that the transaction was an insolvent transaction, that is to say, an unfair preference or an uncommercial transaction entered into when the company was insolvent or which rendered it insolvent, the liquidator must prove that the payee was a “related person” or that the transaction was an “unreasonable director-related transaction”.
  28. The presence in the Act of this kind of overlap of causes of action is not at all surprising.  Even in this appeal, the liquidator originally sued to recover the payments upon more than one ground.  Apart from the specific statutory cause of action relied upon now, the liquidator also sought to recover the money from the same payee, Mr Featherstone, upon the basis that the payments had been made in breach of his duties as a director.  That cause of action was not pursued for reasons that are presently immaterial.
  29. There is no reason, in my opinion, why an uncommercial transaction, being a payment made to a director when the company is known to be insolvent and is, therefore, one that no person would reasonably permit a company make, cannot also be one that confers a preference upon a creditor.
  30. I respectfully agree with Jackson J that these payments were uncommercial transactions.  No reasonable person would have made them knowing what Mr Featherstone knew.  The known circumstances included that the company had never lodged any returns with the Tax Office, that it had never remitted GST, that it had never paid income tax, that it was insolvent or would become insolvent, that the payments would leave the company with less than $4,000 in liquid funds and that the payee was the real owner of the company receiving the money as a trustee of a trust that could benefit himself.  Although the company would receive the benefit of the discharge of the debt, that discharge would be effected only by making a preferential payment.  The corresponding right to continue to occupy the premises for another year, as a benefit, had to be weighed against these other circumstances as well as the fact that that right might be of no practical value to an insolvent company.[30]  What is more, a reasonable person considering payment of all the rent would have regard to the existence of the indemnity granted by Mr Featherstone which protected the company against that liability.
  31. For all of these reasons, the payments were uncommercial transactions and also, as a result, insolvent transactions.
  32. Section 588FE(5) extends the recovery period to ten years if the liquidator can prove that the company’s purpose in entering into the transaction was the purpose of “defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up”.
  33. As I have already said, the Harmer Report recommended against the use of the term “fraud” and the 1992 Amendments adopted this recommendation.  Many cases, now no longer relevant, had considered the difficulties of proof of fraudulent intent.  Thus, for example, in Grellman v PT Garuda Indonesia[31] Hill J observed that where there is consideration for a payment it is necessary to show that the disponee was privy to the fraud.  His Honour relied upon Re Barnes; Ex parte Stapleton[32] as authority for that proposition.  That was a case in which Gibbs J was concerned with whether the relevant transaction was a fraudulent sham or whether, alternatively, the bankrupt and the disponee had conspired to defraud creditors.[33]
  34. Reasoning of this kind is understandable when one bears in mind the connotations of the word “defraud”.  In Re Patrick and Lyon Ltd,[34] in a passage cited with approval by Dixon CJ in Hardie v Hanson,[35] Maugham J said:

“I will express the opinion that the words “defraud” and “fraudulent purpose,” where they appear in the section in question, are words which connote actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame.  No judge, I think, has ever been willing to define “fraud,” and I am attempting no definition.  I am merely stating what, in my opinion, must be one of the elements of the word as used in this section.”

  1. In Hardie v Hanson, the controller of a company had continued to trade although he knew that the company was unable to pay its debts.  Dixon CJ declined to conclude from that fact alone that the appellant had actually been dishonest.  That the appellant caused the company to continue to trade and to incur liabilities without any reasonable prospect of being able to meet them might prove that he had committed an offence of insolvent trading but that alone was insufficient to prove an intention to defraud creditors.  It would be otherwise, his Honour said, if the purpose of the appellant had been to relieve himself of liabilities or to recoup his own position at the expense of his creditors.[36]  While deceit is not an element in the concept of “defrauding” in the insolvency context, dishonesty is.[37]
  2. Of course, that the debtor made the payment without being conscious of his own dishonesty may be beside the point.  As Lord Hatherley LC said in Freeman v Pope:[38]

“If we had to decide the question of actual intention, probably we might conclude that the settlor, when he made the settlement, was not thinking about his creditors at all, but was only thinking of the lady whom he wished to benefit; and that his whole mind being given up to considerations of generosity and kindness towards her, he forgot that his creditors had higher claims upon him, and he provided for her without providing for them.  It makes no difference that Messrs. Gurney, the bankers, seem to have been willing to forego the immediate payment of their debt; the question is, whether they could not within a month or less after the execution of the settlement, if they had been so minded, have called in the debt and overturned the settlement?  Beyond all doubt they could, on the ground that it did not leave sufficient property to pay their debt; and this being so, we are not to speculate about what was actually passing in his mind.”

  1. The relevance of this history is that the traditional overriding criterion of actual or implied fraud and its associated element of dishonesty was jettisoned by the 1992 legislation in favour of objective criteria.  This has also extended to an abandonment of undervalue as the signal marker of fraud.  It is now merely one of a general class of factors that must be considered when applying the test of the hypothetical conduct of the reasonable person.  That test requires the application of a standard of conduct that has long been familiar to common lawyers.  The factors that can be relevant to the application of that standard will vary according to the context in which the standard is to be applied.  One thing is clear.  In the context of the recovery of money or property by the liquidator of a company, it cannot sensibly be argued that the effect of a payment or disposition as a preference of one creditor over others is irrelevant; a fortiori, if the giving of a preference was intentional.
  2. In the absence of direct evidence of intention, such an intention can be inferred from the nature of the transaction and the circumstances surrounding it including the knowledge of the parties.
  3. As Chesterman J demonstrated in R v Reid[39] an intention to secure a result is not the same thing as knowing that that result will be the probable consequence of an intended act.  However, it is uncontroversial that knowledge of circumstances that render an outcome probable or certain may nevertheless serve to prove an intention in the actor to achieve that result.
  4. In Stewart & Walker v White[40] Griffith CJ said:

“… I think, that the words “with a view of giving” in the Queensland section must be read as equivalent to “with an intention to give”.  In this regard I accept the reasoning of the learned Judges of the Supreme Court of New Zealand in the case of Official Assignee of Kinross v Robjohns.  I think that when a debtor, knowing that he cannot pay all his creditors in full, deliberately pays one of them, he intends the necessary consequences of his action, i.e. he intends to give him a preference.  And I think that under such circumstances he makes the payment with a view of giving the creditor a preference within the meaning of sec. 107.”

  1. It is necessary, therefore, to consider the circumstances of this case insofar as they may bear upon the standard of the reasonable person.
  2. Mr Featherstone had been in business for about 10 years before these events and asserted that he had a practical and businessperson’s knowledge of how tax liability could be incurred.  He himself had not submitted any tax returns between 2001 and 2008.  He caused his employee, Ms Marks, who was then 19 years old, to appear on the public record, falsely, as the person who solely owned and controlled Ashala although he was always its real owner and its controller.  The company traded by way of the provision of services so that it accumulated almost $500,000 over two years.  It paid no Goods and Services Tax in respect of the fees it received for its services.  It paid no income tax and did not even acknowledge its existence to the tax authorities by lodging papers that the law required it to lodge.  At the very least, Mr Featherstone knew that the company may have a tax liability; indeed, in my view, Mr Featherstone knew that the company had a not insubstantial tax liability.  The company was liable to pay rent to Mr Featherstone but was indemnified by him against that liability.
  3. In these circumstances, the company was able to accumulate almost half a million dollars in its bank account.  After two years, Mr Featherstone caused the company to pay to him all but a few thousand dollars of its money by way of rent despite the indemnity he had given.  But he did not receive the money into his own hands.  Instead, he caused the money to be paid directly to a third party, the vendor of an apartment, and then disguised his interest in the resulting acquisition by causing the title in the apartment to be registered in Ms Marks’s name.  He then let the company die leaving it liable to pay the Commissioner of Taxation a substantial sum of tax and started another company with the same, or a similar name, which continued the same business, rising phoenix-like from the ashes of its predecessor.  When it became apparent that the company was insolvent and that it owed the Commissioner of Taxation a substantial sum of money Mr Featherstone made no move to honour the indemnity he had given but instead, raised a number of specious defences.
  4. The circumstances also include that Mr Featherstone defended the liquidators claim by telling lies on oath.  As Jackson J found, he lied about tax credits setting off any GST liability.  He lied about having settled the company’s liability with the Commissioner of Taxation.  He lied about his intention to support the company financially and he lied about his knowledge of its taxation liability.  He disguised his own involvement in the company and, until after his own tax audit was over, in December 2009, he disguised his ownership of the apartment.  Those lies were told to deny the only other rational or possible explanation for his doings, namely that he took the money in the way that he did in order to defeat the interests of the company’s other creditor.
  5. There were other relevant factors.  Mr Featherstone continued to maintain falsely at trial that the company was controlled by Ms Marks and not by him.  He never explained why he arranged his affairs so that his role as owner and principal of the company and owner of the apartment should have been hidden from public view.  One inference is that these arrangements were made in order to hide his own responsibility for the matters that are now the subject of these proceedings.  Mr Featherstone proffered no other explanation.
  6. It is more common in criminal cases than in commercial cases to consider the significance of lies in circumstantial cases.  In the leading authority on the subject, Edwards v The Queen,[41] Deane, Dawson and Gaudron JJ said:

“Ordinarily, the telling of a lie will merely affect the credit of the witness who tells it. A lie told by an accused may go further and, in limited circumstances, amount to conduct which is inconsistent with innocence, and amount therefore to an implied admission of guilt. In this way the telling of a lie may constitute evidence. When it does so, it may amount to corroboration provided that it is not necessary to rely upon the evidence to be corroborated to establish the lie. At one time it was thought that only a lie told out of court could amount to an implied admission, but the distinction is not logically supportable and is no longer drawn. When the telling of a lie by an accused amounts to an implied admission, the prosecution may rely upon it as independent evidence to “convert what would otherwise have been insufficient into sufficient evidence of guilt” or as corroborative evidence.

But not every lie told by an accused provides evidence probative of guilt. It is only if the accused is telling a lie because he perceives that the truth is inconsistent with his innocence that the telling of the lie may constitute evidence against him. In other words, in telling the lie the accused must be acting as if he were guilty. It must be a lie which an innocent person would not tell. That is why the lie must be deliberate. Telling an untruth inadvertently cannot be indicative of guilt. And the lie must relate to a material issue because the telling of it must be explicable only on the basis that the truth would implicate the accused in the offence with which he is charged. It must be for that reason that he tells the lie. To say that the lie must spring from a realization or consciousness of guilt is really another way of saying the same thing. It is to say that the accused must be lying because he is conscious that “if he tells the truth, the truth will convict him”.”[42]

