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Fielding v Dushas

 

[2013] QCA 55

Reported at [2013] 2 Qd R 416

 

SUPREME COURT OF QUEENSLAND 

 

CITATION:

Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas [2013] QCA 55

PARTIES:

ANDREW FIELDING AS LIQUIDATOR OF LYNGRAY DEVELOPMENTS PTY LTD (in liquidation)
ACN 084 052 371
(applicant)
v
SASHA ELIZABETH DUSHAS
(respondent)
SOTIRI DUSHAS
(not a party to the appeal)

FILE NO/S:

Appeal No 5098 of 2012
Appeal No 9608 of 2012
DC No 3517 of 2008

DIVISION:

Court of Appeal

PROCEEDING:

Application for Leave s 118 DCA (Civil)
Application for Extension of Time/General Civil Appeal

ORIGINATING COURT:

District Court at Brisbane

DELIVERED ON:

22 March 2013

DELIVERED AT:

Brisbane 

HEARING DATE:

6 November 2012

JUDGE:

Margaret McMurdo P and White JA and Daubney J
Separate reasons for judgment of each member of the Court, Margaret McMurdo P and White JA concurring as to the orders made, Daubney J dissenting in part

ORDERS:

In Appeal No 5098 of 2012:

  1. Grant the application for leave to appeal.
  1. Allow the appeal.
  1. Set aside the order of the District Court   dismissing the claim.
  1. Instead, declare that each of the 22 payments totalling $59,758 made from 5 June 2003 by Lyngray Developments Pty Ltd to Sasha Elizabeth Dushas is voidable under s 588FE(6A) Corporations Act 2001 (Cth).
  1. Order that Sasha Elizabeth Dushas pay the sum of $44,818.50 to Lyngray Developments Pty Ltd, together with interest at 10 per cent from 15 August 2008.
  1. The parties have leave to make submissions as to the appropriate costs order in the appeal and at first instance in accordance with para 52 of Practice Direction No 3 of 2013.

In Appeal No 9608 of 2012:

  1. Refuse the application for an extension of time to appeal.
  1. The parties have leave to make submissions as to the appropriate costs order in this application and at first instance in accordance with para 52 of Practice Direction No 2 of 2010.

CATCHWORDS:

CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PREFERENCES UNCOMMERCIAL TRANSACTION – where the applicant liquidator of Lyngray Developments Pty Ltd seeks leave to appeal the decision of the District Court dismissing the application for a declaration under the Corporations Act 2001 (Cth) that transactions concerning payments to the respondent were voidable and for an order to repay the amount of the impugned payments to the company – where impugned payments involved depletion of the company’s assets –where respondent is a close blood-relative of the company director – where there were “suspicious” uses of the company’s funds – where the company’s principal place of business was located in a property owned by the daughter – where the company paid for the rent of this property to the bank account of the daughter – where company's accounts recorded 25 per cent of rental as attributable to the company's use – whether there was evidence of any benefit to the company in entering into the transactions constituted by the impugned payments – whether transactions were voidable as “unreasonable director-related transactions” under s 588FE(6) of the Corporations Act – whether an order should be made under s 588FF(1) Corporations Act to repay the impugned payments – whether the applicant should have leave to appeal under s 118 District Court of Queensland Act 1967 (Qld)

Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003

Corporations Act 2001 (Cth), s 588FDA, s 588FE, s 588FF

District Court of Queensland Act 1967 (Qld), s 118

Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd & Dushas & Anor [2012] QDC 96, cited

Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93; [1991] FCA 162, cited

COUNSEL:

T Pincus for the applicant

C D Coulsen for the respondent

SOLICITORS:

MacGillivrays Solicitors for the applicant

Rudkin Hitchcock Grant Solicitors for the respondent

  1. MARGARET McMURDO P: This is an application for leave to appeal under s 118 District Court of Queensland Act 1967 (Qld).  It is from a decision dismissing the application of the liquidator of Lyngray Developments Pty Ltd for a declaration under s 588FE(6A) Corporations Act 2001 (Cth) that transactions concerning impugned payments to the respondent, Sasha Dushas,[1] were voidable and for an order to repay the amount of the impugned payments to the company under s 588FF(1) Corporations Act
  1. I consider that the application for leave to appeal should be granted for two reasons. First, it raises matters of general importance, namely, the application of s 588FDA(1)(c) and s 588FF(4) Corporations Act.  Second, as I explain later in these reasons, the primary judge erred in refusing the liquidator's application.  The interests of justice require that this error be remedied for the benefit of the company's creditors.
  1. I agree with Daubney J that the appeal must be allowed, although my reasons and proposed orders differ in part from his Honour's. Daubney J has set out the relevant legislation and facts. I will only repeat or add to these where necessary to explain my reasoning.
  1. The first question in the appeal is whether the primary judge rightly held that the impugned transactions were not unreasonable director-related transactions, that is, whether in terms of s 588FDA(1)(c) Corporations Act:

"it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(i)the benefits (if any) to the company of entering into the transaction; and

(ii)the detriment to the company of entering into the transaction; and

(iii)the respective benefits to other parties to the transaction of entering into it; and

(iv)any other relevant matter."

