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

Reported at [2017] 2 Qd R 1

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

Reported at [2017] 2 Qd R 1

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

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

PARTIES:

ASHALA MODEL AGENCY PTY LTD (IN LIQUIDATION) ACN 114 423 406

(first plaintiff)

and

DAVID JAMES HAMBLETON AS LIQUIDATOR OF ASHALA MODEL AGENCY PTY LTD ACN 114 423 406

(second plaintiff)

v

DARRELL MORGAN FEATHERSTONE AS TRUSTEE UNDER INSTRUMENT 710920248

(first defendant)

and

DARRELL MORGAN FEATHERSTONE AS TRUSTEE OF THE KJM FAMILY TRUST

(second defendant)

and

GREGORY DAVID FEATHERSTONE AS TRUSTEE UNDER INSTRUMENT 710920248

(third defendant)

and

GREGORY DAVID FEATHERSTONE AS TRUSTEE OF THE KJM FAMILY TRUST

(fourth defendant)

FILE NO:

BS7133/12

DIVISION:

Trial Division

PROCEEDING:

Trial

DELIVERED ON:

6 June 2016

DELIVERED AT:

Brisbane

HEARING DATE:

15-16 March 2016

JUDGE:

Jackson J

ORDERS:

The judgment of the court is that:

  1. The plaintiffs’ claims against the third defendant are dismissed.
  2. Upon the second plaintiff’s claim for relief under s 588FF(1)(d) of the Corporations Act 2001 (Cth) it is ordered that the first defendant as trustee of the KJM Family Trust transfer Lot 106 on BUP 103388 in the County of Stanley Parish of North Brisbane Title Reference 50095706 to the first plaintiff.
  3. The first defendant is entitled to prove in the winding up of the first plaintiff for rent payable under the lease made between the first plaintiff and the first defendant dated 1 July 2007 to the extent of $480,150.
  4. The parties provide any submissions as to costs in writing not exceeding five pages in length on or before 14 days from this judgment.

CATCHWORDS:

CORPORATIONS – WINDING UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PREFERENCES AND VOIDABLE TRANSACTIONS – UNCOMMERCIAL TRANSACTIONS – where the first defendant leased premises to the plaintiff company for three years for $166,050 payable yearly in advance, but agreed no rent would be payable until demand was made – where the plaintiff company paid, on the first defendant’s behalf, a $23,00 deposit for a residential unit, then the $435,010 balance of the purchase price – where the first defendant had agreed to accept the reduced sum of $460,000 for rent owing – where the plaintiff company was insolvent and the transaction left it unable to meet its taxation obligations – where the plaintiffs alleged that the transaction was an uncommercial transaction voidable under s 588FE(5) – whether an unfair preference is capable of constituting an uncommercial transaction where no undervalue is involved – whether a reasonable person in the company’s circumstances would enter into the transaction for the purpose of leaving other creditors unpaid in a winding up – whether the first defendant’s purpose in causing the payments to be made was to delay, defeat or interfere with other creditors

CORPORATIONS – WINDING UP – WINDING UP IN INSOLVENCY – WHAT CONSTITUTES INSOLVENCY – GENERALLY – where the plaintiff company had been experiencing cash flow shortage and current asset deficiency – where the first defendant had agreed to indemnify the first plaintiff from all costs, claims and expenses, but allowed the plaintiff company to cease trading without providing assistance or attending to its known taxation liabilities – whether the first defendant was truly willing to provide the support required – whether the plaintiff company was insolvent

Corporations Act 2001 (Cth), ss 9, 588FA, 588FB, 588FC, 588FE, 588FF, 588FG

Bankruptcy Act 1966 (Cth), s 121

Property Law Act 1974 (Qld), ss 227, 228

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34, applied

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

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

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

First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60, applied

Glegg v Bromley [1912] 3 KB 474, cited

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

Holloway v McFeeters (1956) 94 CLR 470; [1956] HCA 25, applied

Johnson v Leader Computers Pty Ltd (2014) 118 SASR 408; [2014] SASCFC 14, cited

Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, considered

Marcolongo v Chen (2011) 242 CLR 546; [2011] HCA 3, cited

McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284; [1979] HCA 18, cited

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

Old Kiama Wharf Company Pty Ltd (in liq) v Betohuwisa Investments Pty Ltd (2011) 85 ACSR 87; [2011] NSWSC 823, cited

Payne v Parker [1976] 1 NSWLR 191, cited

Re Cube Footwear Pty Ltd [2013] 2 Qd R 501; [2012] QSC 398, cited

Re Solfire Pty Ltd (in liq) [1998] 2 Qd R 92; [1997] QSC 167, followed

The Trustees of the Property of Cummins v Cummins (2006) 227 CLR 278; [2006] HCA 6, cited

Tosich Construction Pty Ltd (in liq) v Tosich (1997) 23 ACSR 466, considered

Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363, cited

COUNSEL:

L Copley for the plaintiffs

B McGlade for the first defendant

No appearance for the third defendant

SOLICITORS:

Irish Bentley Lawyers for the plaintiffs

Lillas & Loel for the first defendant

  1. Jackson J: At the outset it should be noted that the plaintiffs’ claims against the third defendant (who is also incorrectly separately named as the fourth defendant – although a relevant requirement was that the originating process state the representative capacity) must be dismissed, in effect by consent, because he no longer has any interest in the proceeding as trustee of the property against which part of the claim is brought.[1]
  1. Most of the plaintiffs’ claims against the first defendant (who is also incorrectly separately named as the second defendant) are stayed by the operation of s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (“BA”). This is because the first defendant is an undischarged bankrupt and they are claims for provable debts.

The remaining claim

  1. The second plaintiff has elected to proceed upon the remaining claim he brings against the first defendant under s 588FF(1)(d) of the Corporations Act 2001 (Cth) (“CA”).
  1. That paragraph provides, relevantly:

“(1)Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(d)an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:

(i) money that the company has paid under the transaction;

(ii)…”

  1. The remaining claim is for an order that the first defendant as the trustee of the KJM Family Trust transfer Lot 106 on BUP 103388 in the County of Stanley Parish of North Brisbane Title Reference 50095706 to the first plaintiff.
  1. The basis of the remaining claim is that a transaction of the first plaintiff is voidable because of s 588FE(5) of the CA.
  1. Section 588FE(1) relevantly provides that a transaction of a company may be voidable because of any one or more of subsections (2) to (6). Section 588FE(5) provides:

“(5)The transaction is voidable if:

(a)it is an insolvent transaction of the company; and

(b)the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and

(c)the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.”

  1. The parties are agreed that the second plaintiff’s claim for relief under s 588FF(1)(d) is not a legal proceeding in respect of a provable debt that is stayed under the BA.

Corporate status of the first plaintiff and some of the actors

  1. The first plaintiff was incorporated on 24 May 2005.
  1. On 12 October 2008, it was deregistered by the Australian Securities Investment Commission (“ASIC”). On 24 July 2012 it was reinstated by order of this court.
  1. Also on 24 July 2012, the second plaintiff was appointed liquidator.
  1. From incorporation on 24 May 2005 to 23 February 2007, Kristy Jasmine Marks was the sole appointed director of the first plaintiff.
  1. From 23 February 2007 to 6 July 2007, Justin McCabe was the sole appointed director of the first plaintiff.
  1. From 6 July 2007 to 12 October 2008, Mal Marshall was the sole appointed director of the plaintiff.
  1. From incorporation on 24 May 2005, Ms Marks was the sole registered share holder of the first plaintiff.
  1. From 28 May 2005, Ms Marks held all the shares in the first plaintiff on trust for the first defendant and agreed to transfer those shares to him upon request.
  1. At the material times during their appointments or shareholding, each of Ms Marks, Mr McCabe and Mr Marshall was an employee of a business or company associated with the first defendant (including the first plaintiff).