  1. When a witness is a person who knows the truth about a material matter, a decision not to give evidence can make an available inference stronger.[43]  But when a witness who knows the truth about a matter gives evidence and chooses to hide the truth behind lies, there may be an even stronger reinforcement to a competing inference.[44]  These are principles that are not limited to proof of guilt in criminal cases.  They are equally applicable, subject to any necessary modification by reason of the different standard of proof, to civil cases.
  2. In this case the lies that Mr Featherstone told related to material issues.  The lies were explicable only on the basis that the truth would have exposed him to a liability.  His lies therefore reinforced strongly the inference that his purpose had been to defeat creditors of the company.
  3. His other purpose was, of course, to buy an apartment for himself (by means of a trust interest that would hide his own interest in the apartment from public scrutiny) for as long as he wished.  However, this purpose, to benefit himself by being able to use the apartment in this way as his own, in fact only reinforces the inference of intent to defeat the interest of others.[45]
  4. In my opinion a reasonable person, knowing of the company’s failure to comply with its taxation obligations, would not have paid the company’s money to Mr Featherstone without first assessing its true financial position.  Upon doing so such a person would have learned that the proposed payment would effect a preference to Mr Featherstone leaving the company insolvent, with only a few thousand dollars and a large liability to the Commissioner of Taxation.  A reasonable person would not have participated in Mr Featherstone’s scheme of deception concerning his interest and responsibility by making the payments.
  5. For all of these reasons, as well as the reasons given by Jackson J, I respectfully agree with his Honour’s conclusions on this point.
  6. It remains necessary to dispose of the appellant’s remaining ten grounds of appeal.
  7. By grounds 1 and 5 of his “Further Further Amended Notice of Appeal” the appellant contends that these proceedings could not be commenced without the liquidator’s first obtaining leave under rule 72 of the Uniform Civil Procedure Rules and that this proceeding was automatically stayed by s 58(3)(b) of the Bankruptcy Act 1966.
  8. No leave was sought under rule 72.  However, that failure was merely an irregularity and rule 371 has the effect that the proceeding is not a nullity.  The appellant does not contend that he, or anyone, has suffered a prejudice by this failure and I would reject this ground.
  9. Section 58(3)(b) of the Bankruptcy Act applies only to proceedings to recover a provable debt.  This is not such a proceeding for the money was paid to Mr Featherstone as a trustee of a trust and the property sought is held by him as trustee of a trust.  I would reject this ground.
  10. By ground 6 the appellant contends that Jackson J erred in admitting evidence about Ashala India Pty Ltd and about Ashala Pty Ltd.  Evidence about these companies was relevant not only as part of the context and narrative of events and as going to the appellant’s business experience but in addition, as appears from my reasons, their existence bore upon the proper inference to be drawn.  I would reject that ground also.
  11. By ground 8 the appellant complains that Jackson J erred in deciding that the rent payable was uncommercial.  His Honour made no such finding.  In any case, whether or not the rent was uncommercial was immaterial to any of the conclusions which his Honour reached.  I would reject this ground.
  12. By ground 11 the appellant contends that Jackson J was wrong in finding that the appellant had negligently formed the view that there would be no taxation liability of substance.  Jackson J made no such finding and this argument must be rejected.
  13. By ground 13 the appellant says that Jackson J erred in finding that the company failed to keep adequate records.  The evidence of the inadequacy of the company’s books was uncontradicted.  There is nothing in this ground.
  14. By ground 21 the appellant contends that Jackson J should have granted a charge in his favour to the extent of rent that was payable to him.  No coherent reason has been given to support this proposition which would result in the appellant being given an unfair preference.  I reject it.
  15. By ground 22 the appellant contends that Jackson J should have ordered the respondents to pay his costs.  This cannot be sustained having regard to the appellant’s failure at trial and on appeal.
  16. By ground 23 the appellant says that the conduct of the respondent liquidator has been an abuse of process.  This is obviously a baseless ground and must be rejected.
  17. As to ground 9, the proposition that Mr Featherstone received cheques for the money for value leads nowhere.  The existence of past consideration for the payments was not in issue and was merely a factor in determining whether the payments were uncommercial transactions.  I reject this argument.
  18. Finally, the appellant has applied to tender fresh evidence.  That evidence comprised evidence that he himself would give and evidence that would be given by Ms Marks.  As to his own evidence, Mr Featherstone would wish to lead evidence to show that, in reaching a settlement with the Australian Taxation Office, he had also settled the company’s liability.  The problem is that this was an issue dealt with by Mr Featherstone in his evidence at the trial.  In his affidavit, which he seeks to tender, the only new point is that he now states the amounts that he paid by way of personal income tax.  That is new evidence but it was available at trial and there is no possible basis upon which it could now be admitted.  It is also irrelevant.  As to the evidence of Ms Marks, it is also said to be relevant to the same issue.  She would say that an officer from the Taxation Office told her that if she paid “your tax bill” then that officer, and inferentially the Office, would have no concerns about her starting another company.  She would say that she received a letter, exhibited to her proposed affidavit, in which the Australian Taxation Office told her that it had completed its audit of her affairs and would be taking no further action.  All of this evidence could have been called at the trial and none of it is relevant in proving that the company did not owe a tax debt to the Commissioner.
  19. The application to adduce further evidence should be refused.
  20. I would dismiss the appeal with costs.
  21. MORRISON JA:  I have had the considerable advantage of reading the draft reasons of the President and McMurdo JA.  I agree with the President that the appeal should be dismissed.  In light of the differing opinions, I intend to give some brief reasons for that conclusion.
  22. The factual background to the transactions in question are set out in the reasons of both the President and McMurdo JA, and I do not need to repeat them.  Each of their Honours upheld the findings as to insolvency and rejected all grounds apart from the main ground under consideration, namely whether the transactions were uncommercial transactions within s 588FB of the Corporations Act 2001 (Cth).  I agree that those other grounds should be rejected, for the reasons given by their Honours.
  23. I can therefore turn directly to the main ground.
  24. Section 588FB provides:

“(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to: 

  1. the benefits (if any) to the company of entering into the transaction; and
  1. the detriment to the company of entering into the transaction; and 
  1. the respective benefits to other parties to the transaction of entering into it; and 
  1. any other relevant matter. 
  1. A transaction may be an uncommercial transaction of a company because of subsection (1): 
  1. whether or not a creditor of the company is a party to the transaction; and 
  1. even if the transaction  is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”
  1. Section 588FB is part of a suite of provisions in the Corporations Act 2001 (Cth) all dealing with related matters.  Thus: s 588FA deals with unfair preferences, s 588FB deals with uncommercial transactions, and s 588FC with insolvent transactions.  Then s 588FE provides that those transactions can be declared voidable at the suit of a liquidator of the company and the court can make orders that benefit the company’s creditors.  The evident purpose behind the provisions is to ensure that unsecured creditors are not prejudiced by the disposition of assets of a company, or the assumption of liabilities by the company, in the period shortly before a winding up of the company.[46]
  2. The factors enumerated under s 588FB(1) make it necessary that the nature and effect of the transaction be considered, all within the prism of a reasonable person “in the company’s circumstances”.
  3. The requirement that the relevant inquiry be circumscribed by “the company’s circumstances” means that regard must be had to the state of knowledge of the company at the time of the transaction.  That includes the state of knowledge of the directing mind of the company.  As was said in Tosich Constructions Pty Ltd v Tosich:[47]

“What the Court must do is to consider each of the matters to which reference is made in section 588FB(1) and, having regard to them, reach a conclusion as to whether a reasonable person in the company’s circumstances would not have entered into the transaction.  The company’s circumstances must include the state of its knowledge, that is, of the knowledge of those who were relevantly its directing mind.  Only if the Court can conclude that a reasonable person in the company’s circumstances would not have entered into the transaction does the section make that transaction uncommercial.”

  1. The test is what might be expected of a reasonable person.  The test is not whether the transaction is so unreasonable that no reasonable person would enter into it, but rather whether a reasonable person would normally enter into such a transaction.[48]
  2. Authority suggests that there are two primary purposes served by s 588FB.  The first is to prevent gifts and bargains which do not accord with normal commercial practice.[49]  The second is to prevent the assets of the company being depleted through transactions at an undervalue.[50]  However, there has been no limit placed upon the transactions that can be caught as uncommercial.[51]
  3. Further, the required consideration is whether a reasonable person in the company’s circumstances would not have entered into the transaction.  When considering the company’s circumstances it cannot, in my view, be supposed that a company will be given wrong advice or that a directing mind would ignore proper advice.  A reasonable person would take and accept appropriate advice about the transactions.  The fact that the parties to the impugned transaction act at the direction of one mind, and do not exercise independent judgment, is a relevant matter under s 588FB.[52]
  4. In Mulherin v Bank of Western Australia; McCann v Bank of Western Australia[53] it was held that three features were relevant to the conclusion there that a transaction was uncommercial.  First, that in the result, the company derived little or no benefit from the transactions but did suffer detriment.  Secondly, it was relevant that a director appeared to have been the beneficiary of the arrangement and that “on the face of things” he had procured such benefit in breach of his director’s duties.  Lastly, that a reasonable person in the company’s circumstances would have been aware of legal risks that might arise as a result of the director gaining a benefit from the transaction and the potential that the transaction would be found to be unlawful.
  5. In considering whether a transaction is for the benefit, or to the detriment, of a company, a relevant factor is the interests of the unsecured creditors.[54]  A transaction which has the effect of reducing the company’s debts may nonetheless be an uncommercial transaction if it adversely affects the interests of other creditors, as Young JA said in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd:[55]

“The primary judge held at [222] that Buzzle (as distinct from its creditors) suffered no detriment from the relevant transaction. 

With respect this cannot be correct.  It is true, as the primary judge stated, that in making the payments Buzzle reduced its debts to the Resellers.  However, that was not the whole picture.  Buzzle had limited resources and to deprive itself of liquidity before it legally had to do so, where it had other pressing creditors and a need to expend monies on its computer accounting system amounted to a detriment.

“Detriment” in the section is not limited to a detriment that can necessarily be measured in money terms.  The word refers to commercial detriment.”

  1. The court will look at “the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction”.[56]
  2. With those principles in mind one can turn to the present case.
  3. It is the need to have regard to the state of knowledge of the company, including the state of knowledge of Mr Featherstone, that is the key to resolution of the issue here.
  4. It is true to say that the lease of 1 July 2005, and the agreement of 4 August 2007, were not, themselves, impugned transactions.  However, in my view, that does not lead to the conclusion that the transactions entered into in 2007 to give effect to them were not uncommercial transactions for the purposes of s 588FB.
  5. Mr Featherstone knew the following about the company, and the impact of the transactions, as at the date of the two transactions:
  1. it had received considerable income from its business since incorporation in 2005 and therefore had a liability to income tax;
  2. it had never lodged a tax return;
  3. it had never paid tax;
  4. it had never lodged a BAS return or remitted GST;
  5. those failures would render the company liable to penalties under the tax laws;
  6. the payment of $460,000 would render the company insolvent;
  7. whilst the unit was to be his residence it was, in fact, to be a trust asset; therefore he was receiving the money (paid at his direction to the vendor) as trustee of a trust that would benefit him;
  8. it could not rely upon his indemnity, which had been given to the company in respect of its payment of rent, because he was not going to honour it; and
  9. he would receive a total of $460,000, being 100 per cent of the agreed rent debt, whereas the relevant creditor for the tax liability would receive effectively nothing; certainly the tax creditor would not receive anything like 92.34 cents in the dollar, which was the return to him out of the $498,150 of the total rent for the three years.
  1. Because he was the directing mind of the company the company also knew all those matters at the time of the transactions.  The company acted as directed by Mr Featherstone.
  2. There is no doubt that the parties to these transactions did not exercise independent judgment.  There was no suggestion of the company receiving advice, let alone independent advice.
  3. In my view, a reasonable person in the company’s circumstances would not have made the payments in question, knowing that it would render the company insolvent and cause a payment to one creditor (Mr Featherstone) of 100 per cent of his debt, when the tax creditor[57] would receive nothing like that, if anything.  A reasonable person, even knowing that the 4 August 2007 agreement was not impugned, would have sought to resist payment of the $460,000, called upon the indemnity, and if necessary put the company under external administration.  The transactions had the detrimental effect on the company of not only depleting almost all its cash reserves, but leaving it exposed to the inability to meet its income tax and GST liabilities, including any penalties that might be imposed.  The risk of such penalties was high, given that Mr Featherstone ran the company’s affairs with complete disregard of its lawful obligations.
  4. It assists to see the sequence of events surrounding the two transactions:
  1. as noted above, the validity and enforceability of the lease and the letter of 1 July 2005 were not challenged at the trial; therefore a consideration of what occurred proceeds on the basis that until there was written request for the rent, in the form of an invoice, no rent was owing under the lease;
  2. Mr Featherstone decided in June/July 2007 to “use the money in [the company’s] bank account to purchase the property”;
  3. since he was then the directing mind of the company at the time, it can be inferred that the company agreed, at the same time, to permit its bank account to be depleted for that purpose;
  4. as at 1 July 2007 the rent due under the lease was $498,150,[58] but it was not then owing; it would only become due and owing if a written request was made in terms of the 1 July 2005 letter, that is to say “in writing … in the form of an invoice”; there was no evidence of any such written notice or invoice until 4 August 2007;
  5. therefore, at the time the company agreed to pay out $460,000 to benefit Mr Featherstone he was not then a creditor with a debt payable to him;
  6. in that state of affairs, on 1 August 2007 the company paid $23,000 to the vendor of the unit, to  benefit Mr Featherstone;  that was the first step in implementing the agreement to deplete its funds to benefit its director;
  7. on 4 August Mr Featherstone and the company (by its then director on the record, Mr Marshall)[59] agreed that Mr Featherstone would accept $460,000 “as full and final payment” for rent owing; that was recorded in the agreement of 4 August which was not impugned in the trial;
  8. given the sequence of steps above the agreement of 4 August was the second step in implementing the agreement by the company to deplete its cash resources to benefit its director; and
  9. on 16 August the balance of the $460,000 was paid out, that being the third step and finalisation of the agreement to benefit Mr Featherstone.
  1. As in Mulherin, here the director appears to have been the beneficiary of the arrangement and, on the face of things, he procured that benefit in breach of his director’s duties.[60]  The yardstick proposed by Professor Baxt is:[61]

“During times of difficulty and conflict, the yardstick by which a director may safely judge their own actions is this:

Taking account of all the circumstances, is what I propose to do “in my honest belief” in the best interests of all the shareholders (present and future) of the particular company of which I am a director?