  1. The impugned transactions involved payments for rental of Ms Dushas' premises. Ms Gray, the company's director and Ms Dushas' mother, made the payments. I agree with Daubney J's reasons for finding that the impugned transactions were unreasonable director-related transactions under s 588FDA(1)(c).  The trial judge erred in concluding that the impugned transactions resulted from a legitimate company loan to Ms Gray.  A reasonable person in the company's circumstances would not have entered into the transactions resulting in the impugned payments, having regard to the matters listed in s 588FDA(1)(c)(i)-(iv).  The transactions, therefore, were voidable as unreasonable director-related transactions of the company under s 588FE(6A).
  1. This Court must then consider a second question: whether, in exercising its discretion under s 588FF Corporations Act, it should order Ms Dushas to make a payment to the company equal to some or all of the money that the company paid under the impugned transactions.  The determination of this question requires a consideration under s 588FF(4) Corporations Act as to what the difference is between:

"(a)the total value of the benefits provided by the company under the transaction; and

(b)the value (if any) that it may be expected that a reasonable person in the company's circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c)."

  1. The amount of the value referred to in s 588FF(4)(a) in this case is $59,758 (the total of the impugned payments). Determining the amount referred to in s 588FF(4)(b) in this case is more difficult.  Ms Dushas did not claim, either in the primary court or on appeal, that, as the company partially used the property for business purposes, that portion of the impugned transactions made for company purposes equated to the amount in s 588FF(4)(b).  There was, however, evidence to that effect and the issue was raised both at trial and on appeal.
  1. The company was incorporated in 1998 at the request of Ms Gray's then de facto partner, Mr Crawford, to enable him to carry on his chemical development business through a corporate vehicle.[2]  Throughout the entire period of the impugned payments from June 2003 until September 2005, Ms Gray and Mr Crawford lived in the property.  Ms Gray paid the rent into Ms Dushas' ANZ Bank mortgage account.  It is rather curious that under the rental agreement the payments were to precisely match Ms Dushas' mortgage obligations to the bank.[3]  But it is not suggested that the rental did not represent fair market value or that it was made to defeat creditors.[4]
  1. As Daubney J explains in his reasons, Ms Gray's conduct as a director was reprehensible and the company's records were in a parlous state. It is true that the company's far from satisfactory and incomplete accounts recorded only that, from September 2004, 25 per cent of the rental was attributable to the company's use.[5]  It is also true that the property was specified as the company's principal place of business only from 31 January 2005, and as its registered office only from 22 February 2005.[6]  The last eight of the 22 impugned payments were made after 31 January 2005.  But Ms Gray deposed that from the time she and Mr Crawford moved into the property in 2002, it was both their family home and the premises from which the company operated its business.  The evidence of Ms Gray and Ms Dushas established that the downstairs area was used as the company's office.  The company's only other premises were a self-storage unit located nearby.  The company administration was predominantly carried out at the property.[7]  The office was near the kitchen and contained a desk, fax machine and computer.  The garage was used to store company products.  The dining room was used for packaging.[8]  That evidence was all unchallenged and was accepted by the primary judge.
  1. The extent of the company's use of the property was the subject of submissions at trial. The liquidator in his written submissions contended that:

"To the extent if any that some parts of the payments were by way of rental for the company's use of the property as its office…that could only apply in relation to payments 22 and 23 totalling $4,600."[9]

  1. The written submissions on behalf of Ms Dushas at trial referred to the fact that the company conducted its business from the property where there was an office which both Ms Gray and Mr Crawford used for company purposes.[10]  The garage space served as a warehouse for company products.[11]  And during oral submissions at trial, her counsel stated:

"What is clear on the financial accounts of the company it seems to be that the company was using the house for at least office facilities and some – I'll call it warehousing…It is clear from the accounts that the accountants were doing an apportionment as to the rent on – there seems to be a three quarter one quarter."[12]

  1. The primary judge noted during oral argument that Ms Dushas's strongest point was that the company clearly did derive some benefit from the payments. In response, her counsel emphasised that there was no evidence the property was not used as the company office and warehousing facility.[13]  Unfortunately, the judge made no direct findings apposite to s 588FF(4)(b), no doubt because his Honour wrongly accepted Ms Dushas' case that the impugned transactions were a legitimate loan.
  1. Ms Dushas' counsel maintained his approach at trial in his submissions in this Court. He contended only that the impugned transactions were a legitimate loan. On his case, it was unnecessary to make any order under s 588FF. He made no alternative submission that any order made under s 588FF should be calculated in accordance with s 588FF(4)(b) by subtracting from $59,758 the value of the impugned transactions that a reasonable company in the company's circumstances would have made having regard to the matters referred to in s 588FDA(1)(c).
  1. The issue of the extent of the company's use of the property was, however, raised in the appeal. The liquidator in his draft notice of appeal seeks an order requiring Ms Dushas to "pay to the company an amount equal to all, or some specified portion, of the payments in question".[14]  When questioned about this issue at the appeal hearing, counsel for the liquidator noted that the company's accounts recorded 25 per cent of rental as attributable to the company's use.[15]
  1. Despite the way Ms Dushas' case was conducted at trial and on appeal, as I have found the impugned transactions were unreasonable director-related transactions under s 588FDA(1)(c), I must now exercise the discretion under s 588FF and determine whether Ms Dushas must repay some or all of the impugned payments. This involves a consideration of the difference between the amounts referred to in s 588FF(4)(a) and (b).  The liquidator is seeking to recover payments made by the company to a third party in circumstances where there was no evidence the company was insolvent at the time; the payments did not reflect market value; or were made to defeat creditors.  There is evidence that part of the impugned payments may have been made, as provided for by s 588FF(4)(b), by a reasonable person in the company's circumstances having regard to the matters referred to in s 588FDA(1)(c).  In many cases, the determination of this amount will be capable of precise arithmetical calculation.  In other cases, the present amongst them, the evidence will be imprecise and judges will be required to assess the value as best they can on the evidence.
  1. It is true that the property was specified as the company's principal place of business only from 31 January 2005 and the company's unimpressive and incomplete accounts only recorded rental payments from 30 September 2004. But acting on the primary judge's unchallenged findings and the evidence to which I have referred, and in the absence of competing evidence from the liquidator, I am satisfied, on balance, that throughout the period of the impugned payments the company conducted its business from the rented premises. It is also true that the company ceased to trade on 1 April 2005 before the last six of the impugned payments. But, again, in the absence of competing evidence from the liquidator, I am satisfied, on balance, that it was reasonable for the company to maintain business premises at a fair rental over the ensuing five months whilst it concluded its operations.  The liquidator has not called evidence to establish nor submitted in this appeal that the 25 per cent of the rental attributed by the company as being for company purposes was exaggerated or unreasonable.  An allocation of 25 per cent of the rental for company purposes seems broadly consistent with the unchallenged evidence from Ms Gray and Ms Dushas as to the significant extent of the company's use of the property for company purposes.  Despite the unsatisfactory aspects of the evidence, on balance I am satisfied that a reasonable person in the company's circumstances may be expected to have provided 25 per cent of the value of the impugned transactions for the company's use of the property, having regard to the matters referred to in s 588FDA(1)(c). 
  1. As I have noted in this case, the value of the amount referred to in s 588FF(4)(a) is $59,758.00 (the total amount of the impugned payments). For the reasons I have given, I am satisfied that, under s 588FF(4)(b), the value that may be expected that a reasonable person in the company's circumstances would have provided having regard to the matters referred to in s 588FDA(1)(c) is 25 per cent of that amount.  In exercising my discretion under s 588FF(1), I would order that Ms Dushas pay the company an amount of 75 per cent of the impugned payments, that is, $44,818.50.