The first defendant, the Darrell Featherstone Family Trust and Ashala Model Agency Pty Ltd (ACN 106 763 679)

  1. The first defendant has long experience in the modelling industry and has managed businesses in both that industry and other industries, such as hospitality and security services.
  1. On 4 June 2002, a settlor settled a nominal sum upon the first defendant as trustee of the Darrell Featherstone Family Trust. On 13 June 2002, the first defendant as trustee of the Darrell Featherstone Family Trust agreed to purchase Lot 3 on BUP 588 in the County of Stanley Parish of North Brisbane Title Reference Number 14643003 (“Albert Street property”) for the sum of $423,500. It appears likely that the trust was constituted to acquire the Albert St property.
  1. On 19 August 2002, the contract to purchase the Albert Street property was settled. The first defendant says it was with money he personally provided or borrowed.
  1. Thereafter, the first defendant paid approximately $80,495 to fit out the Albert Street property as premises to conduct a model agency business. The first defendant says he was a creditor of the Darrell Featherstone Family Trust for both the purchase price and the cost of the fitout, totalling $503,995.
  1. On 22 October 2003 the first defendant incorporated Ashala Model Agency Pty Ltd ACN 106 763 679 (“the first Ashala Model company”).
  1. The first defendant was the sole director and shareholder of the first Ashala Model company. It commenced trading as a model agency business from the time of its incorporation.
  1. Ms Marks was one of the staff employed by the first Ashala Model company. She was appointed manager and took care of the day to day running of the business. The first defendant assisted Ms Marks when she specifically requested him to do so, managed the money and accounting side of the business, and did advertising and marketing.
  1. On 24 May 2005, the first defendant caused the first Ashala Model company to change its name to Ashala India Pty Ltd. From this point, I will mostly refer to that company in these reasons as Ashala India.

Circumstances surrounding the incorporation of the first plaintiff and its operations

  1. The first defendant says that sometime in 2005 (necessarily before 24 May 2005) he agreed with Ms Marks for her to take over the business. He says that Ms Marks incorporated the first plaintiff on 24 May 2005 and nominated herself as the sole director and shareholder of the first plaintiff. He deposes to a number of conversations he says he had with Ms Marks about those subject matters.
  1. The first defendant’s evidence was given by way of affidavit and was added to in his oral evidence. The effect of much of it was that the first plaintiff was a company belonging to Ms Marks in which he had little involvement. His evidence in this respect was self-serving and I reject that evidence. Apart from the first defendant’s uncorroborated evidence there is not a document in evidence that supports his story in this regard. The documents and contracts that were created at the relevant time do not stand consistently with the idea that the first plaintiff was Ms Marks’ company.
  1. First, as already mentioned, from 28 May 2005 Ms Marks declared that she held all of the shares in the first plaintiff on trust for the first defendant and agreed to transfer them to the first defendant on his request. In other words, from the beginning of the first plaintiff’s operations, the first defendant had the legal control which he could exert through his beneficial ownership of all of the shares in the first plaintiff. The first defendant agreed in oral evidence that his ownership of the first plaintiff was not disclosed to others. I note that as a matter of outward appearance, the first plaintiff was the same company carrying on the same business as Ashala India had been. It would take a company search or observance of the change in the ACN to detect the difference.
  1. Second, on 1 July 2005 the first defendant as lessor agreed in writing to lease the Albert Street property to the first plaintiff for a term of three years commencing on that day and ending on 30 June 2008 (“lease”). The agreed rent was $166,050. That sum was approximately 33 per cent of the amount paid by the first defendant to purchase and fit out the Albert Street property three years previously. The rent was payable yearly in advance. The plaintiffs did not challenge the validity of the lease.
  1. The first defendant said that the rent was a market rent agreed between him and Ms Marks at the time. In the absence of any other evidence to support that assertion I do not accept that it was a market rent. A rent return on investment of 33 per cent is an unusually high investment yield. There was no evidence that either the first defendant or Ms Marks had any expertise in assessing market rent. The first defendant stated only that he and Ms Marks used a website to ascertain a fair market rent.
  1. Third, not only did the first plaintiff have the same name as the company which previously operated the model agency business from the Albert Street property (that was owned and controlled by the first defendant) but it appears that sums were deposited into the first plaintiff’s account from the day on which its bank account was opened, that most likely were receipts from Ashala India’s operations. No explanation was given by the first defendant for the lack of separation of the businesses of Ashala India and the first plaintiff, as a company which he claims was owned and controlled by Ms Marks as a separate venture by her.
  1. Fourth, also on 1 July 2005, the first defendant entered into an agreement varying the lease agreement between the first defendant and the first plaintiff for the Albert Street property so that “until such time as [the first defendant issues] such an invoice there is no rent owing by Ashala Model Agency Pty Ltd to [the first defendant] under the terms of the lease agreement” (“rent variation”). The first defendant offered no rational explanation why he entered into the lease with the first plaintiff for an annual rent of $166,050 payable in advance, yet contemporaneously agreed under the rent variation that no rent would be payable until demand was made. The plaintiffs did not challenge the validity of the rent variation.
  1. Fifth, on 1 July 2005 the first defendant entered into a deed of indemnity with the first plaintiff under which the first defendant “agreed to indemnify and keep indemnified the [first plaintiff] from all costs, claims and expenses that the [first plaintiff] may be subject to.” Again, the first defendant offered no rational explanation for why he indemnified the first plaintiff against all expenses if the first plaintiff was owned by and was a venture of Ms Marks. As well, despite the unlimited terms of the indemnity, he did not intend to indemnify the first plaintiff against its liability for the rent.
  1. The first defendant did not say that these uncommercial arrangements were made by him because of a domestic relationship between him and Ms Marks. I found his explanations for them to be unconvincing. In my view, the first defendant at all times had the intention to control the first plaintiff and to obtain the benefit of its operations either through his beneficial ownership of the shares or through the amounts that would be payable as rent on the face of the contractual documents between the first plaintiff and the first defendant.
  1. Sixth, the conclusions thus far are supported by other facts as to how the first plaintiff’s affairs were conducted. In a public examination by the liquidator in 2013, the first defendant said that the first plaintiff was incorporated “to get away from [his] ex-girlfriend” (not apparently Ms Marks). He said that he did have control of the first plaintiff and that he owned the shares of the first plaintiff to start with. In oral examination at the trial he said that Ms Marks did the running of the agency day to day, but as an owner of the shares of the company if he told her to do something she would do it. She would have to take direction from him. She owned the shares on trust for him but the end result was that they were his shares whenever he wanted to take them off her. Ms Marks was paid a wage.
  1. As well, the operating expenses of the first plaintiff were funded by use of the first defendant’s personal credit cards which were reimbursed to him by the first plaintiff paying the amount owing on the credit card from the company’s funds in ANZ bank accounts. It is unclear whether all of the payments so made by the company were to reimburse company expenses.
  1. All of that evidence is inconsistent with the affidavit and oral evidence given by the first defendant at the trial saying or suggesting that the first plaintiff’s business was Ms Marks’ business or that she was in any way a true owner of it – or that she had any interest in it other than as employee who was paid a wage.

The first defendant was a director of the first plaintiff

  1. Although the first plaintiff’s claim made against the first defendant as a director has not proceeded, the question whether the first defendant was a director of the first plaintiff is in any event relevant to the second plaintiff’s case. That follows because the second plaintiff’s case is that the first defendant was in effect the directing mind and controller of the first plaintiff during the events constituting the alleged voidable transaction.
  1. Section 9 of the CA defines a director to mean, inter alia, a person who is not validly appointed as a director if the directors of the company are accustomed to act in accordance with the person’s instructions and wishes.  Some of the evidence already outlined or summarised above shows that Ms Marks was accustomed to act in accordance with the first defendant’s instructions or wishes.[2] 
  1. However, by the time of the alleged voidable transaction in August 2007, the circumstances supporting that conclusion were even clearer.
  1. First, on 23 February 2007 Ms Marks was replaced by Justin McCabe as sole director of the first plaintiff. The first defendant says that was so that Ms Marks could assume another role as employee and licensee of another of the businesses he controlled.
  1. Whether or not that is so, the point for present purposes is that from Ms Marks’ retirement or resignation, Mr McCabe was the first plaintiff’s sole director. The first defendant did not suggest that Mr McCabe had any interest in the first plaintiff’s business other than to fulfil the role of director as an employee under his control. Ms Marks may or may not have been involved as well in the running of the first plaintiff’s business at the time, and there is no evidence of this beyond the first defendant’s assertions to the effect that she “remained in charge”. The point is that from February 2007 Ms Marks was not even a validly appointed director. There is no suggestion in the evidence that Mr McCabe was accustomed to act in accordance with Ms Marks’ directions as opposed to the first defendant’s directions.
  1. Second, on 6 July 2007, Mr McCabe ceased to be a director of the first plaintiff and was replaced by Mal Marshall. Mr Marshall, again, was an employee of one of the first defendant’s businesses.
  1. In oral examination, the first defendant gave evidence about Mr Marshall’s role. He said that he put a document in place to protect himself from Mr Marshall because he was not going to allow “someone like” Mr Marshall to have direct access to money. Ms Marks remained the signatory of the account.
  1. Thus, although Mr Marshall was shown as the sole director of the first plaintiff at the time of the relevant transactions, he had no interest in the first plaintiff other than his role as director and employee. He did not have control of the first plaintiff’s bank account. The first defendant said that he was the shareholder and did not want Mr Marshall to be a signatory of or control the bank account. On this view, Mr Marshall was someone who would be accustomed to act in accordance with the instructions or wishes of the first defendant.
  1. In terms of control, this was the state of the first plaintiff’s affairs when the alleged voidable transaction occurred.

