McLeod v Wotton[2013] QDC 324

DISTRICT COURT OF QUEENSLAND

1. [1]
   The defendant’s brother had been the sole director of the second plaintiff prior to his unexpected death. The defendant was the executor of his brother’s estate and was appointed the sole director of the second plaintiff in his brother’s place on 28 November 2006. The defendant’s evidence was that he accepted the appointment as sole director to enable him to manage the company and to administer his brother’s estate.^[1]

2. [2]
   The defendant’s brother died intestate.^[2]The only people who received any disposition from the estate were the defendant’s parents who each received approximately $22,000.^[3]

3. [3]
   Before being appointed director of the second plaintiff, the only involvement the defendant had with the second plaintiff was when he worked for his brother for approximately three months some years earlier.

4. [4]
   The first plaintiff was appointed administrator of the second plaintiff on 31 May 2007 pursuant to Part 5.3A of Chapter 5 of the Corporations Act 2001 (“the Act”), thus making this date the relation-back day.

5. [5]
   The first plaintiff was appointed liquidator of the second plaintiff on 27 June 2007 pursuant to Part 5.5 of the Act.

6. [6]
   The transaction the subject of this claim is the repayment by the second plaintiff to the defendant of $80,000 on 19 February 2007. It is not in dispute that the defendant had provided a sum of $80,000 to the second plaintiff on 7 February 2007.

7. [7]
   The first plaintiff alleges that in receiving the payment of $80,000 from the second plaintiff, the defendant has breached the Act by:

1. (a)
   receiving an unfair preference pursuant to s. 588FA of the Act; and/or

2. (b)
   being the beneficiary of an uncommercial transaction pursuant to s. 588FB; and/or

3. (c)
   being the beneficiary of an unreasonable director-related transaction pursuant to s. 588FDA; and/or

4. (d)
   breaching his director’s duties under s. 588G by failing to prevent the second plaintiff trading while insolvent, the alleged insolvent trading being the payment of the $80,000 to the defendant.

8. [8]
   The defendant disputes that he has breached the Act in any of the ways alleged.

Statutory regime

9. [9]
   There is no real dispute between the parties as to the nature and affect of the statutory regime relevant to the issues in this matter.

10. [10]
    The court is empowered to make orders under s. 588FF of the Act if it is satisfied that a transaction is voidable under s. 588FE. A voidable transaction (relevant to an unfair preference or an uncommercial transaction) is one that is an insolvent transaction and which was entered into during the six months before the relation-back day.^[4]

11. [11]
    An insolvent transaction is an unfair preference or an uncommercial transaction entered into while the company is insolvent, or which causes the company to become insolvent. ^[5]

12. [12]
    A transaction is also voidable if it is an unreasonable director-related transaction that was entered into during the four years before the relation-back day.^[6]

13. [13]
    An unfair preference is a payment made by the company to a creditor that results in the creditor receiving more than would otherwise have been received if the debt was proved in the winding up.^[7]

14. [14]
    A transaction is uncommercial if a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefit and detriment to the company, the benefit to the other party to the transaction and any other relevant matter.^[8]

15. [15]
    Under s.588G a director causes a company to trade whilst insolvent if he/she causes the company to enter into an uncommercial transaction within the meaning of s. 588FB at a time when the company was insolvent and there were reasonable grounds for suspecting that the company was insolvent or would so become insolvent. Section 588H provides that it is a defence to an allegation of a contravention of s. 588G(2) if it is proved that, at the time the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent and would remain so even if it incurred that debt and any other debts that it incurred at that time.

Transaction

16. [16]
    The defendant accepts that the payment on 19 February 2007 was a transaction within the meaning of that term as provided by s. 9 of the Act.