Proposed orders

I would make the following orders:

  1. Grant the application for leave to appeal.
  1. Allow the appeal.
  1. Set aside the order of the District Court dismissing the claim.
  1. Instead, declare that each of the 22 payments totalling $59,758 made from 5 June 2003 by Lyngray Developments Pty Ltd to Sasha Elizabeth Dushas is voidable under s 588FE(6A) Corporations Act 2001 (Cth).
  1. Order that Sasha Elizabeth Dushas pay the sum of $44,818.50 to Lyngray Developments Pty Ltd, together with interest at 10 per cent from 15 August 2008.
  1. The parties have leave to make submissions as to the appropriate costs order in the appeal and at first instance in accordance with para 52 of Practice Direction No 3 of 2013.

CA No 9608 of 2012

  1. I would refuse the application for an extension of time to appeal.
  1. I would give the parties leave to make submissions as to the appropriate cost order in this application and at first instance in accordance with para 52 of Practice Direction No 3 of 2013.
  1. WHITE JA:  I have read the reasons for judgment of the President and Daubney J.  I agree with those of the President and the orders which she proposes.  I agree with much of what Daubney J has written save for his approach to the evidence about s 588FF(4), namely, that it was insufficient to permit a value to be ascribed to the benefit received by the Company from the rental arrangement.
  1. The President has explained how the evidence is adequate to permit an estimate to be made under that provision of the Corporations Act 2001 (Cth).
  1. Both the President and Daubney J have set out the evidence in the books of account of the Company.  In light of the oral evidence of Ms Dushas and, more particularly her mother, Ms Gray, about the use which the Company made of the premises, it does not seem an unrealistic allocation to attribute 25 per cent of the rental payments to the benefit which the Company received.
  1. The liquidator, in my view, in light of that evidence assumed an evidentiary onus of showing that that allocation was unreasonable or inflated. The liquidator did not.
  1. Not without some hesitation, I support the conclusion that the state of the evidence thus permits the conclusion reached by the President at [16] of her Honour’s reasons that:

“…a reasonable person in the Company circumstances may be expected to have provided 25 per cent of the value of the impugned transactions for the Company’s use of the property, having regard to the matters referred to in s 588FDA(1)(c).”

  1. DAUBNEY J:  On 11 May 2012, the learned primary judge dismissed the applicant’s claim for a declaration under s 588FE(6A) of the Corporations Act 2001 (“the Act”) that certain transactions were voidable and for a consequential order under s 588FF of the Act requiring the respondent to pay the amount of the transactions to the applicant.  The applicant now seeks leave to appeal against that judgment.  On 30 August 2012, the learned primary judge ordered that there be no order for costs in the proceeding below.  On 8 October 2012, the learned primary judge being unavailable, another District Court judge ordered that the respondent have leave to appeal against that costs order.  Accordingly, there was also before this Court an application by the respondent for an extension of time for filing a notice of appeal against the costs order below.