In the case of financial difficulty, ‘creditors’ could and perhaps should be substituted for ‘shareholders’.  If the answer to the question is ‘yes’, then the director need not fear an action for breach of duty under either the statute or common law.”

  1. There is no doubt that when a company is in a position of financial distress or insolvency the directors owe fiduciary duties to the creditors, to act bona fide in the interests of the company and for proper purposes.[62]  Given that the transactions made the company insolvent and favoured one creditor, the director himself, to the disadvantage of others, the question posed in the third paragraph could not have been answered affirmatively.  And that leaves to one side whether this was another phoenix operation for the Ashala companies.
  2. A reasonable person in the company’s circumstances would have been aware of legal risks that might arise as a result of the director gaining a benefit from the transaction and the potential that the transaction would be found to be unlawful.
  3. In my view, the fact that the 4 August 2007 agreement was not impugned is not determinative of the outcome.  Mr Featherstone agreed to purchase the unit on 1 August 2007.  The first transaction was the payment of $23,000 (as a deposit) on 1 August 2007.  The rental then due (but not payable) under the lease was $498,150, it having become due on 1 July 2007: clause 3 of the lease.  At that time there was no agreement by Mr Featherstone to accept less than the full amount of the rental due under the lease; that only came on 4 August.  However, since it is plain that the source of the funds for the unit was always going to be the company’s bank account,[63] the only inference is that Mr Featherstone intended, and the company had agreed, ahead of the 4 August agreement that the company would pay the purchase price out of its bank account.  Otherwise it would not have paid the deposit.
  4. Further, as at 4 August 2017, when Mr Featherstone caused the company to agree to pay a total of $460,000,[64] the company did not have that sum in its accounts.  The bank statements reveal that it did not have that total until 9 August, and then only exceeding it by $1,286.41.
  5. The payment of the $23,000 on 1 August and the balance on 16 August, was the implementation of the agreement between Mr Featherstone and the company that it would deplete its cash resources almost entirely in order to enable Mr Featherstone to buy a unit, knowing that it would thereby render itself insolvent.
  6. I do not consider that the two transactions, in the company’s circumstances, can be explained away as being “perfectly explicable and … readily and easily … explained by normal commercial practice”.[65]
  7. I agree with what the President has said as to the inference of Mr Featherstone’s intent when he caused the company to make the payments.
  8. I agree that the appeal should be dismissed.  I would also order that the appellant pay the respondents’ costs of the appeal.
  9. McMURDO JA:  In August 2007, the respondent company (“the company”) was carrying on business as a model agency, as it had done from premises in the Brisbane CBD from 2005.  It occupied those premises as the tenant of the appellant, Mr Featherstone.
  10. The company had built up a large amount of cash, holding in its bank accounts in excess of $400,000.00.  It then made two payments, one for $23,000.00 on 1 August 2007 and the second for $435,010.00 a few weeks later.  The funds paid were used in the purchase of an apartment, in a building in central Brisbane called Quay West.  The purchase price was $460,000.00.  On the completion of that purchase, the apartment was transferred by the vendor to a Ms Kristy Marks, as trustee.  But from the time of its purchase it was the home of Mr Featherstone, and in April 2011, he became its registered proprietor, holding it free of any encumbrance.
  11. Subsequently the company ceased to carry on its business and it was de-registered in 2008, before being re-registered and wound up as an insolvent company in 2012.  The second respondent is its liquidator.  At no time did the company pay any GST or income tax.  The liquidator lodged Business Activity Statements on the basis of his reconstruction of its affairs.  The Australian Tax Office (ATO) is the company’s major creditor.
  12. In the judgment under appeal,[66] the liquidator obtained relief under s 588FF(1)(d) of the Corporations Act 2001 (Cth) (the CA), upon the basis that those two payments constituted a voidable transaction or transactions, because they were an “insolvent transaction” (as defined in s 588FC of the CA) to which the company was a party for a purpose of defeating, delaying, or interfering with the rights of some of its creditors on a winding up: s 588FE(5) of the CA.  The trial judge (Jackson J) found that they constituted an insolvent transaction upon the basis that they were an “uncommercial transaction” (as defined in s 588FB of the CA).  In his conclusion, these were payments which a reasonable person in the company’s circumstances would not have made.  The relief which was granted was that Mr Featherstone was ordered to transfer the apartment to the company and he became entitled to prove in the winding up.
  13. Mr Featherstone, who is unrepresented in this appeal although he was represented at the trial, advances many arguments for why those orders should be set aside.  He says that the judge erred in concluding that the payments were an uncommercial transaction or transactions, because a reasonable person might have made them having regard to all of the circumstances which he says then existed.  He argues that the judge erred, in several ways, in concluding that the company’s purpose in making the payments was to defeat, delay or interfere with the rights of creditors on a winding up.  He argues that the judge erred in finding that the company was insolvent at the time of the payments, or that it was made insolvent by them, so that for that reason also, they were not insolvent transactions as defined in s 588FC.  In that respect, he says that the judge failed to consider the financial support which, Mr Featherstone says, he had agreed to provide to the company.  To pursue that last argument, Mr Featherstone seeks to rely upon evidence which was not before the trial judge.
  14. Then there are further grounds of appeal, in which the judgment is challenged upon the basis of Mr Featherstone’s status as an undischarged bankrupt.  It is said that by the combined operation of s 37 of the Cheques Act 1986 (Cth) and s 82 of the Bankruptcy Act 1966 (Cth), Mr Featherstone was not susceptible to the liquidator’s claims.  A further argument is that the judgment should be set aside because the court’s leave was not sought, as it was required, by rule 72 of the Uniform Civil Procedure Rules 1999 (UCPR).  And it is argued that this was a claim in respect of a provable debt, which was effectively stayed by s 58(3) of the Bankruptcy Act.
  15. For the reasons that follow, I would allow the appeal.  I respectfully disagree with the trial judge’s analysis of two issues, namely whether the payments constituted an uncommercial transaction and whether they were made for a purpose of defeating, delaying or interfering with the rights of some of its creditors on winding up.  I agree with the trial judge that the company was insolvent when the payments were made, or at least that it became insolvent by the making of them.  As I will explain, what I see as the proper outcome of this appeal follows from the way in which the liquidator defined and confined his claim.

Events before the payments in question

  1. From its incorporation in May 2005 until February 2007, Ms Marks was the company’s only director.  After then, its only director was a Mr McCabe until his replacement, on 6 July 2007, by a Mr Marshall, who remained in office until the company’s deregistration.
  2. Ms Marks was its only shareholder.  But Jackson J found that she held all of the shares on trust for Mr Featherstone, at least from 28 May 2005 when she and he signed a document recording the existence of that trust, including an express agreement by her to transfer the shares to him at his request.  Jackson J rejected Mr Featherstone’s evidence that he had agreed with Ms Marks that she was the true owner of the business: there were no documents supporting that claim and it was inconsistent with the document to which I have just referred.
  3. The company conducted its business from premises which I will call the Albert Street property.  This was a strata unit of which the registered owner was Mr Featherstone.  He had purchased it in 2002, as trustee for the so called Darrell Featherstone Family Trust.
  4. In October 2003, Mr Featherstone had incorporated another company which had also been called Ashala Model Agency Pty Ltd.  He was its sole director and shareholder.  Ms Marks was an employee.  It conducted a model agency business from the Albert Street property.  It ceased to do so and changed its name in May 2005, when the (subject) company was incorporated.
  5. A document entitled “lease agreement,” between Mr Featherstone and the company, was signed by Mr Featherstone and Ms Marks (for the company) and dated 1 July 2005.  It was there agreed that the Albert Street property would be leased by him to the company for a term of three years from 1 July 2005, at an annual rent of $166,050.00.  The rent was to be paid at the commencement of each year of the term or as otherwise agreed.  But there was a letter signed by Mr Featherstone and addressed to Ms Marks at the company, also dated 1 July 2005, in which he wrote that no rental would be payable “until such time that I request it in writing … in the form of an invoice …”.
  6. Jackson J queried the amount of that rent, which he thought was high when compared with the price which Mr Featherstone had paid for the Albert Street property ($423,500.00) and the cost of fitting it out for the model agency business ($80,495.00).  Jackson J did not accept this was a market rental, but noted that the existence and validity of the lease was not challenged and nor was the agreement that the rent should not be payable until there was an invoice for it.[67]
  7. There was yet a further document signed by Mr Featherstone and by Ms Marks for the company and dated 1 July 2005.  It was a deed by which Mr Featherstone agreed to “indemnify and keep indemnified [the company] for all costs, claims and expenses that [the company] may be subject to”.  Jackson J accepted that this deed was executed on 1 July 2005.  As I will discuss, Mr Featherstone says that it is critical because it fortifies his argument, which the judge did not accept, that he was always prepared to support the company and that it was at all times solvent.  Jackson J saw its only relevance as being that it was another piece of evidence that Ms Marks was not the true owner of the business.
  8. When the company commenced its business in May 2005, it opened a bank account which the judge described as the first ANZ account.  By May 2006, that had a credit balance of $176,586.91, representing the company’s accumulated trading surplus to that point.  The company then transferred $170,127.20 to what the judge described as the second ANZ account, and from July or August 2006, the company’s income was deposited only to this account.  By August 2007, its credit balance was more than $400,000.00, as I have said.
  9. Although the company had accumulated that cash, it had not paid any rent.  Nor had it paid any income tax or GST.  Indeed, it had not lodged a business activity statement, instalment activity statement or income tax return.  Jackson J found that Mr Featherstone was well aware of the company’s receipts, payments and withdrawals through the bank accounts and the fact that the company had paid nothing to the Australian Taxation Office.

August 2007

  1. According to Mr Featherstone’s evidence (which in this respect was accepted by the judge), he was looking to buy a residential property in June/July 2007 and he decided that he “would use the money in the [company’s] bank account to purchase the property and call on the rental liability to me to the extent that I needed to.”[68]
  2. On 1 July 2007, Mr Featherstone’s solicitor had settled a nominal sum on Ms Marks, as trustee, to constitute the KJM Family Trust, a discretionary trust in which the specified beneficiaries were Mr Featherstone and members of his family.  Mr Featherstone then contracted to purchase the Quay West apartment for a price of $460,000.00.  A copy of the contract was not in evidence, but the judge found that the contract was made on or before 1 August 2007 when Mr Featherstone paid $23,000.00 as a five percent deposit.[69]  This was the first of the payments in question.
  3. On 4 August 2007, a document was signed by Mr Featherstone, Ms Marks and Mr Marshall (by then the company’s director), agreeing to vary the amount and time for payment of the rent on the Albert Street property.  The document provided as follows:

“It is agreed that Darrell Morgan Featherstone will accept $460,000.00 as full and final payment from Ashala Model Agency Pty Ltd for all rent owing from 1/7/2005 to 30/6/2008 for [the Albert Street property].  Payment is to be made to [the vendor of the Quay West apartment] on behalf of Darrell Featherstone as per directions to come.”

As the judge noted, there was no challenge to the validity of that agreement.[70]

  1. On 16 August 2007, an amount of $435,010.00 was paid from the second ANZ account, which was used to complete the purchase on 21 August 2007.
  2. The apartment was conveyed by the vendor to Ms Marks as trustee for the KJM Trust.  Mr Featherstone lived there from the outset and he was still living there at the time of the trial.[71]  That supported his evidence that the sole purpose of the purchase of the Quay West apartment, and of the payments, was to provide him with a place in which to live in the Brisbane CBD.[72]  There was no suggestion that he occupied as a tenant from Ms Marks as the trustee.  Rather, his evidence was consistent with the apartment being effectively his property.