The first plaintiff’s trading surplus

  1. On 25 May 2005, the first plaintiff opened a bank account with the ANZ Banking Group numbered 4971-47146 (“the first ANZ account”).
  1. The first plaintiff thereafter deposited receipts of income into and paid or withdrew the expenses of carrying on its business from the first ANZ account.
  1. On 29 May 2006, the first plaintiff opened another account at the same bank numbered 4946-21535 (“the second ANZ account”).
  1. On that day the balance of the first ANZ account was $176,586.91, representing the accumulated trading surplus over the period to date. Of that amount, $170,127.20 was transferred to the second ANZ account as the opening balance.
  1. From approximately July or August 2006, the first plaintiff did not deposit its regular receipts of income to the first ANZ account.
  1. Thereafter, the trading of the first plaintiff continued substantially through the second ANZ account.
  1. On 1 August 2007, the balance of the second ANZ account was $429,272.15.
  1. On 16 August 2007, the balance of the second ANZ account was $440,133.81.
  1. These balances represented the accumulated surplus of the first plaintiff trading as the Ashala Model Agency from May 2005 to August 2007.
  1. However, over that period, the first plaintiff had paid no amount to the first defendant on account of the annual rent of the Albert Street property.
  1. Also, over that period, the first plaintiff had not lodged any Business Activity Statement (“BAS”) or instalment activity statement or income tax return and had paid no tax to the Australian Tax Office (“ATO”).
  1. Throughout the trading period just summarised, the first defendant was aware of the first plaintiff’s receipts and payments or withdrawals through the bank accounts and that the first plaintiff had made no payments to the ATO in respect of tax.

Purchase of the Quay West unit

  1. According to the first defendant, he became interested in June or July of 2007 in purchasing a unit to live in as his residence.
  1. At the time he was aware of the balance of the second ANZ account as the accumulated surplus of the first plaintiff’s trading as the Ashala Model Agency.
  1. He decided to use those funds to purchase a unit in Quay West apartments in Alice Street, Brisbane. He says that he told both Mr Marshall (the sole director) and Ms Marks (now not a validly appointed director but the sole signatory of the second ANZ account) of his intention to use that money to purchase the property.
  1. On 1 July 2007, the first defendant’s solicitor settled a nominal sum on Ms Marks as trustee to constitute the KJM Family Trust. It was a discretionary trust. The specified beneficiaries were the first defendant and members of his family. The secondary beneficiaries included any employee of any company in which the first defendant held a share or had a share held on his behalf. Ms Marks had no other interest.
  1. On or before 1 August 2007, the first defendant agreed with the owner, Lynette Teulan, to purchase the unit in Quay West described as Lot 106, BUP 103388, County of Stanley, Parish of North Brisbane for $460,000 (“Quay West unit”). No copy of this contract was produced in evidence.
  1. On 1 August 2007, the first plaintiff paid $23,000 to or on behalf of the first defendant as a 5 per cent deposit payable under the Quay West unit contract.
  1. On 4 August 2007, the first defendant, Mr Marshall and Ms Marks executed a document recording that it was agreed that the first defendant would accept $460,000 as “full and final” payment from the first plaintiff for all rent owing from 1 July 2005 to 30 June 2008 for the lease of the Albert Street property (“4 August Agreement”). The plaintiffs did not challenge the validity of the 4 August Agreement.
  1. According to the lease, as at 1 July 2007, the rent that was payable by the first plaintiff to the first defendant was three years rent, namely $498,150. According to the contemporaneous agreement, no amount was payable until demand.
  1. Up to 4 August 2007, the first defendant had made no demand for the rent, although he says that he had previously told both Mr Marshall and Ms Marks that he intended to use the money in the second ANZ account to purchase a unit in Quay West.
  1. The 4 August Agreement further provided that payment (of the amount accepted by the first defendant for the rent owing) was to be made to Ms Teulan on the first defendant’s behalf.
  1. On 16 August 2007, it appears from the relevant bank statement of the ANZ second account that a cash cheque numbered 001801 in the amount of $435,010 was debited to the account.
  1. On 21 August 2007, the Quay West unit contract was settled. It is common ground that the funds for settlement were sourced from and included the $435,010 withdrawn from the first plaintiff’s account.
  1. There was conflicting evidence as to how the settlement monies were provided for at settlement, but the details do not matter.
  1. Thus, the total amount of $458,010 was withdrawn from the second ANZ account in two payments (“challenged payments”) and paid on behalf of the first defendant for the deposit and purchase price of the Quay West unit.
  1. However, as it turned out the first defendant was not the transferee.
  1. On 21 August 2007, Ms Marks as trustee for the KJM Trust became registered as the proprietor of the Quay West unit.
  1. The first defendant began to live in the Quay West unit and has lived there since.
  1. On 28 April 2011, the first defendant was registered as proprietor of the Quay West unit in place of Ms Marks. The parties have proceeded on the assumption that he holds that legal interest as trustee for the KJM Trust.
  1. He has held it free from any registered encumbrance.

Insolvency of the first plaintiff

  1. As from the 4 August Agreement, the current liabilities of the first plaintiff had included $460,000 on account of the rent agreed to be payable for the lease of the Albert Street property.
  1. As a result of the withdrawals from the second ANZ account, the first plaintiff’s cash position and current assets were reduced by $458,010. However the current liabilities of the first plaintiff were also reduced by that amount for rent paid (or if the 4 August Agreement is treated as part of the transaction, non-current liabilities were reduced by $480,150 for rent due but not yet payable).
  1. However, at 16 August 2007 the balance that remained in the second ANZ account was $3,744.21. The balance in the first ANZ account was $26.94. The total was $3771.15. Because of the absence of the records that should have been kept, but were not made available to the second plaintiff as liquidator, it is not possible to reconstruct the position of the first plaintiff precisely. But it is clear that the payments of $458,010 effected an immediate and very serious reduction of current assets.
  1. As at 1, 16 and 21 August 2007, an immediate and obvious question as to the first plaintiff’s position arose from the fact that it had not at any point up to that time attended to its taxation affairs or paid any tax liabilities.

It is common ground that the first plaintiff’s financial position should be assessed by having regard to its unmet tax liabilities.  For this purpose the liquidator reconstructed statements of the first plaintiff’s profit and loss as relevant to an income tax return for the years ending 30 June 2005, 30 June 2006, 30 June 2007 and 30 June 2008.  The summary appears below.

Income Tax Return for Period Ended

Income Tax Return estimate – Profit (Loss)

Loss or Profit (including any prior carried forward losses)

Income Tax Payable

30 June 2016

-$1,809.69

-$1,809.69

$0.00

30 June 2006

$260,439.03

$258,629.33

$77,588.00

30 June 2007

$285,469.51

$285,469.51

$85,640.00

30 June 2008

-$457,260.38

-$457,260.38

$0.00

  1. The reconstructed profit and loss statements were prepared on a cash accounting basis. The liquidator did not have the records to prepare them on an accruals basis.
  1. From this base, the liquidator prepared an estimate of the BAS liabilities for Goods and Services Tax (“GST”) and Pay As You Go (“PAYG”) instalments that the first defendant had over the relevant periods.
  1. The liquidator also prepared reconstructed summary balance sheets of the first plaintiff’s assets and liabilities at various dates. Because all the records were not available some assets and liabilities will have been omitted. However, the balance sheets as so prepared are a sufficient basis for present purposes. Of immediate interest, at August 2007 the assets and liabilities were stated as follows:

Assets

31 August 2007

Cash at bank

$22.19

Cash at bank

$3,708.27

Total Assets

$3,730.46

Liabilities

 

ATO Running Balance Account Debt (notional)

$141,841.47

Rent payable

$40,140.00

Funds received on behalf of Ashala Pty Ltd

$38,847.48

Total Liabilities

$220,828.95

Surplus (Deficit)

($217,098.49)