Background

  1. The applicant is the liquidator of Lyngray Developments Pty Ltd (in liq) (“the Company”). The Company was ordered to be wound up on 25 January 2007. Ms Lynette Gray was the sole director of the company from the time it was incorporated in 1998.  The respondent, Sasha Dushas, is Ms Gray’s daughter.
  1. The respondent had been married to Sotiri Dushas in 1997. They separated in about December 2001. Property proceedings between them in the Family Court were not resolved until 2005. After Mr Dushas separated from the respondent, she was left with, relevantly, a property situated at 5453 Merion Terrace, Sanctuary Cove (“the property”). The property was mortgaged to the ANZ Bank, and the respondent held a mortgage account with that bank.
  1. Between 28 June 2002 and 12 September 2005, the Company made 29 payments, totalling $81,260.30, to the respondent’s mortgage account. Those payments[16] were:

PAYMENTS – extract from Fielding [15]

NoDateCheque #PayeeAmount

  1. 28/06/20021415ST & SE Dushas$4,200.92
  1. 16/09/[2002]1432ST & SE Dushas$4,200.00
  1. 01/10/20021437ST & SE Dushas$2,100.46
  1. 06/11/20021439ST & SE Dushas$2,100.46
  1. 06/12/20021440ST & SE Dushas$2,100.46
  1. 20/02/20031448ST & SE Dushas$4,400.00
  1. 06/03/20031464ST & SE Dushas$2,400.00
  1. 05/06/20031479ST & SE Dushas$2,400.00
  1. 21/08/20031489ST & SE Dushas$155.00
  1. 09/09/20031491ST & SE Dushas$2,200.00
  1. 17/11/20031497ST & SE Dushas$4,200.00
  1. 17/11/20031498ST & SE Dushas$203.00
  1. 08/12/20031551ST & SE Dushas$2,200.00
  1. 07/01/20041561ST & SE Dushas$2,300.00
  1. 09/02/20041576ST & SE Dushas$2,300.00
  1. 08/03/20041584ST & SE Dushas$2,300.00
  1. 08/04/20041590ST & SE Dushas$2,300.00
  1. 10/05/20041591ST & SE Dushas$2,300.00
  1. 13/12/20041621ST & SE Dushas$9,200.00
  1. 15/12/20041629Dushas$7,000.00
  1. 04/01/20051642ST & SE Dushas$2,300.00
  1. 07/02/20051666ST & SE Dushas$2,300.00
  1. 07/03/20051677ST & SE Dushas$2,300.00
  1. 06/04/20051694ST & SE Dushas$2,300.00
  1. 09/05/20051698ST & SE Dushas$2,300.00
  1. 10/06/20051704ST & SE Dushas$2,300.00
  1. 08/07/20051715ST & SE Dushas$2,300.00
  1. 09/08/20051719ST & SE Dushas$2,300.00
  1. 12/09/20051727ST & SE Dushas$2,300.00”
  1. The applicant liquidator contended that 22 of those payments[17] (“the impugned payments”) were voidable as “unreasonable director-related transactions”.  The impugned payments were those numbered 8 – 29 in the above list, and totalled $59,758. 
  1. The evidence of the respondent was to the effect that, following her separation from her husband, she found it difficult to service the mortgage on the property. In about June 2002 she had a discussion with her mother, the upshot of which was that her mother indicated that she and her partner were interested in purchasing the property but they would not be in a position to do so for approximately six months. The respondent said she “reached an agreement” with Ms Gray and Ms Gray’s partner, Mr Crawford, under which the respondent would move to another property and:

(a)Ms Gray and Mr Crawford would move into the property and pay rent to the respondent “until such time as they were in a position to be able to purchase the property”[18];

(b)The rent would be the same amount as the respondent’s mortgage repayments, i.e. $2,400 per month;

(c)Ms Gray and Mr Crawford would pay this rent directly into the respondent’s mortgage account.

  1. This “agreement” was never reduced to writing, nor was there any sort of formal tenancy agreement.
  1. In any event, on 15 November 2005 (several months after her property proceeding in the Family Court was finalised), the respondent entered into a contract to sell the property to Ms Gray and Mr Crawford; that sale settled on 30 November 2005.
  1. In an affidavit filed before the learned primary judge, Ms Gray said that she recalled that at the time her daughter, the respondent, was going through a difficult separation from her husband, the respondent discussed with Ms Gray the fact that the respondent and her husband had two properties in Sanctuary Cove and she would need to sell one because of the financial strain. Ms Gray said that, whilst she and Mr Crawford wanted to buy the property from the respondent, neither Ms Gray nor Mr Crawford had the resources to fund the purchase at that time, but the Company’s business “appeared to be doing well” and they thought that they would be in a position to purchase the property in approximately six months. Ms Gray deposed to the following:

“8.At the time we made the following offer to Sasha which was a relatively straight forward arrangement whereby:

(a)That myself and Ian would move into Merion Terrace and commence paying rent to Sasha until such time as we were in a position to purchase the Property;

(b)The rent to be paid for Merion Terrace to Sasha was to be the equivalent of what her mortgage repayments were.

(c)That we hoped to be in a position to purchase the Merion Terrace property from Sasha in approximately six months time, when we were in a better financial position.

  1. Myself and Ian subsequently moved into the Merion Terrace property after reaching agreement with Sasha.  The agreement was only ever verbal and we never signed a written rental agreement.  At the time it was both our family home and the premises from where the Company operated its business.  We would use the downstairs area as the office for the Company.  The Company’s only other premises were a self storage unit located somewhere in the local area however all of the Company administration was predominately carried out at the house.
  1. Rather than paying the rent for the property by transferring money from the Company account to my personal account as drawings or wages and then immediately transferring them from my personal account to Sasha’s mortgage account, as a matter of convenience, after discussing the matter with Ian, I would pay the money directly to Sasha’s mortgage account form the Company account by cheque.  This was done on the basis that:

(a)It was my money as I understood that it was in lieu of me taking a regular wage or drawing.

(b)Ian had told me that the bookkeeper and accountant would properly record the nature of the transaction in the books and records of the Company.”