The financial position of the company in August 2007

  1. As Jackson J noted, proper financial records were not kept and made available to the liquidator, so that it is not possible to reconstruct the financial position of the company at this point with any precision.[73]
  2. It appears that the company’s only asset was the money remaining in the two ANZ accounts, which totalled (following the second payment) $3,771.15 on 16 August 2007.
  3. The agreement made on 4 August 2007 had reduced the company’s liability for rent to $460,000.00.  That liability had been all but discharged by the two payments, by which the company had secured its occupation of the Albert Street property until 30 June 2008.
  4. However, as was common ground at the trial, the company’s financial position had to be assessed with regard to its liabilities, or potential liabilities, to the ATO.  There was evidence from the liquidator by which the company’s taxable income was reconstructed for the financial years ending June 2005 to June 2008.  By that evidence, it was suggested that the company’s taxable income for the 2006 year was $260,439.03, and for the following year, $285,469.51.  On those incomes, the company would have been liable to be assessed for tax of $77,588.00 for the 2006 year and $85,640.00 for the following year.  As Jackson J noted, those reconstructed profit and loss statements were prepared on a cash accounting basis, rather than an accruals basis.  Mr Featherstone argues that a more realistic representation of the company’s position would have been reached by bringing to account, as an expense in those years, the agreed rental of $166,050.00 per year.
  5. Even so, there would have been a substantial taxable income: approximately $89,000.00 in the 2006 year and $120,000.00 in the 2007 year.
  6. Further, the company must have accrued a substantial liability for GST.  There is no reason to suppose that any of its income had not attracted GST, but the company had lodged no business activity statement.
  7. Jackson J analysed a balance sheet for the company, reconstructed by the liquidator, as at August 2007.  It showed the assets of $3,730.46 (the money then in the bank accounts) and liabilities of $220,828.95, which included “rent payable” of $40,140.00.  As Jackson J said, that amount was excessive because all that remained for rent, after the agreement of 4 August 2007 and the payments, was an amount of $1,990.00.  He also questioned the inclusion of an item of $38,847.48 in that balance sheet.  The remaining item in the balance sheet was an estimate of the company’s liabilities to the ATO, in an amount of $141,841.47.  That included a component of $60,960.00 for unpaid GST.  Allowing for a reduction in the liabilities to the ATO, by using the accrued rent as an expense to reduce the taxable income for the 2006 and 2007 years, Jackson J still arrived at an estimated debt to the ATO of $88,733.80 and a deficit of liabilities over assets of $86,993.34.
  8. On the basis of that analysis, Jackson J concluded that the company was then insolvent.  He reasoned as follows:

[91] The overall conclusion is that on 16 and 21 August 2007 the first plaintiff was insolvent.  It was insolvent because no provision had been made for its tax liabilities and its current liabilities exceeded it current assets by $88,993.34.  Even if before the 4 August Agreement the first plaintiff was not insolvent, the 4 August Agreement which made $460,000 due for the rent made it insolvent.  The stark nature of the current asset deficiency and cash flow shortage was emphasised by the second of the challenged payments in the sum of $435,010.  Even if the 4 August Agreement did not make the first plaintiff insolvent, that payment did so.”

Insolvency

  1. Section 588FC of the CA provides as follows:

“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:

  1. any of the following happens at a time when the company is insolvent:
    1. the transaction is entered into; or
    2. an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
  2. the company becomes insolvent because of, or because of matters including:
    1. entering into the transaction; or
    2. a person doing an act, or making an omission, for the purpose of giving effect to the transaction.”
  1. It was therefore necessary for the liquidator to prove that the payments were made at a time when the company was insolvent or that because of those payments, the company became insolvent.  By s 95A(2) of the CA, a person who is not solvent is insolvent.  Section 95A(1) provides that 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.”
  2. Upon a balance sheet analysis, the company was insolvent in that, upon any view of its tax liabilities, they well exceeded its only asset, which was a small amount of cash.  However the question of a company’s solvency is not to be answered only by reference to the company’s balance sheet, although the balance sheet is relevant.[74]
  3. Mr Featherstone argues that the question of the company’s solvency at this time must be considered by reference to the availability of his financial support.  If it was the case that the company did have a reliable source of finance in Mr Featherstone, for any amount which could reasonably be anticipated as necessary for the satisfaction of its liabilities for tax and GST, then it was solvent.  In Chan & Ors v First Strategic Development Corporation Ltd (in liq) & Anor, Morrison JA, citing decisions of this Court[75] and elsewhere,[76] said that:[77]

“[T]he court has regard to “commercial reality” when assessing whether, as at the relevant date, a company is able to pay its debts as and when they become payable.  The company’s position must be considered by reference, not only to its legal rights and obligations but also to the relative likelihood that it will have funds available to it, albeit from sources in respect of which there is no formalised agreement or understanding.  Those sources might include consideration of the prospect of loans from related corporations or directors.”

  1. Morrison JA then referred to the statement of Giles JA in Lewis v Doran[78] that the key concept is ability to pay the company’s debts as and when they become due.  He specifically agreed with my statement, as the primary judge in Chan, as follows:

“That emphasis on “ability” is important here.  The prospects of obtaining necessary funds from a party, which is not obliged to provide them, must be such as to give the company something more than a chance of paying its debts: the prospects must be sufficient to make the company able to do so.  That does not mean that the provision of the funds must be free of any uncertainty or contingency.  But there must be a sufficient likelihood for the company, and those directing it, to be able to rely upon the availability of those funds when incurring the relevant debts.”[79]

  1. The question then is whether the company had a sufficiently reliable source of funds from its true owner.  Mr Featherstone had agreed, by the deed dated 1 July 2005, to keep the company fully indemnified.  However, for as long as Mr Featherstone was the effective owner of the shares, there was no prospect that someone else, on behalf of the company, would demand his support.  The position was one, such as it was in Chan, where the company could not compel the provision of the financial support of its suggested benefactor.  Therefore, the resources of Mr Featherstone did not make the company able to pay its debts unless Mr Featherstone had decided that he would support the company.  Jackson J considered that question and found that Mr Featherstone had not done so.  That finding was based upon what Mr Featherstone did, and did not do, after the payments in question were made.
  2. Before going to the evidence in that respect, something more should be said of Mr Featherstone’s control of the company.  At the trial he maintained that in August 2007, the company belonged to Ms Marks and he had little involvement in its affairs.  That evidence was rejected by Jackson J for the following reasons.  It was inconsistent with the document recording that she held the shares on trust for him and it was not supported by any other document in evidence.  The three year lease by him to the company of the Albert Street property was at more than a market rent, indicating that it was not negotiated at arm’s length.  The agreement dated 1 July 2005, whereby no rent was to be payable until it was demanded, had no rational explanation if it was negotiated at arm’s length.  The same could be said of the deed of indemnity executed by Mr Featherstone.  In a public examination by the liquidator, Mr Featherstone said that the company had been incorporated “to get away from [his] ex-girlfriend.”  (Jackson J noted that that did not appear have been Ms Marks.)  The operating expenses of the company were funded by the use of Mr Featherstone’s personal credit cards, although he was reimbursed by the company.  Ms Marks was replaced by Mr McCabe as the sole director in February 2007, which was inconsistent with the notion that it was her business.  Jackson J did not accept Mr Featherstone’s evidence that this was done so that Ms Marks could attend to another business, under Mr Featherstone’s control.  In July 2007, Mr McCabe was replaced by Mr Marshall as the director, when Mr Marshall was an employee of one of Mr Featherstone’s other businesses.  The company took the name of its predecessor in the model agency business conducted from the Albert Street property and banked receipts from the previous company’s operations.  Mr Featherstone agreed that the previous company had belonged to him.
  3. There was no support for Mr Featherstone’s evidence that it was Ms Marks who owned and controlled the company and its business and there was abundant evidence demonstrating that he did so.  There was no error by the judge in so finding: indeed no other finding was open.
  4. The company was allowed by Mr Featherstone to be de-registered, still without filing any tax returns or BAS statements.  Mr Featherstone’s explanations for that were as follows.  The first was that the company belonged to Ms Marks.  The second was that he did not believe that there was any debt owing, or which could become owing, to the ATO.  No demand had been made of him by Ms Marks or the ATO in that respect.  He says that he turned his mind of the question of the company’s potential liability to the ATO, but formed the view that there would be no liability.  He pleaded that he then considered that any potential liability to the ATO would not be “significant” and that if it existed, he would be able to meet it.
  5. The judge noted that Mr Featherstone had not been assiduous in attending to his own tax affairs, having not lodged a personal income tax return for any of the eight years from 2001.  Mr Featherstone’s affidavit evidence was that in the respect of GST, he believed that nothing would be payable because there had been sufficient input credits upon purchases by the company.  Those purchases were not identified, let alone quantified.  And in his oral evidence, Mr Featherstone conceded that he would not have known what the GST liability of the company might have been.  At one stage in his oral evidence, he claimed a belief that GST was only payable by the company if it had been “charged” to the customer, an explanation which, unsurprisingly, was not accepted by the judge.
  6. Jackson J rejected each of those explanations for why he had concluded that there was no significant liability to the ATO.  He said these were fabricated reconstructions and lies which reflected badly on Mr Featherstone’s credibility.[80]
  7. Mr Featherstone gave oral evidence that his ability and willingness to support the company, even after the cessation of its business, was demonstrated by his dealings with and payments to the ATO in December 2009.  Jackson J rejected that evidence in this passage:

[104] The first defendant also indicated in oral evidence that he had agreed with the ATO to pay, and had paid, the amount of the first plaintiff’s liability to the ATO as part of his tax settlement with the ATO in December 2009, suggesting that this was evidence of his preparedness to support the first plaintiff pursuant to his indemnity.  I do not accept his statements that his settlement with the ATO included any amount for the liability of the first plaintiff as opposed to his personal tax position.”

  1. It is convenient at this point to deal with Mr Featherstone’s application to this Court to lead further evidence.  To consider this application, it is necessary to say something more about the evidence at the trial.  In his (trial) affidavit, Mr Featherstone referred to an audit conducted by the ATO in 2009.  He said that the ATO then audited his affairs and those of his “related companies … and trusts”, in which he included the company.[81]  He was told that the ATO was also looking at the tax liability of Mr Featherstone’s teenage daughter (who was a successful child model).  He dealt with a Miss Heilbronn from the ATO “throughout the audit process”, telling her that “whatever figure she came up with for the tax liabilities of all such entities (including my daughter), [he] would pay without question or hesitation.”[82]  He said that Ms Marks was also being audited and she told him that “she was concerned about her tax liability and exposure in relation to [the company].”  In response to that concern, he provided her with a letter signed by him and dated 22 November 2009, as follows:

“As per the indemnity you hold from the Featherstone Family Trust in relation to Ashala Model Agency Pty Ltd I confirm that I will immediately pay all and any amounts due and owing by you to the Australian Taxation Office in relation to Ashala Model Agency Pty Ltd.”

  1. Again in his affidavit at the trial, Mr Featherstone said that “after the ATO determined the amount of tax owing by all the above persons/entities, I caused such liability to be paid.  I cannot recall the exact amount I paid, but it was significant.”[83]  His affidavit exhibited a letter which he received from the ATO on 18 December 2009 which, relevantly, was as follows:

“We are writing to advise you of the outcome of our audit of Darrell Featherstone for the period 1 July 2008 to 30 June 2009.  We will not be taking any further action based on the information you have provided.

We also acknowledge receipt of your income tax returns for the 2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008 income years.”