  1. There are some immaterial errors in that balance sheet. First, the entry for rent due should have been $1,990 because by the 4 August Agreement the first defendant agreed to reduce the amount of the rent payable until 30 June 2008 to a total of $460,000 – of which $458,010 had already been paid.
  1. Second, although the liquidator’s report referred to Ashala Pty Ltd commencing to trade in the quarter from 1 July 2007, the assumption that the deposits made thereafter into the first plaintiff’s account were received for Ashala Pty Ltd and were not the first plaintiff’s property was not proved.
  1. Further, the first defendant challenged the accuracy of the second respondent’s estimate of the first plaintiff’s tax liability on the ATO Running Balance Account.
  1. However, the challenge went no further than to suggest that if the first plaintiff had been permitted to prepare its accounts for tax purposes on the accruals basis it would have been able to bring its liability for rent under the lease to account in reduction of its 2006 income tax liability.
  1. Even so, the assumption that it might be able to do so would, as the first defendant submitted, have reduced the ATO Running Account Balance debt as at 31 August 2007 only by $49,815. There are some other minor adjustments that would have to be made, but it is convenient to adopt the first defendant’s submission that the running balance would thereby have been reduced to about $88,733.80 as at 31 August 2007. I note that the running balance so calculated includes $60,960 of unpaid GST liability accrued.
  1. On those bases, an adjustment of the liquidator’s balance sheet would be as follows:

Assets

31 August 2007

Cash at bank

$22.19

Cash at bank

$3,708.27

Total Assets

$3,730.46

Liabilities

 

ATO Running Balance Account Debt (notional)

$88,733.80

Rent payable

$1,990.00

Funds received on behalf of Ashala Pty Ltd

$nil

Total Liabilities

$90,723.80

Surplus (Deficit)

($86,993.34)

  1. The overall conclusion is that on 16 and 21 August 2007 the first plaintiff was insolvent.[3]  It was insolvent because no provision had been made for its tax liabilities and its current liabilities exceeded it current assets by $86,993.34.  Even if before the 4 August Agreement the first plaintiff was not insolvent, the 4 August Agreement which made $460,000 due for the rent made it insolvent.  The stark nature of the current asset deficiency and cash flow shortage was emphasised by the second of the challenged payments in the sum of $435,010.  Even if the 4 August Agreement did not make the first plaintiff insolvent, that payment did so.

The first defendant’s support for the first plaintiff

  1. The first defendant submitted that notwithstanding the apparent insolvency of the first plaintiff at the time of the alleged voidable transaction, the first plaintiff was not insolvent because the first defendant had agreed to “indemnify … the [first plaintiff] from all costs, claims and expenses that the [first plaintiff] may be subject to.”
  1. Second, the first defendant relied on his evidence that he had “committed” to providing support and security for the modelling business and to support his friend Ms Marks. He said that he had sufficient assets (as trustee of the Darrell Featherstone Family Trust) to support the indemnity that he had given.
  1. In Re Cube Footwear Pty Ltd,[4] I discussed whether a company otherwise insolvent might be found not to be insolvent because of the support of some or all of its creditors.  The support of a shareholder or director who has the means is also a relevant factor, as was said in Mulherin v Bank of Western Australia Ltd.[5]  In First Strategic Development Corporation Ltd (in liq) v Chan,[6] Philip McMurdo J said:

“In Williams v Scholz, Muir JA said that in this context ‘the most important consideration is the degree of commitment to the continuation of financial support’, a statement which was endorsed by Morrison JA in International Cat Manufacturing.[7]  (footnotes omitted)

  1. Therefore, the immediate question in the present case is whether the first defendant was truly willing to provide the support required. An obvious point is that he did not in fact do so. He allowed the first plaintiff to cease trading and to become deregistered without any attention being paid to its tax liabilities.
  1. His explanations for doing so must be considered. First, he says that the first plaintiff was Ms Marks’ company, not his own. I have already rejected that assertion. Second, he says that he was not aware that a significant debt existed to the ATO and that no demand had been made of him by Ms Marks or by the ATO upon the first plaintiff. Third, he says that he turned his mind to the question of the first plaintiff’s liability to the ATO at the time but (negligently) formed the view that there would be no liability of substance.
  1. In particular, he pleaded in the defence that he considered that any ATO exposure would not be significant and that the extent of any such liability was something that the first plaintiff and he had the capacity to service. Further, in oral evidence he said that he knew that the rent was a business expense and that when he took that out and it took the bank account down to a “low amount”, so it followed that the first plaintiff “hadn’t made much profit”.
  1. The starting point to analyse this evidence is that the first defendant had significant prior business experience. Before the time of the transaction, he had been in business for ten years and had been responsible for half a dozen entities in relation to their tax affairs. The first Ashala Model company operating the Ashala modelling business – Ashala India as it became later – will have been one of those entities. The first defendant said in oral evidence that it paid all its debts before he closed it down. He said it met its tax obligations. He was aware that it had to submit multiple BAS and that it had to pay income tax. The overwhelming inference is that the first defendant was aware of the bases of tax liability for income tax and GST.
  1. However, the first defendant agreed in cross-examination that by the beginning of 2009 he had not lodged personal income tax returns for the 2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008 tax years.
  1. Next, in several places in his evidence the first defendant said that he clearly recalled turning his mind to the first plaintiff’s tax liabilities before he took the challenged payments. First, he said in his affidavit that he recalled thinking that the first plaintiff would be unlikely to have any significant income tax or GST liability to the ATO. The justifications offered in the affidavit for that thinking were:

-For income tax, that the first plaintiff was breaking even when the rent was taken into account compared to the profits; and

-For GST, that the amount payable would be offset by “the input credits received for the GST inclusive purchases” by the first plaintiff (which were not identified).

  1. As to any income tax liability, the first defendant gave similar oral evidence in recounting “exactly what [his] thinking was at the time” and on the basis that he had a general idea of what the income tax liability of a company or potential income tax liability was. However, in oral evidence he said he wouldn’t have known what the GST liability of the company might have been, inconsistently with the explanation given in his affidavit.
  1. His explanation in oral evidence as to GST liability was confused at best. He suggested that no GST had been charged by the first plaintiff and none collected. In answer to a question whether he thought that if he did not “charge” GST he wasn’t liable for it, he said that he realised that he was liable. Nonetheless he said that the first plaintiff had not charged GST. He made no reference to the explanation in his affidavit that at the time of the payments he thought that the first plaintiff’s GST liability on supplies would be offset by input credits.
  1. In my view, the first defendant’s explanation in his affidavit as to any GST liability being offset by input tax credits was an example of the first defendant making up a plausible explanation for his conduct in taking the challenged payments from the first plaintiff’s bank account. I reject it as a fabricated reconstruction and a lie that reflects badly on the first defendant’s credibility. It assists the second plaintiff’s case in other respects on the question of the first defendant’s intention in taking the challenged payments.
  1. The first defendant also indicated in oral evidence that he had agreed with the ATO to pay, and had paid, the amount of the first plaintiff’s liability to the ATO as part of his tax settlement with the ATO in December 2009, suggesting that this was evidence of his preparedness to support the first plaintiff pursuant to his indemnity. I do not accept his statements that his settlement with the ATO included any amount for the liability of the first plaintiff as opposed to his personal tax position.
  1. I specifically reject the first defendant’s evidence that when the challenged payments were made he intended to support the first plaintiff by paying any liability it had to the ATO. Not only were his statements to that effect self-serving, but his subsequent actions were inconsistent with any intention that the ATO would be paid in respect of the first plaintiff’s liabilities. They were consistent with an intention to avoid those liabilities ever being ascertained or paid.

Post-transaction trading

  1. The first plaintiff’s trading after the alleged voidable transaction is relevant to the inferences that the second plaintiff submitted should be drawn regarding the purpose of the transaction and whether the transaction was an uncommercial transaction.
  1. The evidence was unclear. From two sources, it appeared that the first plaintiff’s trading slowed dramatically and substantially came to a halt by the end of 2007.
  1. First, the rate of receipts of income and deposits as well as payments or withdrawals from the second ANZ account slowed dramatically and ended in a trickle by December 2007. A comparison of the deposits and payments or withdrawals for the years ending 30 June 2006 and 30 June 2007 on the one hand and the six months ending 31 December 2007 on the other hand shows the slow down.
  1. Second, the first defendant agreed in evidence that the first plaintiff had ceased trading by about the end of the year. He attributed the slow down to the impact of the global financial crisis.
  1. Third, the liquidator in a report indicated that yet another “Ashala” company, this time Ashala Pty Ltd, appeared to have commenced trading in July 2007. There was not much evidence to clearly identify that it had taken over the first plaintiff’s business. In cross-examination, however, the first defendant agreed that almost immediately after the purchase of the Quay West unit another company started to trade the business and thereafter the first plaintiff wound down.
  1. In the result, the first plaintiff was clearly moribund by the end of 2007, although there were some minor transactions in the second ANZ account in the succeeding months until its de-registration by ASIC in October 2008.