  1. Both the respondent and Ms Gray were cross-examined before the learned primary judge. In his reasons for judgment, his Honour made the following observations which were not challenged on appeal:

“[21]Ms Gray stated that she had no records showing transactions prior to 1 July 2004.  On that date, according to the General Ledger (Detail) of the company advanced by way of a director’s loan an amount of $9,938.68.  By the end of February 2006 the loan balance had increased to $219,277.  Supermarket costs, pharmacy expenses, purchases of perfume, restaurant costs, drawings, ATM withdrawals, hairdressing charges, nursery purchases, doctors’ accounts, utility bills and, of course, payments to the mortgage account of Mr and Mrs Dushas appear regularly in the ledger.  It is clear that Ms Gray treated the director’s loans from the company as a substitute for salary or wages.

[22]The evidence before this Court, however, is entirely silent as to the terms and conditions attaching to these loans.  How these were to be repaid, over what period and at what interest rate have not been explained.  Ms Gray certainly could offer no assistance in this regard.  It may be inferred that the payments itemised in the general ledger of the company were payments for day-to-day living expenses of Ms Gray which were paid through the company.”

  1. His Honour’s view of the use by Ms Gray of the company’s funds in this manner was set out as follows:

“[38]I am extremely suspicious of the manner in which Ms Gray and Mr Crawford used the company account for all types of personal and living expenses.  Precisely when a loan account was established to debit such expenses against their names remains unclear.  Similarly, the evidence is silent as to the terms and conditions of repayment of the loans.  Although the identity of the respondent’s accountant was known to the applicant, no attempt was made to adduce evidence from that person which may well have enabled a more complete understanding of the financial relationships between the company and Ms Gray.”

The judgment at first instance

  1. Section 588FF(1)(a) of the Act relevantly provides that where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction.
  1. Section 588FE(6A) provides that a transaction is voidable if:

“(a)it is an unreasonable director-related transaction of the company;  and

(b)it was entered into, or an act was done for the purposes of giving effect to it:

(i)during the 4 years ending on the relation-back day;  or

(ii)after that day but on or before the day when the winding up began.”

  1. Section 588FE(1)(b) provides that if a company is being wound up, a transaction may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003.  That amending legislation commenced on 11 April 2003. 
  1. The statutory tests for determining whether a transaction was an “unreasonable director-related transaction” are set out in s 588FDA:

“588FDA  Unreasonable director-related transactions

(1)A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

(a)the transaction is:

(i)a payment made by the company;  or

(ii)a conveyance, transfer or other disposition by the company of property of the company;  or

(iii)the issue of securities by the company;  or

(iv)the incurring by the company of an obligation to make such a payment, disposition or issue;  and

(b)the payment, disposition or issue is, or is to be, made to:

(i)a director of the company;  or

(ii)a close associate of a director of the company;  or

(iii)a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii);  and

(c)it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)the benefits (if any) to the company of entering into the transaction;  and

(ii)the detriment to the company of entering into the transaction;  and

(iii)the respective benefits to other parties to the transaction of entering into it;  and

(iv)any other relevant matter.

The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.

Note:Subparagraph (a)(iv) – This would include, for example, granting options over shares in the company.

(2)To avoid doubt, if:

(a)the transaction is a payment, disposition or issue;  and

(b)the transaction is entered into for the purpose of meeting an obligation the company has incurred;

the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).

(3)A transaction may be an unreasonable director-related transaction because of subsection (1):

(a)whether or not a creditor of the company is a party to the transaction;  and

(b)even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

  1. There was, and is, no issue in the present case that each of the impugned payments:

(a)was a payment made by the Company, for the purposes of s 588FDA(1)(a);

(b)was a payment made to a “close associate of a director” of the Company, for the purposes of s 588FDA(1)(b).[19]

  1. The hearing below and the appeal sought to be pursued by the applicant turn on the application of s 588FDA(1)(c). More particularly, it was clear, and his Honour below properly found, that by making the impugned payments the Company suffered a detriment by reason of the loss of the funds which were paid to the respondent’s mortgage account. The principal criticisms of the judgment related to his Honour’s treatment and assessment of “the benefits (if any) to the Company of entering into the transaction” and “the respective benefits to [the respondent] of entering into” the transaction.
  1. In the course of his reasons for judgment, the learned primary judge appropriately identified the relevant inquiries to be made:

“[34]With respect to the test in s.588(FDA)(1)(c) of the Act, an objective standard is applied in determining whether a transaction is uncommercial.  The four criteria to be considered, i.e. the benefits enjoyed by the company, the detriment to the company, the respective benefits others received and any other relevant matters, are not considered in a vacuum but by reference to the circumstances of the company including the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors.  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 Capital Finance Australia Limited v Tolcher [2007] FCAFC 185 per Gordon J.

[35]The Court should examine the transaction in question very closely when considering the commerciality where that transaction involves a relative of a company’s director.  See Mcdonald v Hanselmann [1998] 144 FLR 463 at 470.”

  1. He found that each of the impugned payments had been made by the Company to a close associate of a director (para [36]) and, as already noted, that the Company suffered a detriment (para [39]).
  1. His Honour identified the essential contest before him as follows:

“[37]In determining whether it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, the benefits and detriment to the company must be identified.  The applicant points to the lack of any benefit to the company from the payment of the mortgage of its director’s daughter without any agreement (or suggestion of a prospect) of repayment.  However, the respondents contend that although the director of the company received a benefit in that she had a house in which to live, the company also gained an asset, being the debt owing to it by its director.  Accordingly, it is said, in paying money to the respondents the company suffered no detriment in terms of s.588FDA(1)(c) of the Act.”