  1. The letter clearly referred only to Mr Featherstone’s tax position.  It referred to no other entity, most particularly the company.  And it shows that the ATO’s audit related to the year ended 30 June 2009, which commenced after the company’s cessation of business and nearly a year after the payments which are the subject of this case.
  2. In cross-examination, Mr Featherstone said that the audit had extended to the affairs of the company.  He said that Ms Heilbronn had asked him “to work out what she [sic] believed I owed for the money coming out of that company.”[84]  He said that he “worked it out to about … $170,000.00 of tax”, which he immediately declared as his income for the 2006 and 2007 years and on which he then paid the required income tax.[85]  He claimed that during a meeting with Ms Heilbronn, he saw that she held copies of the bank statements of the company.[86]  He denied the suggestion that the audit had related only to his personal income and was unrelated to the company.
  3. The proposed new evidence is as follows.  First there is an affidavit by Mr Featherstone,[87] where he says that he was the subject of an audit by the ATO from August to December 2009 which extended to the subject of “income for the 2005/06 and 2006/07 financial years which came only from income that was recorded in the bank statements of [the company] as that was where all our income went …”  He says that “the ATO asked me to work out the GST and tax owing for [those] financial years.”  Effectively the same evidence was given by Mr Featherstone in cross-examination at the trial.
  4. In this new affidavit, Mr Featherstone says that the “amounts of tax declared and paid” for those two financial years, as “accepted by the ATO” were as follows:

“2005/06 Financial Year

Morgan Featherstone - $65 000 ($15 600 tax paid)

Kirsty Marks - $90 000 ($26 100 tax paid)

Darrell Featherstone - $90 000 ($26 100 tax paid)

Total tax paid for 2005/06 financial year = $67 800

2006/07 Financial Year

Morgan Featherstone - $75 000 (tax paid was $17,850)

Kirsty Marks - $85 000 (tax paid was $21 850)

Darrell Featherstone - $85 642 ($26 100-80 tax paid)

Total tax paid for 2005/06 financial year = $61 8006-80

Tax paid in total for Ashala for 2005/06 and 2006/07 years was $129 606-80

Amount the judgment claims is owing $88 733-80

Amount of tax I overpaid $40 873”

  1. In this affidavit, Mr Featherstone discusses, as he had in his evidence at the trial, his meetings with Ms Heilbronn, his letter of indemnity in favour of Ms Marks and his concern to pay the ATO anything which it claimed was owing.  Again he suggests the ATO’s representatives told him “that they would prefer the net income of the company to go into our personal tax returns rather than have [the company] re-registered.”
  2. The only part of this evidence which is new, in that it was not before the trial judge, is that which specifies the amounts said to have been paid at the completion of the 2009 audit.  That is evidence which could have been led at the trial.  Mr Featherstone’s explanation for not doing so is that he instructed his legal representatives that he had paid the ATO and that his instructions were “deliberately disobeyed without consultation and for no obvious reason with detriment [to] the obvious outcome.”
  3. The other new affidavit is by Ms Marks, who was not a witness at the trial.  She refers to the audit in 2009, in which, she says, she was asked by the ATO “to work out what we thought [the company] owed”, which caused Mr Featherstone and her to go to the bank accounts of the company “to work out was owing for tax and GST which we did and the figures were agreed with by the ATO.”  She says that as the company was de-registered at this time, the ATO agreed that “we would simply pay the money owing on our tax returns on a company officer/shareholder basis and the amount of tax we would pay would cover any tax liability for that period including GST.”  She says that “Darrell’s daughter … was included also as money had been paid to her through the bank accounts.”  Ms Marks exhibits copies of her tax returns as well as those of Mr Featherstone and his daughter, for the 2006/07 years.
  4. She was interviewed by ATO officers during the audit and the interview was recorded.  She exhibits to her affidavit a transcript of that interview.  On page 41 of that transcript, an ATO officer is recorded as saying to her:

“I know there’s a lot of companies that have been de-registered – I don’t care – I don’t really want to go too much into those at the moment but what I do want to know is everything that you are linked to at the moment that’s still in operation, [what] it’s doing.”

The transcript records Mr Featherstone’s presence at the meeting, asking the ATO officers whether there would be any “objection if we were to start a new company, as long as we meet what you’re asking us to do …?”  In a response upon which Mr Featherstone strongly relies, the ATO officer is recorded as saying: “I’m saying, you know if, certainly if you pay your tax bill I wouldn’t have any concerns with you starting from another company … [o]ften if people have a string of de-registered companies around them that haven’t met their tax obligations, it can be referred to our compliance area to make sure they’re not being done in order to avoid your tax obligations.  Okay?  So certainly once you have paid your tax bill and once you’ve got your GST and everything sorted out and your wages sorted out, and all of that it’s a business decision how you operate.”  (It may be noted here that the company’s default in paying GST had not been “sorted out.”)

  1. Ms Marks also exhibits a letter from the ATO dated 18 December 2009, advising her that the ATO had completed its audit and would not be taking any further action based upon “the information you have provided” and upon receipt of her income tax returns for the 2006, 2007, 2008 and 2009 income years.
  2. The 2006 tax return by Ms Marks, which she sent to the ATO in November 2009, declared $90,000.00 as income received from the company during that year.  Her 2007 return, sent to the ATO at the same time, declared $85,000.00 as income received from the company during that year.  Mr Featherstone’s tax returns for those years, sent to the ATO at the same time, declared $90,000.00 as income received from the company in the 2006 year and $85,642 in the following year.  The returns lodged on behalf of Mr Featherstone’s daughter declared income from the company of $65,000.00 in the 2006 year and $75,000.00 in the 2007 year.
  3. From the affidavit of Ms Marks, there is evidence supporting Mr Featherstone’s assertion that he came to an arrangement with the ATO in respect of his income related to the company’s business within those two tax years.  This evidence would have been admissible at the trial, because it was relevant to Mr Featherstone’s claim that he was prepared to discharge the company’s tax obligations.  And Mr Featherstone had pleaded that he reached such a settlement with the ATO in 2009.[88]  The fundamental difficulty for his application to admit this new evidence is that none of it is shown to have been unavailable at the trial.
  4. Special leave is required to adduce this evidence, this being an appeal from a final judgment.[89]  It is well established that for such evidence to be admitted in the appeal:[90]

“First it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; second, the evidence must be such that, if given, it would probably have an important influence on the result of the case, although it may not be decisive; third, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, though it may not be incontrovertible.”

  1. Moreover the new evidence is not such as to have a probable influence on the outcome of the question of insolvency.  Its relevance is said to be that it supports Mr Featherstone’s claim that he was always willing to discharge the company’s tax obligations.  But the question is whether that was his will at the time at which these payments were made.  He allowed the company to discontinue its business and become de-registered in 2008 without filing a tax return or lodging a Business Activity Statement.  He made the payments to secure a negotiated outcome from the ATO’s audit in the second half of 2009, in a circumstance where he had not filed an income tax return for his own income for some eight years.  All of that gives the impression that he paid the ATO only to protect his own position, rather than being concerned to ensure that the company had met its obligations.  As I have discussed, when he let the company cease business and later become de-registered, he must have known that it had unfulfilled obligations to the ATO.
  2. Therefore the application to adduce this further evidence should be refused.  It should also be noted here that at the commencement of the hearing of the appeal, the Court set aside a subpoena which had been issued, at Mr Featherstone’s request, to the ATO, for the production of Mr Featherstone’s tax returns.  The subpoena was set aside upon bases provided by sub-division 355-B of the Tax Administration Act 1953 (Cth).

Conclusion on insolvency

  1. Upon the evidence at the trial, there is no reason to disturb the finding of the trial judge that in August 2007, Mr Featherstone was unwilling to support the company by discharging any liability which it had to the ATO.  The most generous view for Mr Featherstone is that he was prepared to do so if that would secure a resolution of his personal position with the ATO, not having filed a personal tax return for some years.  Such a qualified preparedness to meet the company’s liabilities to the ATO did not make the company solvent.  Outside the circumstances in which Mr Featherstone reached his agreement with the ATO in 2009, there is no reason to suppose that he would have met any liability of the company to the ATO.  His actions between August 2007 and the 2009 audit strongly indicate to the contrary.  Absent Mr Featherstone’s support, it is clear that the company, if not already insolvent, was made insolvent by these payments.

The case under s 588FC

  1. A transaction of a company which is insolvent, or which becomes insolvent because of the transaction, is an “insolvent transaction” within s 588FC “if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company …”.
  2. Section 588FA defines an unfair preference.  Section 588FB defines an uncommercial transaction.  The case which was pleaded against Mr Featherstone was that each payment, or the combination of the two payments, was an uncommercial transaction.  There was no allegation that it was an unfair preference.
  3. It is necessary to set out s 588FB in full:

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

  1. the benefits (if any) to the company of entering into the transaction; and
  2. the detriment to the company of entering into the transaction; and
  3. the respective benefits to other parties to the transaction of entering into it; and
  4. any other relevant matter.
  1. A transaction may be an uncommercial transaction of a company because of subsection (1):
  1. whether or not a creditor of the company is a party to the transaction; and
  2. even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”
  1. The statement of claim referred to the two payments together as “the Payment”.  Paragraph 18 of the pleading alleged as follows:

“18. The Payment was:

  1. a transaction of the Company that it would be expected that a reasonable person would not have entered into; and
  2. a transaction entered into by the Company for the purpose of defeating, delaying or interfering with the creditors of the Company within the meaning of section 588FE(5) of the Corporations Act.
  1. It was pleaded that Mr Featherstone was a de facto director of the company, was aware of its exposure to the ATO, had ignored the company’s exposure or obligations to the ATO and had made the Payment leaving the company with no capacity to discharge those obligations.
  2. Curiously, the pleading made no reference to the lease of the Albert Street property or the agreement of 4 August 2007, pursuant to which the payments were made.  On the face of the statement of claim, the payments had been made for no apparent benefit to the company.
  3. The lease and the agreement of 4 August 2007 became relevant by Mr Featherstone’s pleading, which alleged that the funds used for the purchase of the Quay West apartment came from the company by the payment of rent which was due for the Albert Street property.
  4. It was undisputed that the agreement for lease and the agreement of 4 August 2007 was each a valid and enforceable agreement.  There was no challenge to the authenticity of the documents and nor was their legal effect in question.  Most importantly, neither was alleged to have been a part of the transaction which was the subject of the liquidator’s claim.  Therefore the commerciality (or otherwise) of those agreements was not questioned by the liquidator’s pleaded case.  The commerciality of the transaction which was pleaded, namely that constituted by the two payments, had to be assessed upon the premises of those agreements.  Consequently, when the first payment was made, Mr Featherstone was entitled to demand that sum (and more) and when the second payment was made, an amount of $460,000.00 (or, another view, that amount less $23,000.00) had become due and payable to him.  These were payments in reduction of the company’s debt to Mr Featherstone, although they were paid to the vendor at Mr Featherstone’s direction.
  5. By s 588FB(1), the commerciality of the transaction must be assessed having regard to the benefits to the company of the transaction, the detriment to the company of the transaction, the respective benefits to other parties of the transaction and any other relevant matter.
  6. The principles to be applied here were summarised by Gordon J, sitting in the Full Court of the Federal Court, in Capital Finance Australia Ltd v Tolcher as follows:[91]

“(1) as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: see also Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555 at [156] and Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366-367;

  1. four criteria are to be considered — the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));
  1. the objective criteria are not considered in some vacuum but by reference to “the company’s circumstances” which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: Tosich Construction 78 FCR at 367; and
  1. for a transaction to be “uncommercial” it must result in “the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice” or where “the consideration … lacks a ‘commercial quality’”: see Peter Pan Management Pty Ltd (in liq) v Capital Finance Corporation (2001) 19 ACLC 1, 392 at [43]; Lewis v Cook (2000) 18 ACLC 490 at [45]-[46] and Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548 and the Explanatory Memorandum, Corporate Law Reform Bill 1992 at [1044].”
  1. On the face of the statement of claim, there was no benefit to the company from the transaction constituted by these payments.  But on the facts which were proved, there was a benefit in that the payments discharged (or all but discharged) the company’s debt to Mr Featherstone and  assured the company of its continuing occupation of the Albert Street property until 30 June 2008.  The detriment to the company was that it lost almost the entirety of its then working capital.  So far as the benefits to other parties to the transaction were concerned, the beneficiary was Mr Featherstone, by having his debt (almost entirely) repaid.
  2. Jackson J reasoned that the payments constituted an uncommercial transaction in this way.  First, he found that the transaction was an unfair preference,[92] although, as he noted, that was not an allegation which had been made by the liquidator.[93]  He identified the differences between an unfair preference, as defined in s 588FA, and an uncommercial transaction, as defined in s 588FB.  Because of those differences, he said that an unfair preference would not be, in each and every case, an uncommercial transaction.[94]  Next, he said that if the liquidator could show that the company’s purpose, in causing the payments to be made, was to have his own debt paid, leaving the ATO and other creditors to remain unpaid, then the transaction was an uncommercial one.[95]
  3. He concluded that the transaction, constituted by the two payments, was an uncommercial one as follows:

[179] In my view, the transaction comprising and including the challenged payments clearly had the effect of an unfair preference as between the first plaintiff and the first defendant who were both parties to it. [This] is because the first defendant received from the first plaintiff in respect of the rent for the Albert Street property more than he would have received if he had proved for the rent in a winding up of the first plaintiff.