Unfair preference – Section 588FA

17. [17]
    The plaintiffs bear the burden of establishing the necessary conditions of an unfair preference claim.^[9]Those conditions are:

1. (a)
   that there has been a “transaction” within the meaning of s. 9 of the Act;

2. (b)
   the transaction resulted in the unsecured creditor receiving a greater payment from the company than he would otherwise have received if he had to prove the debt in winding up;

3. (c)
   the transaction was an “insolvent transaction” as defined in s. 588FC; and

4. (d)
   the transaction was entered into during the six months before the relation-back date.^[10]

18. [18]
    The test for whether a transaction is a preference was stated in Air Services Australia v Ferrier & Anor;^[11]

“A payment will only be preferential where it ultimately results in a decrease in the net value of assets available to meet the competing demands of other creditors.”

19. [19]
    The defendant has submitted that the court would not be satisfied that this transaction was a preference because a refund of money to a person by a company does not otherwise decrease the net value of assets, it simply brings that value back to the level it was before the refunded payment was made.

20. [20]
    No authority has been sighted in support of that submission. That is hardly surprising. The submission overlooks the fact that prior to its repayment, the $80,000, assuming it had been loaned to the company, formed part of the company’s assets. The debt associated with that loan formed part of its liabilities. Accordingly, on the assumption that the $80,000 was the subject of a loan to the company, the repayment of it to the defendant resulted in a decrease in the net value of assets available to meet the competing demands of other creditors. In other words, the transaction was a preference it if resulted in the defendant, who was an unsecured creditor, receiving a greater payment than would otherwise have been the case if the debt had to be proved in the winding up.

21. [21]
    In that regard I note the comment of Dawson, McHugh and Gaudron JJ in Airservices Australia v Ferrier:^[12]

“…if the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due.”

22. [22]
    The first plaintiff has submitted that the court should find that the transaction was an unfair preference given to the defendant because:

1. (a)
   the transaction occurred during the relation-back period;^[13]

2. (b)
   the second plaintiff and the defendant were parties to the transaction (s. 588FA(1)(a));^[14]

3. (c)
   the defendant received more than he would have received as he was an unsecured creditor with no priority; and

4. (d)
   the second plaintiff was insolvent from at least 6 February 2007 or alternatively the second plaintiff became solvent by reason of entering into the transaction (s. 588FC(b)(i)).

23. [23]
    As to points (a) and (b) above there is no dispute between the parties.

24. [24]
    As to point (c), the first plaintiff relies on the fact that there are presently no funds in the liquidation available for distribution to the second plaintiff’s unsecured creditors and there is no prospect that unsecured creditors will receive a dividend of 100 cents per dollar (s. 588FA(1)(b)).^[15]I note that there was no challenge to this assertion and I accept the evidence in that regard.

25. [25]
    The defendant has submitted however that the full amount owing to him is a relevant consideration. The evidence shows that he made further payments to the second plaintiff in the amounts of $20,000 for one payment, and three payments each of $10,000. These payments all occurred after he had received the $80,000 repayment on 19 February 2007. None of those amounts have been repaid. The defendant submits that this should be taken into account when considering whether he received a preference.^[16]

26. [26]
    That submission would have some force to it if the court concluded that the payments to and from the first plaintiff were part of a running account. I will come back to that issue.

27. [27]
    Insofar as paragraph (d) above is concerned, there is a dispute as to whether the plaintiff has proved that the second plaintiff was insolvent at the relevant time or became insolvent because of the transaction.

28. [28]
    The defendant has also submitted that the court would not be satisfied that the transaction was an unfair preference, because:

1. (a)
   the company was not insolvent at the time of the transaction; and/or

2. (b)
   the transaction was part of a running account; and/or

3. (c)
   the transaction occurred in the context of it being part of a resulting trust.

Was the company insolvent?

29. [29]
    Section 95A of the Act defines insolvency:

“A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable.”

30. [30]
    In Sandell v Porter,^[17]Barwick CJ pointed out that whilst insolvency is expressed in the relevant bankruptcy provision as an inability to pay debts as they fall due out of the debtor’s money, the debtors own monies are not limited to his cash resources immediately available.