  1. His conclusion, and the reason for dismissing the liquidator’s claim, was:

“[42]I accept the submission of the first defendant that it is not unreasonable for a person in the company’s circumstances to lend money to its directors to pay rent on a residence, provided that a loan account is raised against the directors.  The difficulty in this case lies in determining whether (and under what conditions) a loan account was raised against Ms Gray.  If Ms Gray had been required by the terms of a loan account to repay monies sourced from the company’s account, then it would be the case that there existed no difference in value between the benefits provided by the company and the value that the company would have provided having regard to the matters in s.588FDA(1)(c) of the Act.”

Discussion

  1. The applicant contended that his Honour erred in:

(a)not having regard to the benefits of the transactions to the respondent;  and

(b)his assessment that the raising of a director’s loan account constituted a benefit for the Company.

  1. For the respondent, it was submitted that his Honour’s finding that it was “not unreasonable for a person in the Company’s circumstances to lend money to its directors to pay rent on a residence, provided a loan account is raised against the directors” was reached after a proper examination of the questions posed by s 588FDA(1)(c), and no error had been committed.
  1. As to the first of the points raised by the applicant, it is correct that his Honour did not expressly advert to, or make a finding on, this element in his reasons for judgment. Whilst having identified this element, his Honour did not then give it any express consideration. It would seem, rather, that he was focused on the issue of identifying any benefit for the Company. It is patently clear that the respondent did receive a benefit from the impugned payments, which were directed to payment of her personal mortgage liabilities. Section 588FDA(1)(c) calls for an assessment of whether a reasonable person in the Company’s circumstances would not have entered into the transaction, and requires that assessment to be made having regard to the matters specified in the subsection. His Honour, with respect, erred in failing to have regard to the element identified in s 588FDA(1)(c)(iii).
  1. As to the second point, it is, with respect, difficult to follow the learned primary judge’s line of reasoning. He said that he accepted the respondent’s submission that it was not unreasonable for a person in the Company’s circumstances to lend money to its directors to pay rent on a residence, provided that a loan account is raised against the directors. He then, however, referred to the difficulty in determining whether, and under what conditions, a loan account was raised against Ms Gray, and concluded his consideration with a hypothetical proposition.
  1. In short, his Honour failed to articulate findings about a matter to which he was required to have regard, i.e. the benefits (if any) to the Company of entering into each transaction, and thereby erred in his approach to the exercise of the discretion.
  1. The central tenet of the respondent’s argument below and before this Court was that the benefit gained by the Company from each impugned payment was the asset constituted by the debt represented by the director’s loan account.
  1. This argument was, and is, impossible to accept on the uncontested findings and otherwise on the uncontroversial evidence below.
  1. The only evidence which could have supported a finding that each payment by the Company to the respondent’s mortgage account was matched by the creation of a debt of corresponding value by Ms Gray to the Company were entries made in the Company’s director’s loan account.  But the fact that these entries were made in the Company’s books of account does not prove that there was, in fact, an agreement of value by Ms Gray to repay those sums to the Company; on the contrary, the efficacy of the entries in the books is underpinned by the validity of the agreement from which the transactions recorded in the books are derived.[20]
  1. It is also relevant to have regard to the findings by the learned primary judge, which are set out above in [13]. Those findings quite properly led his Honour to be “extremely suspicious” of the manner in which Ms Gray and Mr Crawford used the Company’s accounts for all types of personal and living expenses.
  1. Also relevant was Ms Gray’s evidence that the payments by the Company into her daughter’s mortgage account was payment of Ms Gray’s money “as I understood that it was in lieu of me taking a regular wage or drawing”.
  1. There were, on the evidence, further circumstances of suspicion. Exhibit 2 recorded the payments by the Company to the respondent’s mortgage account as having commenced on 28 June 2002. Yet Ms Gray said she had no records showing transactions prior to 1 July 2004. The Company’s general ledger noted that the “beginning balance” of the director’s loan account as at 1 July 2004 was $9,438.68, yet by the end of February 2006, the loan account had increased to $219,277. Ms Gray’s own evidence was that the Company was her only source of funds. 
  1. Further, the uncontested evidence at trial was that the Company stopped trading on 1 April 2005, when the Australian Tax Office garnisheed the Company’s bank accounts. Yet six further payments, totalling $13,800, were made after that date by the Company to the respondent’s mortgage account. There could have been no possible benefit to the Company in making these payments after it had ceased to trade.
  1. All of those matters, in my view, compel a finding that the evidence could not support a conclusion that each of the impugned payments was matched by the benefit of an equivalent loan by the Company to Ms Gray. On that basis, a court could not be satisfied that any of the impugned transactions yielded a benefit to the Company.
  1. The learned primary judge also appears to have elided the considerations relevant to s 588FDA and those relevant to s 588FF. In his reasons for judgment, at [41], he noted:

“[41]The power found in s.588FF(1) of the Act can only be used to make orders for the purposes of recovering for the benefit of the creditors of the company, the difference between:

(a)the total value of the benefits provided by the company under the transaction;  and

(b)the value (if any) that it may have expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in this paragraph, s.588(1)(c).”

  1. His Honour then went on to consider, as I have noted, matters relevant to the assessment under s 588FDA(1)(c) and, without making a finding as to whether these were or were not “unreasonable director-related transactions”, seemed simply to have moved directly to considering whether to exercise the discretion under s 588FF.
  1. The proper disposition of this matter called for two discrete stages of inquiry:

(a)Was each of the impugned payments voidable as an “unreasonable director-related transaction”?