[180] Second, in my view the inferential finding is available and should be made that the first defendant was aware at the time of the challenged payments that he would be paid as a creditor, leaving the ATO or any other creditors to remain unpaid in the winding down of the first plaintiff’s operations and in any winding up of the first plaintiff that followed.

[181] Accordingly, the transaction of making the challenged payments was an uncommercial transaction within the meaning of s 588FB.

[182] Next, in my view, the first plaintiff was insolvent at the time when the challenged payments were made or became insolvent by making the challenged payments.

[183] Accordingly, the transaction was an insolvent transaction within the meaning of s 588FC.”

  1. In that passage, Jackson J did not refer to Mr Featherstone’s purpose or purposes in causing the payments to be made.  He referred instead to Mr Featherstone’s awareness of the effect upon the ATO or any other creditors.  There is some tension between those paragraphs and his earlier reasoning to which I have referred above.  Be that as it may, it was the company’s insolvency and the effect upon other creditors, of which Mr Featherstone was aware, which made the transaction an uncommercial one, in the judge’s view.
  2. In this reasoning, Jackson J identified what he described as a principle[96] which derived from, or was exemplified by, a decision of Ambrose J in Re Solfire Pty Ltd (in liq).[97]  In that case, a company took a number of steps, over a period of some months, to ensure that its property was kept from certain creditors and instead paid or transferred for the benefit of others, most notably its directors.  Two of its creditors sued to recover debts owing to them by the company.  On the following day, the company executed a bill of sale, securing all present and future indebtedness to the grantees, who were the company’s then directors.  The creditors’ claim went to trial.  After a few days of the trial, the directors resolved that the company would not continue to defend the case and the creditors were given judgment, for sums totalling a little under $50,000.00, on the next day.  But that was not before the company, having withdrawn from the case, made a further agreement with its directors.  They agreed to assume liability for some of the company’s debts and to accept a payment from the company in full satisfaction of what was secured by the bill of sale.  It was also agreed that certain of the company’s assets would be transferred to them.  On the following day (the date on which judgment was entered against the company), the directors arranged to have more than $180,000.00 of the company’s funds paid to the directors’ solicitors.  About a month later, the directors and the company executed a deed of agreement which recorded that the sum which had been paid to their solicitors and that the property which had been transferred to them had been received by them in full and final satisfaction of the secured debt.  They formally released their security.  On the following day, they caused the company to file an application to be wound up on the ground of insolvency.
  3. The first question in Solfire was whether the directors, as grantees under the bill of sale, had taken a step to enforce their charge, within the meaning of s 267(1) of the Corporations Law.  Ambrose J held that they had not done so; rather, the company had voluntarily discharged its obligations without any formal demand being made by the directors.  Relevantly to the present case, Ambrose J then held that there had been a transaction which was both an unfair preference and an uncommercial transaction.  He defined that transaction as “the whole transaction” which had commenced with the agreement made by the company on the day of its withdrawal from the trial and which concluded on the day on which it filed the application for its own winding up.  That series of events, he said, was a transaction “designed to defeat the rights of its judgment creditors”, being “conceived by the [directors] as a method by which the ordinary processes of the law … could be circumvented so that the company having used all of its available resources to pay creditors (including the [directors]) other than those judgment creditors, the moneys that were owing to them, could go into liquidation leaving its judgment creditors with judgments and unsatisfied statutory demands which would be worthless.”[98]  Ambrose J then said:[99]

“In my view the whole transaction may properly be characterised as “an uncommercial transaction” within s 588FB of the Corporations Law.  It is clear in my view that the whole object of the transaction … was to give “an unfair preference” to the company’s creditors (including the [directors]) at the expense of its judgment creditors.”

  1. In my respectful opinion, there is no particular principle which can be said to come from Solfire.  Instead, it was an application of the equivalent provisions of the then Corporations Law to the particular facts of that case.  It is an example of how the two kinds of transactions, unfair preferences and uncommercial transactions, are not mutually exclusive.
  2. True it is that Ambrose J concluded that there was an uncommercial transaction, from the fact of the purpose of those who conceived and implemented it, to defeat certain creditors.  Ambrose J did not identify the relevance of that consideration by reference to the terms of s 588FB.[100]  I would accept that where a company’s purpose has been to prefer one creditor to the detriment of others, that can be a relevant matter to consider in assessing whether the transaction was an uncommercial one.  In that assessment, the question is whether, upon an objective view, a reasonable person in the company’s circumstances would not have entered into the transaction.  Put another way, it is whether the transaction is such “that it could not be explained by normal commercial practice”.[101]  The transaction in Solfire was plainly one which could not be so explained.  Instead, it could be explained only as it was by Ambrose J.  Where the transaction could not be explained by normal commercial practice, a conclusion that it was an uncommercial transaction could be fortified by an identification of its true explanation.
  3. Jackson J discussed Tosich Construction (in liq) v Tosich,[102] where that company was indebted to a director when he caused the company’s accountant to purchase bank cheques, using the company’s funds, to pay the purchase price of a house on behalf of the director’s daughter.  A liquidator unsuccessfully argued that this was an uncommercial transaction.  Lehane J referred to the detriment to the company, by the reduction in its working capital, and to a benefit from the reduction of its net indebtedness to the director.  He said that the fact that the director was to apply the proceeds of the reduction of his debt in making a gift to his daughter was not relevant.  Lehane J also said that another matter which might have been relevant was whether the director was entitled then to require payment of the debt, but noted that there was no suggestion that he was not.[103]  Lehane J then referred to another possible consideration, but one which had not been argued:[104]

“Another question which was not explored, but which could conceivably, in a case such as this, give rise to other relevant matters is the relationship between insolvency, or perhaps the view of its solvency or otherwise which a reasonable person would have taken in the company’s circumstances at the time, and what a reasonable might be expected to have done.  I mention these matters, which do not arise on the case which the applicant sought to make or on the evidence, only to demonstrate why I am not prepared to hold, as counsel for the respondent invited me to, that a transaction for which value is given (including by way of the reduction of a debt) cannot be an uncommercial transaction.  It is by no means impossible, I think, to conceive of circumstances in which it could be one.”

  1. That passage suggested a potential relevance of a company’s insolvency in this context.  However it does not support the proposition that a transaction, which does have an apparent commercial explanation, is an uncommercial transaction if it affects, or is intended to affect, a creditor or creditors.
  2. An appeal from that judgment was dismissed.[105]  Relevantly here, the Court referred to the consideration of the benefit to the director, in receiving repayment of his debt, as “having very little weight” in the circumstance where the debt was owing and payable on demand.  That comment could be applied to the payments in the present case.
  3. Jackson J discussed the judgment of White J (as he then was) in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd[106] and the judgment on appeal in that case.[107]  Certain debts had been paid by the company, when insolvent, before those debts had become due and payable.  White J said that there was benefit to the company from the transaction, constituted by those payments, because the debts to those creditors had been reduced.  He then said that the company, as distinct from its other creditors, incurred no detriment from entering into the transactions.[108]  Young JA (with whom the other members of the Court agreed) disagreed with that statement.  Young JA said:[109]

[116] With respect this cannot be correct.  It is true, as the primary judge stated, that in making the payments [the company] reduced its debts to the [payees].  However that was not the whole picture.  [The company] had limited resources and to deprive itself of liquidity before it legally had to do so, where it had other pressing creditors and a need to expend moneys on its computer accounting system amounted to a detriment.

[117] “Detriment” in the section is not limited to a detriment that can necessarily be measured in money terms.  The word refers to commercial detriment.”

(Emphasis added)

  1. Jackson J said that “the question as to whether there is an uncommercial transaction on the principle of Solfire is also informed by obiter dicta” in Gordon v Leon Plant Hire Pty Ltd (in liq),[110] where Black J said:[111]

“It seems to me that the findings which I have reached above in respect of Lyon Form’s insolvency, and the fact that these payments were simply the transfer of its funds to a director, immediately prior to the lodgement of tax returns which would crystallise its unpaid tax liabilities and bring about its liquidation, are sufficient to establish that these payments were both unreasonable director-related transactions within the meaning of s 588FDA of the [CA] and uncommercial transactions within the meaning of s 588FB of the [CA]. An order should therefore be made under s 588FF of the [CA] that Marcos pay Lyon Form the sum of $107,450 in respect of these payments.”

That was a case, however, where for no apparent commercial reason, a director had simply caused in excess of $100,000.00 of the company’s money to be paid to him shortly ahead of its demise.  By his description of the payments as “simply the transfer of its funds to a director”, Black J was referring to the absence of any tenable commercial explanation.  In that way, the case was similar to Solfire.  But again, there is no discernible principle from this judgment that a transaction which does have a commercial explanation is an uncommercial one, if it would have, or is intended to have, effect as an unfair preference.

  1. In my respectful view, the authorities to which Jackson J referred do not support the conclusion that this was an uncommercial transaction.  A transaction will be an uncommercial one only where a reasonable person in the company’s circumstances would not have entered into it.  If a reasonable person could have done so because it could be explained by normal commercial practice, the company’s purpose for doing so is not relevant.  As the authorities have consistently emphasised, the commerciality or otherwise of the transaction is to be assessed upon an objective view, having regard to the company’s circumstances.  Those circumstances include the state of knowledge of those who are the directing mind of the company.  But it is another thing to say that their purpose matters, because it is what a reasonable person might have done, rather than why this company did what it did, which is determinative.  In Tosich Construction (in liq) v Tosich, the Full Court said of s 588FB that:[112]

“[T]he draftsman’s intention was simply to emphasise the objective nature of the inquiry, not into what the particular company might have done, but into whether a reasonable person would not have entered into the transaction.”

  1. Jackson J did not discuss whether the company’s insolvency, to the knowledge of Mr Featherstone as its de facto director, was relevant in this way: as a director of an insolvent company, he was under a duty to the company to take into account the interests of its creditors: Kinsela v Russell Kinsela Pty Ltd (in liq);[113] Westpac Banking Corporation v Bell Group (in liq) (No. 3).[114]  If this duty was breached by Mr Featherstone, was there a consequent and relevant “detriment” to the company?  In my view however, that inquiry would distract from the essential question, which is to assess that if the transaction can be explained by commercial considerations.
  2. Were these payments an uncommercial transaction? Upon the case which was pleaded and the concessions made by the liquidator, these were payments of debts which were owing to Mr Featherstone, in the case of the first payment, upon demand, and in the case of the second payment, due and owing according to the agreement of 4 August 2007.  That agreement, not impugned by the liquidator, left the company with no legal choice as to whether to make the second payment.  The fact that the company and Mr Featherstone were not at arm’s length is of little weight, once it is accepted that the various agreements between them, as to the payment of rent, were legally enforceable and not voidable at the option of the liquidator.  And not only was the second payment due and owing under that agreement, but the company’s entitlement to occupy the premises for the next 10 months or so depended upon it.  Therefore, the payment had a commercial explanation:  a reasonable person in the company’s circumstances could have decided to make the payment.  The company’s insolvency did not make it uncommercial: its insolvency was a further and distinct element by which an uncommercial transaction would become an insolvent transaction.[115]
  3. As for the first payment, the only difference is that it was made prior to the agreement of 4 August 2007.  At that point, the debt to Mr Featherstone was payable upon demand.  The fact that a demand had not been made is a question of little weight, as the same point was regarded in Tosich Construction Pty Ltd (in liq) v Tosich.[116]  In my view, if viewed as a separate transaction, the first payment was not an uncommercial one.  In any case, the relief which was granted depended upon a finding that the two payments together were uncommercial.