31. [31]
    The defendant submits that the purported evidence of insolvency at the relevant time comes from the first plaintiff’s report,^[18]and that the court “cannot place much weight” on that report because:

1. (a)
   the first plaintiff has abandoned part of his original claim regarding an additional sum of $20,000 only after it became clear after examining the second plaintiff’s bank accounts that this payment was made between company accounts and not to the defendant.^[19]This mistake is said to be “glaring” and, given that the liquidator could not even trace a simple transaction between company accounts, little weight should be placed on his opinion as to the date of insolvency as contained in his report (i.e. 6 February 2007);

2. (b)
   the report takes figures from the second plaintiff’s internal accounts, which by the first plaintiff’s own admission contain inaccuracies and are not the best source of information;

3. (c)
   the aged debtors listed in his report as being 300 days old are only 300 days old at the time of his appointment as administrator on 31 May 2007. This is over 100 days after the date of the payment sought to be impugned. The relevant date for proving insolvency according to the report is 6 February 2007 and therefore aged debtors at 31 May 2007 cannot be relevant to the issue;

4. (d)
   at the time of writing his report (approximately two and a half years after appointment as administrator) the plaintiff misinterpreted the second plaintiff’s financial affairs by characterising the previous payment of wages to the defendant’s brother as a loan;^[20]

5. (e)
   the amount owing to trade creditors listed in the report does not take into account the date when those creditors were to be paid;^[21]

6. (f)
   all the statements in the report are made with the benefit of hindsight;^[22]and

7. (g)
   in the first plaintiff’s words, “It’s a memo. It’s not a comprehensive report.”^[23]

32. [32]
    The defendant submits that given the many errors and unsubstantiated assumptions in the report, the court should find that the report is insufficient to establish insolvency as at 19 February 2007.

33. [33]
    It is not only that report however which is relied upon by the first and second plaintiffs to support the assertion of insolvency. The second plaintiff’s financial statements show that it had not earned a profit since the 2004/2005 financial year, which in turn showed that the company had a trading deficiency before and during the relation back period. The first and second plaintiffs submit that this a common feature of insolvency.^[24]I agree. Furthermore, the company’s aged payables throughout 2006 and 2007 continued to stay the same, which meant that the company was failing to repay debts, and of those creditors that were paid, a number of payments were made well outside trading terms.^[25]Additionally, the second plaintiff had failed to remit tax in the sum of $105,912.94 as at 25 January 2007 to the Australian Taxation Office (“ATO”). That had grown to $150,076.91 by the end of that financial year.^[26]The company also had a tax running account that was consistently overdue. Overdue taxes is another common feature of insolvency.^[27]

34. [34]
    The company’s liquidity ratio was also below 1 as at 6 February 2007, further indicating that the company was not able to pay its debts as and when they fell due.^[28]

35. [35]
    Finally, the second plaintiff had failed to pay superannuation since 2005^[29]and by the time of the first plaintiff’s appointment there was approximately $37,000 of outstanding superannuation contributions.^[30]

36. [36]
    I also note the following evidence of the first plaintiff that is of relevance to this issue:^[31]

“And we’re just starting with your report. In general terms, what has been your assessment of the company’s financial position in relation to solvency in or around early February 2007?— It’s my opinion that the company was insolvent as at that time. I looked at various factors, the company’s trading profit and loss, the company’s balance sheet and its cash flow and I looked at some indicia as well.

Okay. And what are those indicia?—One of the big issues was the tax liability of the company. Since Mr Wotton took over in November ’06, there was an inheritance of a tax liability. It certainly didn’t decrease, it just grew during the tenure of Mr Wotton’s directorship to over 125,000 when I was appointed as administrator.

Okay. And what would that tell you as somebody looking at the books and records of the company?—There were some cash flow issues. For instance, there was a notice of intention to commence legal action and garnish the company’s bank accounts which was in February of ’07. So the ATO took it fairly seriously that they were not getting their payments, the payments weren’t up to date as to what they should have been.