(b)If so, how should the discretion under s 588FF be exercised?

  1. As to the first of these questions, it is apparent that the only real issue was that raised by s 588FDA(1)(c).
  1. Having regard to that section, the matters to which regard is required to be had can be stated as follows:

(a)Insofar as it was argued that, for the purposes of s 588FDA(1)(c)(i), the Company gained a benefit from each impugned transaction by reason of the debt represented by the director’s loan account, this argument cannot be accepted for the reasons I have given above.  It is, however, true that there was some evidence before the learned primary judge about another form of benefit to the Company.  In her affidavit, Ms Gray, after referring to the fact that the “rental agreement” with the respondent was only verbal and never in writing, said:

“At the time it was both our family home and the premises from where the Company operated its business.  We would use the downstairs area as the office for the Company.  The Company’s only other premises were a self storage unit located somewhere in the local area however all of the Company administration was [predominantly] carried out at the house.”

Under cross-examination, Ms Gray said that there was an “office area” to the left of the house’s entry which was used for the Company’s purposes, the kitchen was used for making product, and the dining room was used for packing product.  The Company’s General Ledger also contained entries under the heading “Rent” which, on their face, attributed 25 per cent of the money paid to the respondent’s mortgage account ($1,725.00) as being for rent paid by the Company.  The first entry was dated 30 September 2004 and, on its face, was for three months rent.  It is not clear whether this was supposed to be in arrears or in advance.  Similar entries appear in the General Ledger on 31 December 2004 and 31 March 2005.  The General Ledger then recorded payments of “rent” to “ST & SE Dusma” (sic) in the sum of $575.00 on 11 April 2005, 9 May 2005, 10 June 2005, 8 July 2005, 9 August 2005 and 12 September 2005.  Ms Gray was cross-examined on these entries in the General Ledger.  She knew nothing about them, and presumed the entries had been made by the Company’s bookkeeper (an unidentified person who, according to Ms Gray, came to the house to do the books every month).  The respondent also gave some evidence on this topic.  In response to questions from the learned primary judge, the respondent said that the Company’s office was run out of the house, the garage was used for storage of raw product, product was cooked in the kitchen, packaged in the dining room and “they ran their whole company out of the house” (AR 24).

This evidence collectively would support a finding that the Company in fact derived some benefit from the impugned transactions in the sense that Ms Gray permitted the Company to use part of the house for its operations.  For completeness, however, I note that the respondent did not in any way submit to this Court that this provision of accommodation to the Company constituted a benefit to the Company for the purposes of s 588FDA(1)(c)(i).

(b)The Company suffered the detriment of being deprived of the funds paid to the respondent’s mortgage account;

(c)The respondent received the benefit of payments into her mortgage account and Ms Gray received the benefit of a house to live in;

(d)There were other relevant matters, namely:

(i)the fact that the respondent is a close blood relative of Ms Gray calls for close and critical examination of the transaction;

(ii)the “extremely suspicious” circumstance of Ms Gray using the Company’s funds to pay personal and living expenses, in conjunction with the other suspicious circumstances described above;

(iii)Ms Gray’s own evidence that the money in question was paid “in lieu of [her] taking a regular wage or drawing”;

(iv)the fact that the payments continued even after the Company had ceased to trade.

  1. In short, each of the impugned payments involved depletion of the Company’s assets, with benefits received by the director and her daughter. The only benefit to the Company which could be identified in the evidence below was the relatively unparticularized evidence about its use of part of the house, to which I have referred above. I note again, however, that the respondent (presumably on the basis of a deliberate forensic decision in that regard) did not seek to advance this before this Court as a matter of benefit to the Company to which regard should be had.  In those circumstances, it could be expected that a reasonable person in the Company’s circumstances would not have entered into any of the transactions constituted by the impugned payments.
  1. Accordingly, each of the impugned payments was an “unreasonable director-related transaction” and therefore voidable under s 588FE(6A).
  1. The second inquiry, then, goes to the exercise of the discretion under s 588FF. In the context of a case such as the present, where the order sought was for recovery of money paid for the benefit of the respondent, s 588FF(4) effectively allows the Court only to order the recovery of the difference between:
  1. the total value of the benefits provided by the Company;  and
  2. the value (if any) that it may be expected that a reasonable person in the Company’s circumstances would have provided having regard to the matters referred to in s 588FDA(1)(c).
  1. The total value of the benefits provided under the impugned payments was $59,758.
  1. As to the second element of this equation, the only possible benefit which the Company received from some (at best) of the impugned payments was accommodation in parts of the house. I say “at best” because while, on the records contained in the Company’s General Ledger, the first attribution of part of the moneys paid to the respondent’s mortgage account was on 30 September 2004, the payments into the mortgage account actually started in June 2002 and the first of the impugned payments was on 5 June 2003. There was simply no evidence as to why the General Ledger started recording this “rent” from 30 September 2004, nor any explanation as to why there was no attribution of any of the payments prior to that date. Ms Gray, as was noted by the learned primary judge, said that she had no records showing transactions prior to 1 July 2004. Moreover, Ms Gray said both in the response to the questionnaire which the Company’s liquidator required her to complete[21] and in evidence[22] that the Company ceased to trade on about 1 April 2005.  Given the cessation of trading, and the inevitable cessation of cooking, packaging and shipping of product, it cannot be said that the Company continued to derive the benefit of the accommodation in the house in the same way as it had before it ceased to trade.  This means, at best, the only “rent” payments to which regard might properly be had are those entered in the General Ledger on 30 September 2004, 31 December 2004 and 31 March 2005, totalling $5,230.  But even if I were prepared to treat these entries as somehow representative of the benefit of accommodation used by the Company during that period, there is simply no evidence on which to base a finding that this is the value which it might be expected a reasonable person in the Company’s circumstances would have provided for that benefit.  There was no evidence as to the justification for attributing 25 per cent of the amounts paid to the respondent’s mortgage account to “rent”.  There was no evidence to demonstrate how this figure was derived – for example, was it on a proportion of floor area of the house, or based on the cost of renting commercial premises for the purpose, or just a number picked by the bookkeeper?  Nor was there any evidence to explain or justify the continued payment of “rent” (according to the General Ledger) even after the Company had ceased to trade.
  1. For my own part, at least, I consider that the absence of evidence on these matters means that, even if one accepts that the Company received a benefit in the form of accommodation in the house, an assessment of the value that a reasonable person in the Company’s circumstances would have provided for that benefit is not able to be undertaken. In any event, I observe again that the respondent did not advance any case before this Court that there should be an accounting for the value of the accommodation, but limited herself to an “all or nothing” case based on the director’s loan account argument.
  1. Accordingly, in my view the value to be taken into account in this case for the purposes of s 588FF(4)(b) is nil.
  1. The amount which I would order be recovered for the benefit of the Company’s creditors is, therefore, the full amount of the total value of the impugned transactions, namely $59,758.