Failure to call Ms Marks or Mr Marshall as witnesses

  1. In several areas of the case, the first defendant relied on the rule in Jones v Dunkel[8] to submit that any inference to be drawn should be approached having regard to the second plaintiff’s failure to call Ms Marks and Mr Marshall, on the footing that their evidence would not have assisted the second plaintiff’s case.
  1. In Payne v Parker,[9] Glass JA explained when one party rather than the other would be expected to call a witness:

“… Whether the [Jones v Dunkel] principle can or should be applied depends upon whether the conditions for its operation exist. These conditions are three in number: (a) the missing witness would be expected to be called by one party rather than the other, (b) [their] evidence would elucidate a particular matter, (c) [their] absence is unexplained.

The first condition is also described as existing where it would be natural for one party to produce the witness, or the witness would be expected to be available to one party rather than the other, or where the circumstances excuse one party from calling the witness, but require the other party to call him, or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other party to call him, or where the witness’ knowledge may be regarded as the knowledge of one party rather than the other, or where [their] absence should be regarded as adverse to the case of one party rather than the other. It has been observed that the higher the missing witness stands in the confidence of one party, the more reason there will be for thinking that [their] knowledge is available to that party rather than to [their] adversary. If the witness is equally available to both parties, for example, a police officer, the condition, generally speaking, stands unsatisfied. There is, however, some judicial opinion that this is not necessarily so. Evidence capable of satisfying this condition has been held to exist in relation to a party’s foreman; [their] safety officer; [their] accountant; [their] treating doctor.”  (emphasis added) (citations omitted)

  1. In the present case, although Ms Marks was a director of the first plaintiff for a time, she ceased to be so in February 2007 and Mr Marshall was appointed a director on 6 July 2007. The second plaintiff was not appointed as liquidator until 24 July 2012. The first plaintiff had then been de-registered for approximately three years. Since then the second plaintiff has been conducting the first plaintiff’s winding up in insolvency, which led him to examine the directors’ conduct including that of Ms Marks and Mr Marshall.
  1. The first defendant submitted that the second plaintiff ought to have called Ms Marks and Mr Marshall because he obtained an order for their oral examinations and they were orally examined.
  1. In my view, that is no reason to have expected the second plaintiff rather than the first defendant to have called Ms Marks, who the first defendant described as a good friend in his evidence and who remained the trustee of one his family trusts until 2011. Equally, I do not consider that it was expected that the second plaintiff would call Mr Marshall. Accordingly, no Jones v Dunkel inference arises.

Uncommercial transactions under the CA

  1. The definition of an uncommercial transaction appears in s 588FB of the CA. It provides that:

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

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

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

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

(d)any other relevant matter.

(2)A transaction may be an uncommercial transaction of a company 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. The second plaintiff alleges that the transaction was constituted by the challenged payments on 1 August 2007 of $23,000 and on 16 August 2007 of $435,010. It also at least indirectly alleges that the challenged payments were used to fund the purchase of the Quay West unit.
  1. The second plaintiff alleges that a reasonable person would not have entered into the transaction. Section 588FB(1) requires that regard be had to pars (a) to (d).
  1. A critical step is to define the relevant transaction. The term “transaction” is defined in s 9 of the CA to mean, in Pt 5.7B, a transaction to which the relevant body is a party, including a payment. The case law recognises that where a course of conduct, plan or series of steps is involved, it may be appropriate to take a wide view of what constitutes the transaction whilst keeping in mind that the steps taken in engaging in the course of conduct, plan or series of steps may comprise transactions in themselves. In Capital Finance Australia Ltd v Tolcher,[10] Lindgren J said:

“While I accept that a transaction within s 588FB may be composed of a series of steps, some or all of which may also be properly described individually as transactions … in my view the steps must be connected in a manner that is relevant for the purpose of s 588FB as indicated in the passages set out above. That is to say, they must be linked as showing that the company disposed of property or incurred an obligation in an ‘uncommercial’ way to its disadvantage.”[11]  (citations omitted)

  1. Here, the challenged payments were clearly a transaction or transactions. They were used to fund the purchase of the Quay West unit. The purchaser was initially the first defendant. According to his affidavit he made an initial oral agreement with the vendor. The acquirer was ultimately Ms Marks as trustee for the KJM Trust.
  1. In my view, it would be wrong, however, to treat the relevant transaction as though it were simply the purchase of the Quay West unit as an acquisition of property by a third party using the first plaintiff’s funds. This would ignore the discharge of the debt owed by the first plaintiff to the first defendant on account of rent. As well, it would be wrong to treat the relevant transaction as though it were simply the making of the payments in satisfaction of the rent, so as to ignore the agreed reduction in the rent payable under the 4 August Agreement.
  1. The conventional approach to the question whether an identified transaction is an uncommercial transaction involves a consideration of whether it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to pars (a) to (d) of s 588FB(1).  There are, however, many general statements of the focus of the section in the case law.  One that I have found helpful is in Old Kiama Wharf Company Pty Ltd (in liq) v Betohuwisa Investments Pty Ltd,[12] by Pembroke J:

“Although the most common instance of an uncommercial transaction will be one which occurs at an undervalue, a sale at an undervalue is not the only circumstance that will lead to the conclusion that a transaction is uncommercial. Any situation in which a reasonable person in the company’s circumstances would not have entered into the transaction, even if it were for full value, justifies the conclusion that it is uncommercial.”[13]  (citations omitted)

  1. It does not matter much, in considering the relevant matters under s 588FB(1), whether the transaction is viewed as the payments themselves or as payments to acquire the Quay West unit for the first defendant or Ms Marks as trustee of the KJM Trust.
  1. If the challenged payments are the transaction, the benefit to the first plaintiff in making them was the reduction in the debt of the first plaintiff to the first defendant on account of the rent. Even to the extent that the transaction included using the payments to fund the purchase of the Quay West unit, the first plaintiff still received the same benefit. And to the extent that the transaction included the 4 August Agreement, the first plaintiff received the additional benefit of the agreed reduction of rent from $490,150 payable on demand to $460,000.
  1. On each of those alternative views of the transaction, there was no detriment to the net assets of the first plaintiff, because in making the challenged payments the reduction in assets held in the funds in the second ANZ account was matched or exceeded by the reduction in the liability for the rent.
  1. The detriment, if there was one, comprised the reduced liquidity of the first plaintiff’s position. From at least the time of the 4 August Agreement, when it was agreed that the rent would be paid to the extent of $460,000, that amount was a current liability. Accordingly, as already found, the first plaintiff was already insolvent when the payments were made. It did not have the ability to pay its debts as and when they fell due because it had made no provision for its significant tax liability up to 16 or 21 August 2007.
  1. The first defendant was a party to the transaction because of the 4 August Agreement, and because whether or not the challenged payments were made directly through him they were made on his behalf, at his direction and in reduction of the rent owing to him. He received the benefit of receiving the preferential payments, converting the rent payable to him on demand as a creditor into cash receipts. If the transaction is viewed as including the purchase of the Quay West unit he also received a benefit as a result of the transaction as a beneficiary of the KJM Trust by enjoying possession of the unit as his residence. It was not suggested that he paid any sum for that benefit to Ms Marks as the trustee of the KJM Trust.
  1. The first plaintiff submitted, in effect, that there were two other relevant matters. First, the effect of the payments was to leave the first plaintiff in a position where it was unable to pay any amount of substance to the ATO. In other words, the creditors of the first plaintiff were left with no amount of available assets to meet their claims in the first plaintiff’s insolvency. Second, the first defendant’s purpose in causing the payments to be made was to delay or defeat the ATO as creditor, by leaving the first plaintiff in that condition and causing it to cease trading.
  1. The first defendant submitted that the evidence did not support or justify a finding that he had that intention. Instead, he submitted that he had erroneously believed that there would not be much tax payable and that he had no intention to cause the first plaintiff to cease trading.
  1. The first defendant further submitted that it was immaterial that the facts might show that the payments constituted an unfair preference because that was not the plaintiffs’ pleaded case. The plaintiffs pleaded only that the payment was a transaction of the first plaintiff that it would be expected a reasonable person would not have entered into,[14] which if proved would engage liability under s 588FE(5) by reason of an uncommercial transaction only.
  1. The question is raised whether an unfair preference also constitutes or is capable of constituting an uncommercial transaction. The CA distinguishes between the two, both generally and impliedly in the context of s 588FE(5).
  1. In general terms, under s 588FC, each of an unfair preference and an uncommercial transaction is an “insolvent transaction” if the relevant company is insolvent when the transaction is entered into or the company becomes insolvent because of entering into the transaction.
  1. Under s 588FE(2) a transaction is voidable if two elements are satisfied. First, it must be an insolvent transaction (being either an unfair preference or uncommercial transaction). Second, it must have been entered into or something have been done to give effect to it within six months before the relation-back day.
  1. Under s 588FE(5) a transaction is voidable if three elements are satisfied. First, the transaction must be an insolvent transaction of the company. Second, the company must have become a party to the transaction for a purpose or purposes that include defeating, delaying or interfering with the rights of a creditor or creditors on a winding up (“the purpose element”). Third, the transaction must have been entered into or something done to give it effect within 10 years of the relation-back day.
  1. Thus, the substantial difference between a voidable transaction under s 588FE(2) and one under s 588FE(5) lies in the longer period of 10 years before the relation-back day for the latter, provided the additional requirement of the purpose element is met.
  1. However, because s 588FE(5) proceeds on the basis of an insolvent transaction within the meaning of that term in s 588FC, that transaction may be either an unfair preference or an uncommercial transaction. Section 588FA defines an unfair preference. Part of the section provides:

“(1)A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency…”

  1. Having regard to the text of s 588FB previously set out, and without being exhaustive, some differences in the operation of s 588FB for an uncommercial transaction and s 588FA for an unfair preference immediately appear. First, the latter requires the relevant creditor to be a party to the transaction, whereas an uncommercial transaction is not confined to such a transaction.
  1. Second, an unfair preference turns on the result or effect of the transaction in relation to an unsecured debt owed to the creditor, by comparing what the creditor received from the company with what the creditor would have received on a winding up (in a pari passu distribution of the available assets to the unsecured creditors in accordance with the statutory priorities).
  1. On the other hand, the text of s 588FB is directed to the comparison of the benefits and the detriments to the company, as well as taking into account the benefits to others and other potential factors, in answering the question whether a reasonable person would have entered into the transaction. Time and again, the cases decided upon the meaning of s 588FB have focussed on that section as one directed to the value received by the company under the transaction on the one hand and a consideration of the position or positions of the other parties to the transaction on the other hand. Most of the cases show that the section is engaged when the company receives undervalue.
  1. However, the question remains whether an unfair preference can also constitute an uncommercial transaction where there is no undervalue involved because the company’s net asset position is not reduced by paying off a debt that it owes. Both the legislation and case law supports the conclusion that it cannot do so without something more.
  1. As a matter of statutory interpretation, the obvious textual differences in the definitions of an unfair preference and an uncommercial transaction suggest that they are not intended to cover the same ground or overlap to the extent that an unfair preference, without more, could be an uncommercial transaction. If an unfair preference is a sub-set of the transactions that may form an uncommercial transaction, the obvious question is why is an unfair preference separately (and not inclusively) defined? The question could be answered in part by an analysis of the statutory history of voidable preferences and undue preferences before the introduction of Pt 5.7B of the CA in its present structure to the Corporations Law, but it is unnecessary to do so.
  1. In addition to the textual differences, as a matter of context it is apparent from the structure of Pt 5.7B that it cannot have been intended that an unfair preference, without more, could constitute an uncommercial transaction. As previously stated, s 588FE(2) provides in effect that an insolvent transaction made within 6 months before the relation-back day is a voidable transaction. However, s 588FE(3) provides in effect that a transaction that is “an insolvent transaction, and also an uncommercial transaction” within two years before the relation-back day is a voidable transaction. 
  1. Despite the clumsy drafting, it is clearly enough intended that unfair preferences within six months are voidable under s 588FE(2), whereas uncommercial transactions within 2 years are voidable under s 588FE(3). If every unfair preference is an uncommercial transaction, s 588FE(2) would add nothing to s 588FE(3) because every unfair preference within 2 years would already also be voidable under s 588FE(3).
  1. As a matter of statutory interpretation, it is unnecessary to go further to demonstrate that an unfair preference, without more, does not constitute an uncommercial transaction within the meaning of s 588FB.
  1. As to the case law, the point was at least indirectly dealt with by Lehane J in Tosich Construction Pty Ltd (in liq) v Tosich.[15]  In that case, the company was indebted to a director in the sum of about $1.2 million.  The director caused the company’s accountant and financial controller to purchase bank cheques using the company’s banking facilities or funds.  The bank cheques were used to pay the purchase price of a house.  The director instructed the company’s accountant and financial controller to debit the amount paid for the house to his loan account.  The purchaser of the house was the director’s daughter.  Subsequently, the company was wound up and the liquidator sought to recover the funds from the daughter under s 588FF as an uncommercial transaction and voidable transaction under s 588FG.  Lehane J said:

“If in this case the court were to regard all the relevant steps that were taken … as one transaction, it would not follow, because the last of the steps was a gift to Ms Tosich, that the transaction was an uncommercial transaction. The question to be asked is whether the transaction was one which a reasonable person in the company’s circumstances would not have entered into, having regard to the matters specified. It is not possible to answer that question simply by reference to the benefit which Ms Tosich received and for which she gave no consideration. The matter must be looked at from the point of view of the company. It suffered, no doubt, a detriment by reason of the reduction in its working capital; it obtained a benefit to the extent that its net indebtedness to Mr Tosich was reduced. It is not easy to see why a reasonable person in the company's circumstances would have regarded the fact that Mr Tosich was to apply the proceeds of the reduction of his debt in making a gift to his daughter as particularly relevant to the question whether the company should enter into the transaction. Other matters might have been relevant, as contemplated by para (d) of subs 588FB(1): one might have been whether in fact Mr Tosich was entitled then to require payment of the debt owing to him; but there was no suggestion that he was not. Another question which was not explored, but which could conceivably, in a case such as this, give rise to other relevant matters is the relationship between insolvency, or perhaps the view of its solvency or otherwise which a reasonable person would have taken in the company’s circumstances at the time, and what a reasonable person might be expected to have done. I mention these matters, which do not arise on the case which the applicant sought to make or on the evidence, only to demonstrate why I am not prepared to hold, as counsel for the respondent invited me to, that a transaction for which value is given (including by way of the reduction of a debt) cannot be an uncommercial transaction. It is by no means impossible, I think, to conceive of circumstances in which it could be one.

But the case before me was put on the basis either that I should not accept what the respondent claims to have been the effect of the transaction as between the company and Mr Tosich or, alternatively, that I should look at the transaction as a whole, including the gift to Ms Tosich, and treat it as a ‘hiving off’ of the company’s assets to a member of a director’s family. The applicants’ case fails in its first aspect, as I have held, on facts. It fails in its second aspect because, looked at from the company’s point of view, the transaction involved not a ‘hiving off’ but the reduction of a net indebtedness.”[16]

  1. However, as that passage suggests, there are some cases where a transaction involving a preferential payment may constitute an uncommercial transaction even though the payment has all the hallmarks of a preference and did not necessarily entail any disposition of the company’s property at an undervalue.
  1. The clearest of them, perhaps, is Re Solfire Pty Ltd (in liq).[17]  In that case, the company was defending a proceeding brought against it by a creditor claiming a debt.  In the face of the claim, the directors deliberately caused the company to pay its other creditors, leaving it unable to pay the plaintiff when the claim proceeded to judgment.  Ambrose J said:

“In my view the whole transaction which commenced on 8 August 1996 and concluded at least as far as the company was concerned on 19 September 1996 was one designed to defeat the rights of its judgment creditors. It was conceived by the respondents as a method by which the ordinary processes of the law — however expensive they may have been in the circumstances of this case — could be circumvented so that the company having used all its available resources to pay creditors (including the respondents) other than those judgment creditors the moneys that were owing to them, could go into liquidation leaving its judgment creditors with judgments and unsatisfied statutory demands which would be worthless. In my view the whole transaction may properly be characterised as ‘an uncommercial transaction’ within s 588FB of the Corporations Law. It is clearly distinguishable from Tosich Construction Pty Ltd (in liq) v Tosich.