Okay. What other indicia would there have been for a director of this company to ascertain the true position of the company?—Well, there was – as mentioned previously there was …

I’m sorry. I should restrict it to February of 2007?—Yes. Sure. Sure. Also there was – right throughout the trading history there was this other related entity, CJ & AJ Fabrications, and it, on occasion, would provide financial support to Engineering when Engineering needed money. Well, the tap ran dry in February of ’07 and that company ceased its operations.”

37. [37]
    The first plaintiff then clarified that CJ & AJ Fabrications (a separate company from the second plaintiff which had the same director, the same administrative staff and had been operating from the same premises^[32]) was hopelessly insolvent in February ’07 and ceased operating at that time.^[33]That was relevant for two reasons:

1. (a)
   because it could no longer put money into the second plaintiff as and when needed; and

2. (b)
   it was also a debtor of the second plaintiff in the sum of approximately $67,000 and that sum was never going to be paid.^[34]

38. [38]
    I note also, that in his report,^[35]the first plaintiff said:

“I will now consider a number of the relevant indicia as such considerations strongly support my opinion that the company was insolvent from at least 6 February 2007.

4.1 Overdue Commonwealth and State Taxes

The company failed to remit tax in the sum of $105,912.94 as at 25 January 2007 and $150,076.91 as at 31 May 2007 and the ATO lodged a formal proof of debt for $150,076.91 as at the date of my appointment. I expect to admit same in full (please refer to Note 2.23(e) above for further details in this regard.

These significant statutory debts owing by a company with a limited asset base as previously noted confirmed this indicia of insolvency.

4.2 Creditors unpaid outside trading terms

I have reviewed claims of a number of trade creditors and confirmed that same were being paid by the company (during the relevant period) well outside its stipulated trading terms (at times 60 to 210 days outside these trade terms). Such failures by the company to comply with trade creditors’ terms of trade are yet another indicator of insolvency.

You will also note that a majority of the 58 unsecured creditors listed as creditors in this Liquidation are employees and trade creditors.

Such evidence is yet a further indicia of insolvency.

4.3 Inability to source capital

My investigations show that the company had no ability to attract an investment partner or source a loan(s) from a third party to assist the company to pay its debts and other trading obligations as and when same became due and payable.

5 Conclusion

Having regard to all of the factors I have considered in this report, I conclude that the Company was insolvent from at least 6 February 2007 and continued to be insolvent thereafter until my appointment as Voluntary Administrator on 31 May 2007.”

39. [39]
    Insofar as the defendant’s criticisms of the first plaintiff’s report are concerned, I note that:

1. (a)
   the initial incorrect assertion that a $20,000 payment had been made from the second plaintiff to the defendant does not of itself, cause me to doubt the reliability of the first plaintiff’s evidence and the opinions that he holds. I have no doubt that the reconstruction of this company’s financial position was a difficult exercise and it is hardly surprising that an error was made. Of course, it is also relevant to note that the error was corrected well before the trial of this claim;

2. (b)
   the only figures available to the first plaintiff to work from were those of the internal accounts of the second plaintiff. There is no evidence to support the proposition that those records were so grossly inaccurate that no reasonable assessment of solvency could be made. In fact, the first plaintiff’s uncontested evidence was that the books and records of the second plaintiff overstated the company’s assets and probably understated its liabilities^[36].

3. (c)
   the first plaintiff did not “misinterpret the second plaintiff’s financial affairs by characterising the payment of wages to the defendant’s brother as a loan”.^[37]It was in fact characterised in the balance sheet as a debt owing the company. The first plaintiff’s interpretation of that as indicating that the amount was a loan to the company is the only reasonable interpretation open and it was not until he located another document that indicated that it in fact referred to wages paid that he learned the true position;

4. (d)
   the first plaintiff readily accepted that his report did not detail when any of the amounts owing to trade creditors were due and payable. He also accepted that if those amounts were not due and payable as at 6 February 2007, then that would affect the calculations of solvency. Notwithstanding these issues, he nevertheless maintained his opinion that the company was insolvent at the relevant time; and

5. (e)
   the fact that the statements in the report are made with the benefit of hindsight is hardly surprising or damaging to the first plaintiff’s reliability or credibility.