Disposition of the applications

  1. Having regard to the matters set out above, and acknowledging that both sides advanced on the hearing of the application all arguments relevant for the hearing of an appeal, it is appropriate that the applicant have leave to appeal.
  1. It will also be apparent from what I have written that I am disposed to allowing the appeal and making orders for the recovery of the amount of the impugned payments from the respondent. In those circumstances, it is clearly appropriate that the applicant should have its costs not only in this Court but also its costs of the trial. That being the case, there is no necessity to deal with the respondent’s application concerning the costs order made below.
  1. I would therefore make the following orders:
  1. The applicant have leave to appeal.
  1. The appeal be allowed.
  1. The judgment of the District Court dismissing the claim be set aside and in lieu thereof:
  1. It be declared that each of the 22 payments, totalling $59,758, made from 5 June 2003 by Lyngray Developments Pty Ltd to Sasha Elizabeth Dushas is voidable pursuant to s 588FE(6) of the Corporations Act 2001;
  2. It be ordered that Sasha Elizabeth Dushas pay the said sum of $59,758 to Lyngray Developments Pty Ltd, together with interest thereon calculated at the rate of 10 per cent from 15 August 2008;
  3. It be ordered that the respondent pay the applicant’s costs of and incidental to the proceeding.
  1. The respondent pay the applicant’s costs of and incidental to the application and the appeal;
  1. The respondent’s application filed 15 October 2012 be dismissed with costs.

Footnotes

[1] The application was originally also brought against Ms Dushas's now former husband, Sotiri Thomas Dushas.  He is not a party to the present application.

[2] Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96, [16].

[3] Above, [13].

[4] Above, [39].

[5] Trial, T 1-40; Appeal hearing, T 1-3.  See also Daubney J's reasons at [61(a)].

[6] Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96, [9].

[7] Affidavit of Lynette Margaret Gray sworn 3 November 2011, [9].

[8] Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96, [19].  See also Daubney J's reasons at [61(a)].

[9] Liquidator's submissions at first instance, [15(e)] and see the list of payments set out in Daubney J's reasons at [26].

[10] Submissions on behalf of Ms Dushas at the primary hearing, [18].

[11] Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96, [19].

[12] Trial, T 1-56.

[13] Trial, T 1-57.

[14] AB 582.

[15] Appeal hearing, T 1-3.

[16] As detailed in Exhibit 2, AR 489.

[17] Those which occurred after the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 commenced on 11 April 2003.

[18] Respondent’s affidavit, para 5, AR 323.

[19] As the daughter of Ms Gray, the respondent fell within the definition of “close associate of a director” in s 9.

[20] See, in this regard, the discussion by the Full Federal Court in Temples Wholesale Flower Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93 at 101-102.

[21] AR 255.

[22] AR 46.

Close

Editorial Notes

  • Published Case Name:

    Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas

  • Shortened Case Name:

    Fielding v Dushas

  • Reported Citation:

    [2013] 2 Qd R 416

  • MNC:

    [2013] QCA 55

  • Court:

    QCA

  • Judge(s):

    McMurdo P, White JA, Daubney J

  • Date:

    22 Mar 2013

Litigation History

Event Citation or File Date Notes
Primary Judgment [2012] QDC 96 11 May 2012 Substantive Judgment (Newton DCJ).
Primary Judgment [2012] QDC 242 30 Aug 2012 Costs Judgment (Newton DCJ).
Primary Judgment DC3517/08 (No Citation) 08 Oct 2012 Leave to appeal costs order of Newton DCJ granted.
Appeal Determined (QCA) [2013] QCA 55 [2013] 2 Qd R 416 22 Mar 2013 In Appeal 5098/12, appeal allowed; in Appeal 9608/12, application for extension of time refused: Margaret McMurdo P and White JA (Daubney J dissenting in part).
Appeal Determined (QCA) [2013] QCA 85 16 Apr 2013 Appeal Costs Judgment.

Appeal Status

{solid} Appeal Determined (QCA)