It is clear in my view that the whole object of the transaction stretching from 8 August 1996 to 19 September 1996 was to give ‘an unfair preference’ to the company’s creditors (including the respondents) at the expense of its judgment creditors.”[18]  (citation omitted)

  1. It has not been suggested that Solfire was wrongly decided.  A basis of distinction between Tosich and Solfire is that in the latter the overall transaction had as its purpose that some creditors would be paid leaving others to remain unpaid in a contemplated winding up.  In other words, the directors specifically intended to make payments as preferences to advantage some creditors in the impending insolvency of the company.
  1. This kind of distinction has been considered in the context of other legislation that avoids transactions described as fraudulent dispositions. Historically, such legislation preceded the regimes of both the modern legislation in Pt 5.7B of the CA and the modern bankruptcy legislation,[19] and stemmed from the Elizabethan Statute of Fraudulent Dispositions.[20] 
  1. The Elizabethan Statute was received into New South Wales as part of the law of New South Wales and upon separation as part of the law of Queensland. The ground it covered was replaced in this State by s 227 of the Property Law Act 1974 (Qld).[21]  That section makes voidable every alienation of property made with “intent to defraud creditors”, an expression drawn from the comparable provision of the Law of Property Act 1925 (UK).[22]  Section 227 was described in the report of the Queensland Law Reform Commission upon the Bill that became the Property Law Act 1974 (Qld) including s 227,[23] as “essentially a restatement of the substance of 13 Eliz c 5 as it appears in s 172 of the English Law of Property Act 1925.”
  1. There is a point of present interest in this history for the purposes of s 588FG(5) which is relevant also to the question of the objective test of the conduct of a reasonable person. It will be recalled that the purpose element of s 588FE(5) is “of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company”. With respect to the transferor, the Elizabethan Statute had used the terms “purpose and intent” and “delay, hinder or defraud”. In an entertaining discussion of the history, in Marcolongo v Chen,[24]  the High Court considered the Elizabethan Statute and the NSW comparator to s 227, namely s 37A of the Conveyancing Act 1919 (NSW).  The High Court observed of the Elizabethan Statute:

“That statute was understood as if it read ‘delay, hinder or [otherwise] defraud’. The contrary has not been suggested in the present case.

From this legislative history two things of immediate relevance appear. The first is that an understanding of the issues in this appeal is assisted by consideration of the case law upon the Elizabethan Statute which had been built up before that statute’s repeal and restatement in s 37A. The second is that, in accordance with that case law, exemplified by remarks of Lord Mansfield, and more recently of Arden LJ, the provision and its modern representatives should receive a liberal construction in effecting their purpose of suppressing fraud.”[25]  (footnotes omitted)

  1. In Marcolongo, the High Court rejected the contention accepted in the Court of Appeal below as to the requirement of purpose or intent under s 37A.  Instead, the High Court accepted:

“… [A] statement by Blanchard and Wilson JJ when considering the comparable New Zealand legislation in Regal Castings Ltd v Lightbody. Their Honours said that it was unnecessary to show that the debtor wanted creditors to suffer a loss or that the debtor had a purpose of causing loss: it was necessary to show the existence of an intention to hinder, delay or defeat creditors and in that sense to show that accordingly the debtor had acted dishonestly. Mrs Marcolongo correctly relies also upon the observation by Russell LJ when considering s 172 of the 1925 Act in Lloyds Bank v Marcan. His Lordship said:

‘I am not sure what is meant by a perfectly innocent defeat, hindrance or delay. It must be remembered that in every case under this section the debtor has done something which in law he has power and is entitled to do: otherwise it would never reach the section. If he disposes of an asset which would be available to his creditors with the intention of prejudicing them by putting it, or its worth, beyond their reach, he is in the ordinary case acting in a fashion not honest in the context of the relationship of debtor and creditor. And in cases of voluntary disposition that intention may be inferred … The intention of Mr Marcan is perfectly plain: the lease to his wife was designed expressly to deprive the bank of the ability to obtain the vacant possession to which the bank plainly attributed value, and to diminish to that extent the strength of the bank’s position as creditor. To take that action at that juncture, in my judgment, was, in the context of relationship of debtor and creditor, less than honest: it was sharp practice, and not the less so because he was advised that he had power to grant the lease. It was, in my judgment, a transaction made with intent to defraud the bank within s 172, and would have been within the [Elizabethan Statute].’”[26]  (footnotes omitted)

  1. The question in the present case is whether an intention to make the challenged payments as preferences to advantage one creditor in the impending insolvency of the company is an uncommercial transaction within the meaning of s 588FB, as was decided in Solfire.  That question must depend on the meaning of s 588FB itself, but the analogous context of fraudulent dispositions is of some assistance.
  1. In Johnson v Leader Computers Pty Ltd,[27] the Full Court of the Supreme Court of South Australia considered the South Australian comparator provision to s 227 in Queensland and s 37A in NSW.  A director of a company had guaranteed its debts and then transferred his interest in a residential property to his wife.  A creditor challenged the disposition as fraudulent.  The wife’s defence at trial was that the transfer was made either in satisfaction of a loan made by the wife to the director or that the wife had a restitutionary claim against the director that was discharged by the transfer.  The wife’s defences were rejected both at trial and on appeal.  The Full Court also rejected the wife’s submission that a transfer of property in favour of a creditor is incapable of being made with intent to defraud creditors merely because it prefers one creditor over other creditors.[28]
  1. The Full Court referred to statements taken from Glegg v Bromley,[29] to the effect that a debtor who gives his creditor security with the intention of preferring him or her to other creditors and consequently defeating or delaying other creditors does not have an illegal intention within the meaning of the Elizabethan Statute.[30]  However, having referred to other cases and Marcolongo, the Full Court concluded:

“It is clear from the statements by the High Court and from the actual decision that the existence of consideration or the fact that the transferee is a creditor is only one factor to be taken into account in approaching the factual issue of whether a particular conveyance was made with intent to defraud creditors. That reasoning and that result is inconsistent with a fixed rule that the mere fact that a conveyance is made to a creditor means that there can never be an intent to defraud creditors.”[31]

  1. The question as to whether there is an uncommercial transaction on the principle of Solfire is also informed by obiter dicta in the reasons of Black J in Gordon v Leon Plant Hire Pty Ltd (in liq).[32]  In that case, a director had given evidence that he withdrew funds from the company’s account with the intention of paying a liability of the company but did not in fact do so.  Black J held that:

“It seems to me that the findings which I have reached above in respect of Lyon Form’s insolvency, and the fact that these payments were simply the transfer of its funds to a director, immediately prior to the lodgement of tax returns which would crystallise its unpaid tax liabilities and bring about its liquidation, are sufficient to establish that these payments were both unreasonable director-related transactions within the meaning of s 588FDA of the [CA] and uncommercial transactions within the meaning of s 588FB of the [CA]. An order should therefore be made under s 588FF of the [CA] that Marcos pay Lyon Form the sum of $107,450 in respect of these payments.”[33]

  1. The first defendant submitted that Solfire should be regarded as a case where the transaction of making the payments in question had the “whole object” of defeating creditors, meaning that the sole purpose of the company in making the payments was to defeat the creditor.  The effect of the payment in discharging the company’s debts was incidental to the transaction, not its purpose.
  1. He further submitted that the text of the definition of an uncommercial transaction refers to where a reasonable person in the company’s circumstances would not have entered into the transaction. It is directed to the company’s position, not the creditors’ positions. In particular, he relied on Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd,[34] where White J said:

 

“In my view, as the payment was for full consideration it was not an uncommercial transaction. The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) said (at [1044]):

‘The tests under proposed section 588FB for whether a transaction is uncommercial relies on the phrase ‘if … it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.’ The provision is specifically aimed at preventing companies disposing of assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice. Where consideration is given by the other party to the transaction but the consideration is nominal or trivial or lacks ‘a commercial quality’ then, provided it occurs within the time period set out in the proposed section 588FE, the liquidator may apply to a court to have the transaction set aside or another order made under proposed section 588FF so that the body of unsecured creditors is not prejudiced by this transaction.’ (Emphasis added by defendants.)