40. [40]
    Accordingly, I am satisfied that there is sufficient reliable evidence to support a conclusion, on balance of probabilities, that the second plaintiff was insolvent from at least 6 February 2007 and continued to be insolvent thereafter. Additionally, given that the first plaintiff is a very experienced liquidator and has been a qualified chartered accountant for decades,^[38]his opinion as to the state of the second plaintiff’s solvency is highly persuasive, particularly given that there is no expert opinion to the contrary. In all of the circumstances I am satisfied that the second plaintiff was not solvent as and from 6 February 2007.

Was the transaction part of a running account?

41. [41]
    It is a defence to an action for recovery of an unfair preference if the payment the defendant received was part of a running account.^[39]The defendant has conceded that in order to establish the existence of a running account he must show that there was an ongoing business relationship between him and the insolvent company and that the payments passing between them were made on the understanding that there would be ongoing dealings between the parties.

42. [42]
    It is submitted that to determine whether a running account defence is available, the ultimate effect of all of the transactions should be “looked at en globo”.^[40]

43. [43]
    Here the defendant pleads that the payments he made and the payment he received were part of a running account and an ongoing business relationship. His payments were made on the following dates:

44. [44]
    Of course, the $80,000 was repaid on 19 February 2007.

45. [45]
    It is not disputed that the defendant paid these sums to the second plaintiff to assist it through difficult financial times and allow it to trade on.^[41]

46. [46]
    The defendant submits therefore that the $80,000 payment to him should be viewed as a payment which was part of an ongoing business relationship and not as one of a series of separate transactions.

47. [47]
    Unfortunately for the defendant, his evidence in cross-examination was not consistent with that submission:^[42]

“Right. Okay. Now, just to talk about the nature of this account, this was a discrete transactions (sic) wasn’t it;  80 grand in/80 grand out. That’s right, isn’t it?‑‑‑Yes.

And when you made – and it was for a purpose of bolstering the cashflow at the time of the company. That’s right, isn’t it?‑‑‑For the shortfall to – until job payments come in. Yes.

Yes. And you paid some more money later on in March and then later in April, didn’t you?‑‑‑Yes.

And each one of those were discrete payments to bolster the company for cashflow shortfalls?‑‑‑Yes. Yes.

Okay. So each transaction itself was a discrete transaction that had a start date and potentially a finish date. That’s right?‑‑‑Yes.

And, in fact, the 80,000, that loan – director’s loan on your account, that had finished when you got the $80,000 back, didn’t you?‑‑‑Yes.”

48. [48]
    The defendant’s evidence in that regard was hardly surprising given the facts. It is quite clear that the repayment of that $80,000 ended any commitment that the second plaintiff had to the defendant. Whether the defendant intended or at some future time was prepared to loan further funds was in no way linked to the original payment and repayment. A running account usually entails a trade/creditor relationship designed to encourage continued business and to provide a smooth, continuous path for payments to be made and received. It would be expected to have invoices, trade terms and regular payments in. None of that exists here.

49. [49]
    Given that the subject transaction involved one payment of $80,000 for the express purpose of bolstering the business until further funds were received, followed by one repayment of $80,000, it has none of the indicia of a running account. Whilst the further payments in were also made for the express purpose of bolstering the company’s financial position, each payment was a discrete transaction conducted at the sole discretion of the defendant. Relevantly, no trade or transaction account was set up to monitor the indebtedness.

50. [50]
    In Queensland Bacon v Rees, Barwick CJ said:^[43]

“…implicit in the circumstances in which the payment is made is a material assumption by the parties that there will be a continuance of the relationship of buyer and seller … it is impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed.”

51. [51]
    In Airservices Australia v Ferrier, Dawson, Gaudron and McHugh JJ said:^[44]

“… if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court … looks to the ultimate effect of the transaction.”