An unfair preference?

  1. As already noted, there was no alternative allegation that the payments were an insolvent transaction because they were an unfair preference given by the company.  Jackson J wondered why that case had not been pleaded.  He said that there was no apparent explanation why the case was pleaded as an uncommercial transaction, rather than as an unfair preference.[117]  Ultimately however, he reasoned that the transaction was uncommercial on the basis of facts which included that “the challenged payments clearly had the effect of an unfair preference as between [the company] and [Mr Featherstone]…”[118]
  2. Under s 588FA, a transaction is an unfair preference given by a company to a creditor if they are parties to the transaction and 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 was set aside and the creditor were to prove for the debt in a winding up of the company.  In this case, there was no issue that the transaction was one between the company and a creditor, namely Mr Featherstone.  It was his case that he was being paid the rent which was due to him.  The transaction resulted in his receiving from the company very close to all of his debt.  What would he have received in a winding up?  There was evidence that the ATO had lodged a proof of debt for an amount in excess of $300,000.00.  The company in liquidation is unlikely to have any substantial funds from which to pay that debt.  However Mr Featherstone pleaded that no amount was due by the company to the ATO,[119] about which there was no specific finding.  In this Court the liquidator did not seek to have the judgment upheld upon this alternative basis.
  3. In any event, a conclusion that the transaction was an unfair preference would not be sufficient to uphold the judgment, because there is also Mr Featherstone’s challenge to the finding that the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying or interfering with, the rights of its creditors (apart from Mr Featherstone) on a winding up of the company.  That purpose had to be established by the liquidator because of the time limitations prescribed by s 588FE(3).  Absent the application of s 558FE(5), this transaction took place at a time which was too far ahead of the relation-back day for it to be a voidable transaction.
  4. Section 588FE(5) provides:

“(5) The transaction is voidable if:

  1. it is an insolvent transaction of the company; and
  2. the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and
  3. the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.”
  1. As Jackson J observed, the required purpose need not be the sole purpose which the company had for entering in to the transaction.[120]  Nor is it necessary for a liquidator to show that it was the main or dominant purpose of the company.[121]
  2. It is necessary to set out the findings which were the basis for the conclusion that this element of the company’s purpose was established.  Those findings were as follows:

[177] In the present case, the first defendant knew, as he admitted in evidence:

  1. the earnings and expenses of the first plaintiff as they were shown in the deposits and payments or withdrawals from the first ANZ account and the second ANZ account;
  2. that no amount had been paid on account of tax by the first plaintiff, whether income tax or GST;
  3. that the first plaintiff might have a tax liability.

[178] In addition, in my view, the first defendant knew that:

  1. the first plaintiff had the outward appearance of a company controlled and owned by others, when in fact he controlled it;
  1. the first plaintiff had made no arrangements to attend to its tax liabilities, whatever they were;
  1. the first plaintiff, through his control, did not intend to do anything about those tax liabilities;
  1. after the payments were made, the first plaintiff’s available funds would be limited, and any ability to pay a substantial sum on account of the tax liabilities to date would depend at best on future receipts and profits; and
  1. yet another “Ashala” company was to become involved in conducting the business.”
  1. There could be no serious challenge to the findings in the first of those paragraphs.  The findings in (a) and (b) of the second of those paragraphs were plainly correct. I have already discussed the judge’s reasoning, with which I agree, that Mr Featherstone at all times controlled the company.  And as I have said, the company filed no tax return or Business Activity Statement.  The judge was correct to find that Mr Featherstone did not intend to do anything about those tax liabilities, before he let the company become de-registered in 2008.
  2. The findings in (d) and (e) of the judgment at [178] should be discussed.  As I have said, the immediate effect of the payments was to leave the company with only a few thousand dollars as its working capital.  The company ceased to carry on the business, but not immediately.  The best evidence of what then happened is from the company’s bank statements.
  3. The statements for the account from which the payments were made demonstrate, as Mr Featherstone agreed in evidence, that the company ceased trading by the end of 2007.  And in cross-examination, he accepted that the company which was called Ashala Pty Ltd began to trade soon after the purchase of the Quay West apartment.  The bank statements for this period from mid August to the end of the December 2007 show that there was not an abrupt halt of trading.  Instead, over that period of some four and half months, in excess of $377,000.00 was deposited to the account.  Jackson J said that he had compared the rate of activity upon this account with earlier periods, which, he said, showed that the company’s trading had slowed dramatically after the transaction.[122]  The deposits to the account during that period of four and a half months may be compared with the deposits in the corresponding period in 2006.  That comparison is affected by the liquidator’s omission of two bank statements from those which were exhibited to his affidavit.  That means that some 18 weeks from the period in 2006 are the subject of evidence, from which it appears approximately $360,000.00 was deposited within that period.  That represents a weekly rate of deposits of approximately $20,000.00 compared with the period in 2007 (from the second payment to 31 December) of nearly $19,000.00 per week.  Of course, at the same time, the company was also making substantial withdrawals.  But by 7 September 2007, the balance in its account was more than $20,000.00 and by the end of December, it had grown to $54,138.60, before that amount was transferred to another of Mr Featherstone’s companies.  The point of this is that it is inconsistent with the notion that in August 2007, Mr Featherstone had decided to divert all of the income from the business which had been conducted by the company from the reach of the ATO.  Had the company immediately ceased business and stopped making any deposits to its account after these payments were made, the post transaction activity of the company would have had more weight in considering the purpose or purposes for which the company entered into the transaction.
  4. From his findings as set out above, Jackson J reasoned as follows:

[184] The first plaintiff became a party to the transaction (at the latest) by making the challenged payments. In my view, in light of the findings particularly at [177] and [178] above, the inference is available and should be drawn that one of the first defendant’s purposes in causing the first plaintiff to make the challenged payments was to defeat, delay or interfere with creditors (particularly the ATO) and that accordingly one of the first plaintiff’s purposes was to do the same.

[185] There is no question that the payments were made during the 10 years ending of the relation-back day.

[186] Accordingly, in my view, the transaction was a voidable transaction under s 588FE(5) of the CA.”

  1. The company’s purpose or purposes, in entering into the transaction, had to be inferred, because the judge rejected Mr Featherstone’s direct evidence of the matter.  Subject to what I have said about the post transaction activity of the company, the findings from which the judge inferred that the company had the requisite purpose should not be doubted, let alone disturbed.  But they were not the only relevant facts.
  2. Again, it is again necessary to keep in mind the limited scope of the liquidator’s pleaded case and the effect of the way in which that case was conducted.  What had to be considered, under s 588FE(5), was the company’s purpose or purposes for making the payments.  The liquidator had not pleaded a case which referred to the agreements made between the company and Mr Featherstone, in 2005 and in 2007, about the payment of rent.  It was not part of his case that any of those agreements had been made for a purpose of defeating, delaying or interfering with the rights of creditors.
  3. Clearly, Mr Featherstone had another purpose for causing the company to make the payments, namely that the payments would provide effectively all of the purchase price for what was intended to be his residence.  Although the contract was not in evidence, it was common ground that the purchase price for the apartment was $460,000.00.  Obviously that explains the identical amount which, by the agreement of August 2007, was agreed to be paid and accepted in full satisfaction of the company’s liability for rent.  The judge accepted that Mr Featherstone had been looking to buy a property in central Brisbane to be his residence.  It may be inferred that he decided to buy this property because he could pay for it by having the company pay so much of the agreed rental as was needed for the purchase price.  That was at least his principal purpose in causing the payments to be made.  But was there another purpose, namely that he meant to defeat, delay or interfere with the rights of the ATO or another creditor?
  4. What must be considered here is not simply whether Mr Featherstone was aware that the payments might have such an impact upon creditors.  Instead, that impact must have been one of his purposes, and thereby the company’s purposes, in making the payments.
  5. The availability of alternative funding to purchase the apartment was not explored in the evidence.  Thus it was not alleged that Mr Featherstone had recourse to the company’s funds, rather than to any other source of finance, because he wanted to defeat, delay or interfere with the rights of the company’s creditors.  Nor was it suggested that he purchased the apartment as part of a strategy to put the company’s funds beyond the reach of creditors.
  6. The evidence of Mr Featherstone was rejected in many respects.  In particular, his evidence that he did not have a purpose of defeating, delaying or interfering with the rights of creditors, was rejected.  But as Jackson J recognised, the rejection of that evidence did not prove the contrary.  It remained for the liquidator to prove that this was a purpose of the transaction.  I have set out the facts from which Jackson J inferred that Mr Featherstone and thereby the company had this purpose in causing the payments to be made.  This Court must conduct a real review of the trial and draw its own inferences and conclusions, bearing in mind the advantages enjoyed by the trial judge.  But this is an issue for which the Court is “in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge.”[123]
  7. I respectfully disagree with the judge’s conclusion on this question.  The company’s immediate purpose in making these payments was to discharge a debt which was owing and, for the most part, due and owing.  Accepting that Mr Featherstone’s purposes should be attributed to the company, the purpose was to enable the payment of the purchase price for the apartment which was being acquired as his residence.  He was aware that the company should have substantial liabilities to the ATO.  I accept that he was recklessly indifferent whether the company could pay them.  But he had the company pay the vendor because he wanted to acquire the apartment.  I do not infer that, more probably than not, he did so also in order to defeat, delay or interfere with the rights of the ATO or any other creditor.  The conduct of the company’s bank account, before he transferred its funds to another company months later, suggests that he was unconcerned with their rights.  It is probable that he was unconcerned because, from his own experience, he believed that there was no imminent prospect of a demand by the ATO whilst the company was lodging no returns or business activity statements.  Consequently, this essential element of the liquidator’s case was not established and the claim should have been dismissed.

Bankruptcy Questions

  1. In case my opinion does not prevail, it is necessary to deal with Mr Featherstone’s arguments relating to the effect of his bankruptcy.
  2. In his judgment, Jackson J noted that most of the claims which had been pleaded by the liquidator or the company were stayed by the operation of s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (“BA”).[124]  He further noted that the parties had agreed that the subject claim was not stayed, because it was not a legal proceeding in respect of a provable debt.[125]  None of the arguments which are now to be considered was advanced to the trial judge.
  3. It is argued that leave was required in accordance with s 58(3) of the BA, which provides that after a debtor has become bankrupt, it is not competent for a creditor, except with the leave of the court, to commence any legal proceeding in respect of a provable debt or to take any fresh step in such a proceeding.  But this was not a claim for a provable debt.  It was a claim for the transfer of the apartment to the liquidator, under s 588FF(1)(d) of the CA.  That is not property divisible among the creditors in Mr Featherstone’s estate in bankruptcy, because it is property held by the bankrupt in trust for another person.[126]
  4. Mr Featherstone argues that the respondents had not complied with Rule 72 of the UCPRMr Featherstone became a bankrupt after the commencement of this proceeding.  Rule 72(1) provides that if a party to a proceeding becomes bankrupt, a person may take a further step in the proceeding for or against that party only if the court gives the person leave to proceed and the person follows the court’s directions on how to proceed.  No leave to proceed was sought in this case.  Leave was required although the claim is not for a provable debt.[127]  The Rule was not complied with here.  However r 371 provides that a failure to comply with the UCPR is an irregularity and does not render a proceeding, a document, step taken or order made in a proceeding, a nullity.  Mr Featherstone cites a judgment in the District Court in 2011, Strain v Walsh,[128] where it was said that a failure to comply with this provision deprived the court of jurisdiction in the proceeding.  No reference was then made to r 371 and the observation in that case cannot be accepted.  This was an irregularity which did not affect the court’s jurisdiction.  The point was taken by Mr Featherstone before the case was tried and determined, and no relevant prejudice is now suggested by Mr Featherstone from the fact that leave to proceed was not sought.  The ground of appeal should be rejected.
  5. That leaves for consideration the ground of appeal which is expressed in the most recent amended notice of appeal as follows:

“The learned primary judge erred in fact and in law in not dismissing the claim as the payment of $435,010.00 drawn by cheque on 16 August 2007 from the [company’s] bank account as paid to the appellant by cheque and as such he was a holder for value of the cheque pursuant to s 37 of the Cheques Act 1986.  The appellant was not the appointed Trustee of the KGM Family Trust at the time of the challenged transaction.”