52. [52]
    In this case there is no evidence either express or implied of:

1. (a)
   the existence of any mutual assumption of the continuance of the relationship;

2. (b)
   there being any relationship of buyer and seller; or

3. (c)
   that the purpose of the payment was to induce the creditor to provide further goods or services (or payments in).

53. [53]
    The factual circumstances here clearly show that each of the transactions stood alone and separate to each other, with the understanding that each transaction would be at an end with the repayment of the particular amount. Hence, this potential defence is not available to the defendant.

Was the money held by the second plaintiff on a resulting trust?

54. [54]
    The defendant accepts that the payment to him from the second plaintiff on 19 February 2007 was a “transaction” within s 9 of the Act, but submits that the payment was the repayment of money which had been held on a resulting trust for the defendant and the debtor/creditor relationship required by s 588FA did not exist. The defendant submits that as it was always intended that the money he paid to the second plaintiff be refunded to him once the second plaintiff received payment of certain outstanding invoices, and as the money was paid in for the specific purpose of paying staff wages,^[45]the money was therefore held on trust by the second plaintiff for the defendant. If that submission is correct, then the subject payment would not have been a preference.^[46]

55. [55]
    As the defendant is the party alleging that a trust was created, the burden of proof in establishing that fact rests on him. In that regard I note that:

1. (a)
   the defendant stated numerous times that the money was paid as a director’s loan;^[47]

2. (b)
   no documents were drawn up to create a trust;^[48]

3. (c)
   there was no evidence that any specific oral agreement to create a trust was entered into; and

4. (d)
   there is no evidence that the $80,000 was kept or placed in an account separate from the general affairs of the company.

56. [56]
    A resulting trust can only arise in favour of a party making the relevant payment and it arises when the court can discern an intention by that party to retain its interest in the sum paid.^[49]

57. [57]
    The plaintiffs have also submitted that the defendant’s pleadings are inconsistent in that a resulting trust and a running account are mutually exclusive. I accept that as a correct statement of legal principle, but that of itself does not mean that the court could not, in appropriate circumstances, conclude that no running account existed while accepting that a trust did. Nevertheless, the inconsistent pleadings have some persuasive value.

58. [58]
    Ultimately, I can discern no intention by the defendant to retain his interest in the sum paid and I am not therefore persuaded that the money was held on trust. None of the expected indicia exist to support such an assertion, but more importantly, the defendant’s own evidence directly and specifically contradicts such an assertion. The evidence overwhelmingly supports the conclusion that the defendant supplied the money to the second plaintiff as a director’s loan.

Conclusion regarding an unfair preference payment

59. [59]
    For the above reasons, I am satisfied that the transaction constituted an unfair preference as defined in s 588FA of the Act.

Uncommercial transaction

60. [60]
    Notwithstanding my conclusion that the transaction constituted an unfair preference, I am nevertheless required to assess whether the transaction may also have been uncommercial and/or an unreasonable director-related transaction.

61. [61]
    A transaction is uncommercial within the meaning of s 588FB if a reasonable person in the company’s circumstances would not have entered into the transaction having regard to:

1. (a)
   the benefits (if any) to the company of entering into the transaction; and

2. (b)
   the detriment to the company of entering into the transaction; and

3. (c)
   the respective benefits to other parties to the transaction of entering into it; and

4. (d)
   any other relevant matter.

62. [62]
    In Capital Finance Australia Ltd v Tolcher^[50] Gaudron J held at [129] that uncommercialty was to be determined on an objective standard. This standard however must take into account relevant factors at the time such as the state of knowledge of those directing the company’s mind (i.e. its directors). Furthermore, the transaction 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”.

63. [63]
    In this matter the defendant submits that as the transaction was a mere repayment of a loan from the borrower to the lender it cannot constitute a detriment to the company. He further submits that as he was repaid the exact amount he put in only a few days prior, it could never be said that he received a bargain of such magnitude that it could not be explained by normal commercial practice.