Although this ground was not addressed in Mr Featherstone’s ultimate outline of argument, an earlier outline referred to it.  It was there submitted that as the holder of the cheque, by s 37 he was presumed to have taken the cheque for value, as regards the drawer.  From that he submitted that it follows that any claim against him was for a provable debt.  The submission does not reveal why that would follow.  But in any case, the evidence shows that the cheque was drawn by the bank payable to the vendor,[129] as would be expected where it was the balance of the price to be paid on settlement.  Therefore Mr Featherstone was not the holder of the cheque, as that term is defined in s 3 of the Cheques Act.

  1. For these reasons, none of Mr Featherstone’s arguments in relation to his bankruptcy could have been accepted.

Orders

  1. On 16 December 2016, Jackson J ordered Mr Featherstone to pay the liquidator’s costs of the proceedings.  That order should be set aside because it followed from the orders in the liquidator’s favour which should now be set aside.  At the same time, the judge ordered Mr Featherstone and his brother, who was a third defendant in the proceeding, to pay the liquidator’s costs occasioned by the joinder of the brother as a party and thrown away by the adjournment of the trial on 10 December 2015.  That order was challenged in the amended notice of appeal filed 13 January 2017.  However, that challenge was withdrawn in the notice of appeal filed on 10 May 2017.  As to the costs of the appeal, Mr Featherstone is unrepresented and I would make no order.
  2. I would order as follows:
    1. Allow the appeal;
    2. Set aside the orders numbered 2 and 3 made on 6 June 2016;
    3. Dismiss the second plaintiff’s claims against Mr D M Featherstone (as first and second defendant);
    4. Set aside the order, on 16 December 2016, that the first defendant pay the second plaintiff’s costs of the proceeding.

Footnotes

[1]  See e.g. Sharp v Jackson [1899] AC 419 at 421-423 per Halsbury LC.

[2]  34 and 35 Hen. 8 c.4, Statutes at Large, vol. 5, p. 132.

[3]  13 Eliz. 1 c. 5.

[4]  (1768) 98 ER 165.

[5]ibid. at 168.

[6]  see e.g. Cox v Morgan (1801) 126 ER 1349.

[7]  6 Geo. 4 c. 16.

[8]  drafted by Sir Samuel Walker Griffith: see Joyce, Samuel Walker Griffith, (1984), at p 41.

[9]  See Sir Samuel Griffith’s interpretation of his Act in Stewart & Walker v White (1907) 5 CLR 110 at 115-116.

[10]  5 Vic. No. 17.

[11]  (1861) 15 ER 437.

[12]  (1861) 15 ER 437.

[13]  see Humphrey v McMullen (1868) 7 SCR (NSW) 84.

[14]Williams v Official Assignee of Dunn (1908) 6 CLR 425 at 442.

[15]  (1933) 49 CLR 49.

[16]  As were marriage settlements.

[17]  Australia, The Law Reform Commission, General Insolvency Inquiry, Report No. 45 (1988).

[18]  at [633].

[19]  at [636].

[20]  at [645]-[646].

[21]  at [649].

[22]  at [668].

[23]  at [679].

[24]  at [681].

[25]  at [680]-[681].

[26]  s 588FE(2A).

[27]  s 588FC.

[28]  s 588FE(2).

[29]  Together with s 588FE(6A).

[30]cf. Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 per Hodgson JA at [5] and Young JA at [116], [117].

[31]  (1991) 101 ALR 135 at 143.

[32]  [1962] Qd R 231.

[33]  See also Alton v Harrison (1869) LR 4 Ch App 622; Middleton v Pollock [1873] 2 Ch D 104.

[34]  [1933] Ch 786.

[35]  (1959) 105 CLR 451 at 460.

[36]supra, at 461-2; see Menzies J to the same effect at 465 and at 471 where his Honour emphasized the element of intention to gain personally.

[37]Lloyds Bank Ltd v Marcan [1973] 3 All ER 754 at 760 per Cairns LJ.

[38]  (1870) LR 5 Ch App 538 at 543-544.

[39]  [2007] 1 Qd R 64 at [99] – [112].

[40]supra, at 116-118.

[41]  (1993) 178 CLR 193.

[42]supra at 208‑209.

[43]Jones v Dunkel (1959) 101 CLR 298; Weissensteiner v The Queen (1993) 178 CLR 217.

[44]R v Baden-Clay (2016) 258 CLR 308 at [52].

[45]cf Alton v Harrison, supra, at 626 per Sir G.M. Giffard LJ; Hardie v Hanson, supra, at 465 per Menzies J; Balcombe v De Simoni (1971‑1972) 126 CLR 576 at 582-3 per Barwick CJ.

[46]Demondrille Nominees Pty Limited v Shirlaw [1997] FCA 1220; 25 ACSR 535.

[47]  (1997) 78 FCR 363 at 367.  See also Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129].

[48]Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [54].

[49]  For example, Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 at [129].

[50]  For example, Demondrille Nominees Pty Limited v Shirlaw [1997] FCA 1220; 25 ACSR 535.

[51]Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) & Anor v Doran & Ors [2005] NSWCA 243 at [136].

[52]The Old Kiama Wharf Company Pty Ltd (in liquidation) v Betouwisa Investments Pty Limited [2011] NSWSC 823.

[53]  [2006] QCA 175 per Muir J at [106]-[108], McMurdo J concurring.

[54]Demondrille Nominees Pty Ltd v Shirlaw at 548.

[55]  (2011) 81 NSWLR 47 at [115].

[56]Cussen v Sultan (2009) 74 ACSR 496 at [23].

[57]  And, perhaps, other creditors.

[58]  It was due in advance on 1 July of each lease year: clause 3.

[59]  Who had become director on 6 July 2007, and remained as such until deregistration.

[60]Corporations Act: s 181, good faith and avoid conflicts of interest; s 182, improper use of position; s 183, improper use of information; s 344, ensuring the company complies with its financial reporting obligations; s 588G, insolvent trading.

[61]Duties and Responsibilities of Directors and Officers, 21st ed., 2016, page 72.

[62]Westpac Banking Corporation v Bell Group Limited (in liq) (No 3) (2012) 44 WAR 1; (2012) 270 FLR 1; Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Spies v The Queen (2000) 201 CLR 603.

[63]  Mr Featherstone’s affidavit dated 3 December 2015, paragraph 105.  That stated that he decided in June/July to “use the money in [the company’s] bank account to purchase the property”.

[64]  The first payment of $23,000 having already been made.

[65]  To borrow the language from 640 Elizabeth Street Pty Ltd (in Liq) & Ors v Maxcon Pty Ltd [2015] VSC 22.

[66]Ashala Model Agency Pty Ltd (in liq) & Anor v Featherstone & Anor [2016] QSC 121.

[67]  [2016] QSC 121 at [29], [30] and [32].

[68]  Affidavit of D M Featherstone dated 3 December 2015 paragraph 105.

[69]  [2016] QSC 121 [63], [64].

[70]  [2016] QSC 121 [65].

[71]  [2016] QSC 121, [75].

[72]  Affidavit of D M Featherstone dated 3 December 2015, paragraph 127.

[73]  [2016] QSC 121, [80].

[74]The Bell Group Ltd (in liq) & Ors v Westpac Banking Corporation & Ors (No. 9) (2008) 39 WAR 1 at 141; [2008] WASC 239 at [1073]; Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831 at [96]; Ace Contractors & Staff Pty Ltd v Westgarth Developments Pty Ltd [1999] FCA 728 at [44].

[75]Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz & Anor [2008] QCA 94 and International Cat Manufacturing Pty Ltd (in liq) & Anor v Rodrick & Ors (2013) 97 ACSR 200.

[76]Lewis v Doran (2005) 219 ALR 555; [2005] NSWCA 243.

[77]  [2015] QCA 28 at [40] (footnotes omitted).

[78]  (2005) 219 ALR 555 at 579.

[79]First Strategic Development Corporation Ltd (in liq) & Anor v Chan & Ors [2014] QSC 60 at [69] cited in Chan [2015] QCA 28 at [42] (emphasis in original).

[80]  [2012] QSC 121 at [103].

[81]  Affidavit of D M Featherstone dated 3 December 2015, paragraph 149.

[82]  Affidavit of D M Featherstone dated 3 December 2015, paragraph 152.

[83]  Affidavit of D M Featherstone dated 3 December 2015, paragraph 154.

[84]  ARB 75.

[85]  Ibid.

[86]  ARB 75, 77.

[87]  Filed 18 May 2017.

[88]  Further amended defence filed 14 March 2016 paragraph 13A.

[89] Uniform Civil Procedure Rules 1999 (Qld) r 766(2).

[90]Langdale v Danby [1982] 3 All ER 129 at 137-138, applied in Clarke v Japan Machines (Aust) Pty Ltd [1984] 1 Qd R 404 at 408 and again more recently in Dupois v Queensland Television and Ors [2015] QCA 160 at [21].

[91]  (2007) 164 FCR 83 at 109 [129].

[92]  [2016] QSC 121 at [179].

[93]  [2016] QSC 121 at [163].

[94]  [2016] QSC 121 at [141].

[95]  [2016] QSC 121 at [162].

[96]  Which his Honour Jackson J described as “the principle of Solfire” [2016] QSC 121 at [157].

[97]  [1998] 2 Qd R 92.

[98]  [1998] 2 Qd R 92 at 97.

[99]  Ibid.

[100]  In identical terms to the present s 588FB.

[101]  Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth) at [1044], a description applied in eg Capital Finance Australia Ltd v Tolcher per Gordon J in the passage set out above and in Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 538 per Foster, Lindgren and Madgwick JJ.

[102]  (1997) 23 ACSR 466.

[103]  (1997) 23 ACSR 466 at 474.

[104]  Ibid.

[105]Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363.

[106]  (2010) 238 FLR 384.

[107]Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47.

[108]  (2010) 238 FLR 384 at 433 [222].

[109]  (2011) 81 NSWLR 47 at 63.

[110]  [2015] NSWSC 397.

[111]  [2015] NSWSC 397 [89], set out in the judgment below at [2016] QSC 121 at [157].

[112]  (1997) 78 FCR 363 at 367.

[113]  (1986) 4 NSWLR 722.

[114]  (2012) 44 WAR 1 at [1092]-[1093] (Lee AJA), [2042]-[2095] (Drummond AJA).

[115]  s 588FC.

[116]  (1997) 78 FCR 363 at 367.

[117]  [2016] QSC 121 at [163].

[118]  [2016] QSC 121 at [179].

[119]  Further amended defence paragraph 13A.

[120]  [2016] QSC 121 at [166].

[121]  [2016] QSC 121 at [167].

[122]  [2016] QSC 121 at [107].

[123]Warren v Coombes (1979) 142 CLR 531 at 551.

[124]  [2016] QSC 121 at [2].

[125]  [2016] QSC 121 at [8].

[126]  s 116(2)(a) of the BA.

[127]Southern Cross Mine Management PL v Ensham Resources & Ors [2006] QCA 211; State of Queensland v Beames [2004] 2 Qd R 99.

[128]  [2011] QDC 165 at [10].

[129]  AR 1009.

Close

Editorial Notes

  • Published Case Name:

    Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor

  • Shortened Case Name:

    Featherstone v Ashala Model Agency Pty Ltd (in liq)

  • MNC:

    [2017] QCA 260

  • Court:

    QCA

  • Judge(s):

    Sofronoff P, Morrison JA, McMurdo JA

  • Date:

    03 Nov 2017

  • Selected for Reporting:

    Editor's Note

Litigation History

Event Citation or File Date Notes
Primary Judgment [2016] QSC 121 06 Jun 2016 Jackson J.
Appeal Determined (QCA) [2017] QCA 260 03 Nov 2017 Appeal dismissed: Sofronoff P and Morrison JA (McMurdo JA dissenting).
Special Leave Refused [2018] HCASL 44 21 Mar 2018 Special Leave Refused by Keane and Edelman JJ.

Appeal Status

{solid} Appeal Determined - {hollow-slash} Special Leave Refused (HCA)