64. [64]
    The plaintiffs contend however that the transaction was uncommercial. In that regard, they submit:

1. (a)
   that the transaction occurred at a time when the company was insolvent;

2. (b)
   there was no benefit to the second plaintiff by reason of conducting the transaction;

3. (c)
   there was a detriment to the company in conducting the transaction as it deprived the company of funds when it needed them most;

4. (d)
   the defendant had no knowledge at the time of the transaction whether the cashflow problem still existed at the time the transaction took place;^[51]and

5. (e)
   the defendant knew at the time that he paid $80,000 to the second plaintiff that it had insufficient funds without that payment to pay employees their wages.

65. [65]
    Furthermore, the plaintiff has submitted that the following passage of evidence shows that the defendant insisted on the loan being repaid in full very quickly, irrespective of the company’s financial position at the time:^[52]

“Alright. And why did you pay that money to the company? --- Julianne came to me and, you know, wages need to paid. There was invoices outstanding and, yes things just needed to happen and like it was coming up to Friday and the guys needed to be paid and everything whatnot and there was also we’d just finished the job on the crane girder so I knew that money was coming back. So it’s like alright, well, I can try and solve this here but, you know, the money’s coming back.

What do you mean the money’s coming back? --- well, it’s got to be transferred back to my account.

So when you paid the money in, what was your intention when you paid that money in? --- to get it back.”

…

“I was putting  a lot of money into there and besides the $80,000 and other money there was a lot of things happening, and you know, my bank account was copping a hell of a flogging and, you know, the girls and the guys promising work and work coming in and whatever whatnot, there was a point where, you know, enough was enough. So, you know, it had to start standing on its own two feet so the $80,000 was to go in under the condition that it came back out.”

66. [66]
    Where the party to the transaction is a related entity to the company (i.e. a director), the court should look closely at the transaction and be less inclined to excuse the transaction because of some commercial factor,^[53]and where the company obtains no benefit and a party obtains an advantage that cannot be explained by ordinary commercial practice, an uncommercial transaction occurs.^[54]

67. [67]
    In my view there was no benefit to the company in entering into the transaction. In fact, there was a detriment to the company in that entering into the transaction deprived it of a large sum of money at a time when it was desperately needed.

68. [68]
    Furthermore, the defendant’s lack of knowledge of the company’s financial position was the direct result of him not making any reasonable enquiries as to the state of the company’s finances. At best, he knew that employee’s wages could not be paid without a cash injection from him and he made no inquiries prior to the repayment of that money as to whether the large amount of money that he believed was owing from the “crane job” had been received in the interim period (in fact no such payment was ever received). As is evident from his testimony, the money was repaid in full at his direction, without any real or proper consideration as to the financial circumstances of the company. Accordingly, the almost immediate repayment of the full amount of the loan cannot be explained by normal commercial practice and therefore lacks a commercial quality. Furthermore, the full repayment of that loan after only 12 days from an insolvent company undoubtedly constituted a benefit to the defendant.

69. [69]
    Whilst I accept that the defendant paid the $80,000 to the company with honourable intentions, for the reasons outlined above, I find that the repayment of that loan constituted an uncommercial transaction.

Unreasonable director-related transaction

70. [70]
    Section 588FDA(1) of the Act relevantly states that a transaction of a company is an unreasonable director-related transaction of the company if and only if the transaction is a payment made by the company to a director of the company and it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

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

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

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

4. (iv)
   any other relevant matter.

71. [71]
    Subsection (2) relevantly provides that if the transaction is entered into for the purpose of meeting an obligation the company has incurred, the relevant considerations must take into account the circumstances as they existed at the time of the transaction, not the circumstances that existed at the time the obligation was incurred.

72. [72]
    Subsection (3) relevantly provides that a transaction may be an unreasonable director-related transaction whether or not a creditor of the company is a party to the transaction.

73. [73]
    The defendant has submitted that as the subject payment was a repayment of a loan there is no detriment to the company nor benefit to the defendant. Of course, pursuant to s. 588FDA(1)(c) the reasonableness of the transaction must be assessed from the perspective of the company using a reasonable person test. Given that the second plaintiff was insolvent at the time of the subject transaction I can perceive of no benefit to it in conducting this transaction. There is however, contrary to the defendant’s submissions, a clear and obvious detriment. That is the reduction in available funds to the company to assist in meeting its debts at that time of insolvency.

74. [74]
    Furthermore, as I have already stated, in my view the defendant received an obvious benefit from this transaction, in that he had his $80,000 repaid in full within approximately two weeks of making the loan.

75. [75]
    In those circumstances, I would expect that a reasonable person in the company’s circumstances would not have entered into the transaction. There would be absolutely no reason for such a hypothetical reasonable person to do so.

76. [76]
    Accordingly, I conclude that this was an unreasonable director-related transaction.

Are there any other defences available?

77. [77]
    The defendant has submitted that s. 588FG(1) of the Act sets out a defence that is available to him even if he is found to have benefitted from an unfair preference or from an uncommercial transaction. I disagree.

78. [78]
    Subsection (1) deals with the rights of third parties. The section states:

1. “(1)
   [Restriction on court making s 588FF orders – third party rights effected]

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:

(a) the person received no benefit because of the transaction; or

(b) in relation to each benefit that the person received because of the transaction:

(i) the person received the benefit in good faith; and

(ii) at the time when the person received the benefit;

(A) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(B) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.”

79. [79]
    In this matter the defendant is a party to the transaction and accordingly subsection (1) has no application.

80. [80]
    Although no submissions regarding s 588FG(2) were made, I note that it states:

1. “(2)
   A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.”

81. [81]
    Therefore, if the subject transaction was held to not be an unreasonable director related transaction, consideration would need be given to the application of the provisions of subsection (2)(a)(b) and (c). I have already concluded however that the transaction was an unreasonable director-related transaction of the company. Subsection (2) therefore also has no application and does not provide a potential defence unless I am incorrect in that conclusion. Even then however, there is no evidence before the court that the defendant provided valuable consideration under the transaction or changed his position in reliance on the transaction.

Breach of director’s duties – section 588G

82. [82]
    The plaintiffs have claimed that the defendant has breached a statutory duty in the conduct of the transaction and seeks a declaration that the transaction is void for that reason. They also seek an order that the defendant pay the first plaintiff the sum of $80,000 or alternatively, such other sum as the court deems just and equitable or fairly represents the benefit received.

83. [83]
    The Claim and Statement of Claim identified the statutory duty as that which arose under s. 588G(2) of the Act. I note however that in his written submissions, counsel for the plaintiffs contends that the duty includes that prescribed by sections 180(1) and 181 of the Act. Given however that a breach of those provisions has not been pleaded, it is not appropriate for this court to consider that issue, the defendant having been given no notice that such an allegation was to be made.

84. [84]
    Section 588G prescribes a director’s duty to prevent insolvent trading by a company. The difficulty for the plaintiffs however, is that s. 588G does not empower the court to make the orders sought in the prayer for relief. In fact, it is s. 588J of the act which empowers a court to order that a director pay compensation to a company if a breach of s. 588G is proved. Relief under that head of power however has not been sought in the claim.

85. [85]
    Accordingly, even if the court, after examination of the issue, was satisfied that the defendant had breached s. 588G, and that the potential defences provided under s. 588H had not been established, the finding would have no practical effect because the orders sought could not be made. There is therefore no utility in determining this aspect of the claim.

Orders

86. [86]
    For the above reasons, I order that:

1. (i)
   It is declared that pursuant to the provisions of s. 588FE of the Corporations Act 2001 the transaction by which the defendant received a payment of $80,000 from the second plaintiff on 19 February 2007 is void;

2. (ii)
   The defendant pay to the first plaintiff the sum of $80,000 together with interest under s. 58 of the Civil Proceedings Act 2011 (QLD) at 9.5% from 26 March 2009 to the date of this judgment;

3. (iii)
   Unless written submissions are received within seven days of the date of this judgment the defendant pay the first and second plaintiffs costs of this claim.