The only reason for the payments being impugned is that Buzzle was insolvent at the time the transactions were entered into. It is clear that the fact that a transaction is entered into by a company when it is insolvent is not itself sufficient to make the transaction an uncommercial transaction within the meaning of s 588FB. In essence, the liquidator seeks to recover from Apple as an uncommercial transaction under s 588FB moneys which, prima facie, would have been recoverable from the vendors as unfair preferences under s 588FA if the vendors had been able to satisfy such a claim. But in terms of s 588FB, the benefits to Buzzle of entering into the transaction was that it reduced its debts to the vendors, albeit that the debts had not then become due and payable. Buzzle, as distinct from its creditors, incurred no detriment from entering into the transactions.”[35]

  1. However, this analysis was rejected by the Court of Appeal of NSW in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd.[36]  Young JA (with whom the other members of the court agreed) said:

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

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

‘Detriment’ in the section is not limited to a detriment that can necessarily be measured in money terms. The word refers to commercial detriment.”[37]

  1. In Buzzle the debts were not due and payable when they were paid and at the time the company was insolvent.  Hodgson JA and Whealy JA would have held the transaction to be an uncommercial transaction.  Hodgson JA said:

The evidence does not suggest any particular benefits to Buzzle of making the payments, other than such as might flow from assisting Resellers and/or discharging possible future liabilities. There was the detriment to Buzzle identified above. The transaction had benefits to the Resellers in that their debts were paid, and to Apple in that it received payment without having to pursue the Resellers. I do not understand any other relevant matter to be suggested. In all these circumstances, I would have been inclined to hold that the payments in question were uncommercial transactions.”[38]

  1. I conclude that if the second plaintiff can show that the first defendant’s purpose, as director, in causing the payments to be made was that he would be paid as a creditor leaving the ATO or other creditors to remain unpaid in a contemplated winding down, the transaction was an uncommercial transaction. This is because it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.
  1. I note that this formulation of what constitutes an “uncommercial transaction” does not differ much from the express requirement of the purpose element under s 588FE(5), as discussed above. A logical question is why would that element be required twice, in effect, in a case like this one? The answer may seem prosaic, but there is no apparent explanation why in this case the first plaintiff pleaded that there was an insolvent transaction on the basis that it was an uncommercial transaction, rather than because it was an unfair preference.

The first plaintiff’s purpose or purposes under s 588FE(5)

  1. There is another point to be made about the requirements of the purpose element for a voidable transaction under s 588FE(5).
  1. The purpose element requires that the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors.
  1. The words “or for purposes including the” have the effect that the identified purpose need be only one of the purposes that cause the company to enter into the transaction. Accordingly, if the second plaintiff can show that the first defendant’s intention and therefore the first plaintiff’s purposes were in part to defeat, delay or interfere with any or all of its creditors, that will be enough to engage s 588FE(5), if the other elements are satisfied.
  1. This is not the same as the requirement of a “main” purpose under s 121(1) of the BA as discussed in The Trustee of the Property of Cummins v Cummins.[39]  As a matter of ordinary meaning, a “main” purpose will usually be something greater in degree than any other purpose.  There is no such requirement under s 588FE(5).

Inferences as to the first defendant’s purpose

  1. The first defendant’s submissions concerning whether the inferences as to purpose alleged against him should be drawn relied on, and should logically begin with, Briginshaw v Briginshaw.[40]  That case is frequently cited for the proposition that in civil proceedings the strength of the evidence required to prove a fact or facts on the balance of probabilities is affected by the gravity of the conduct alleged.  For example, where the facts alleged constitute fraud or serious misconduct, more cogent proof will be required before the inference will be drawn than in some other circumstances.
  1. The case is so frequently cited that what was actually decided is mostly forgotten. In 1938 adultery had much more serious legal consequences than it has today, although it was not by then a criminal offence. It was a ground for divorce, which was the issue in that case. Proof of adultery was often difficult. A petitioner would rely on circumstantial evidence and ask that the inference of adultery be drawn. In Briginshaw, the petitioning husband relied on evidence of that kind and on evidence of admissions.  Admissions were alleged to have been made by the wife and the co-respondent to an inquiry agent, the husband and the husband’s sister on different occasions (who were on a mission to gather evidence against the wife) and by an independent witness on yet another occasion.  The wife and the co-respondent gave evidence on oath denying the alleged adultery and the alleged admissions of intercourse.  The trial Judge found that adultery was not proved, although his reasons were expressed in a way that raised a question whether he had applied the criminal standard of proof.  By majority, the High Court held that he had not done so and dismissed the appeal.
  1. Dixon J analysed the case law and, in particular, the approach to a finding of fraud as an example:

“It is often said that such an issue as fraud must be proved ‘clearly,’ ‘unequivocally,’ ‘strictly,’ or ‘with certainty’ … This does not mean that some standard of persuasion is fixed intermediate between the satisfaction beyond reasonable doubt required upon a criminal inquest and the reasonable satisfaction which in a civil issue may, not must, be based on a preponderance of probability. It means that the nature of the issue necessarily affects the process by which reasonable satisfaction is attained. When, in a civil proceeding, a question arises whether a crime has been committed, the standard of persuasion is, according to the better opinion, the same as upon other civil issues…”[41]

  1. Returning to the question of adultery, Dixon J concluded:

“Upon an issue of adultery in a matrimonial cause the importance and gravity of the question make it impossible to be reasonably satisfied of the truth of the allegation without the exercise of caution and unless the proofs survive a careful scrutiny and appear precise and not loose and inexact. Further, circumstantial evidence cannot satisfy a sound judgment of a state of facts if it is susceptible of some other not improbable explanation. But if the proofs adduced, when subjected to these tests, satisfy the tribunal of fact that the adultery alleged was committed, it should so find.”[42]

  1. Clearly enough, an intention to defeat, delay or hinder creditors is a serious allegation that will attract the Briginshaw approach.  So much was accepted in The Trustee of the Property of Cummins v Cummins.[43]
  1. In dealing with an inference for a finding of fact, Holloway v McFeeters[44] is a leading case.  The plurality judgment said:

“Inferences from actual facts that are proved are just as much part of the evidence as those facts themselves. In a civil cause ‘you need only circumstances raising a more probable inferencein favour of what is alleged … where direct proof is not available it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference; they must do more than give rise to conflicting inferences of equal degree of probability so that the choice between them is mere matter of conjecture … All that is necessary is that according to the course of common experience the more probable inference from the circumstances that sufficiently appear by evidence or admission, left unexplained, should be that the injury arose from the defendant’s negligence. By more probable is meant no more than that upon a balance of probabilities such an inference might reasonably be considered to have some greater degree of likelihood’.”[45]  (citations omitted)

  1. In a case like the present, the person best placed to give evidence of the first plaintiff’s purpose or purposes in making the relevant payments is the first defendant. Mr Marshall and Ms Marks might have been able to give some relevant evidence but were not called. In any event, it appears from the evidence and the facts already found that their roles were subject to the first defendant’s control and directions.
  1. The first defendant, as a director and directing mind of the first plaintiff, was not an independent or disinterested witness. His position was quite the opposite. The case law has considered similar problems. An example is McCormack v Federal Commissioner of Taxation.[46] 
  1. In McCormack, the question was whether the taxpayer had discharged the onus of proof that she had not bought property for the purposes of re-sale at a profit for the purposes of s 26(a) of the Income Tax Assessment Act 1936 (Cth).  Gibbs J said:

“In a case arising under s 26(a) the taxpayer is usually the person best able to give evidence as the purpose for which the property in question was bought. Although evidence given by a taxpayer as to the purpose with which he acquired property must, for obvious reasons, ‘be tested most closely, and received with the greatest caution’, that it would be wrong for a judge to regard the evidence of a taxpayer as prima facie unacceptable. The taxpayer's evidence must of course be considered on its merits, in the light of the circumstances of the case, without any prepossession, favourable or unfavourable. If the taxpayer gives evidence that the property in question was not acquired by him for the purpose of profit-making by sale, and that evidence is accepted, he of course succeeds. In some cases the taxpayer may establish that the case does not fall within s 26(a), even though he does not give evidence or does give evidence but is disbelieved … And the fact that the taxpayer was disbelieved could, in appropriate circumstances, itself give rise to an inference adverse to the taxpayer’s case … Nevertheless, if the proper inference to be drawn from the evidence is that the taxpayer bought the property for a purpose other than that of profit-making by sale, the appeal will succeed.”[47]  (citations omitted)

  1. In the present case, the first defendant knew, as he admitted in evidence:
  1. the earnings and expenses of the first plaintiff as they were shown in the deposits and payments or withdrawals from the first ANZ account and the second ANZ account;
  1. that no amount had been paid on account of tax by the first plaintiff, whether income tax or GST;
  1. that the first plaintiff might have a tax liability.
  1. In addition, in my view, the first defendant knew that:
  1. the first plaintiff had the outward appearance of a company controlled and owned by others, when in fact he controlled it;
  1. the first plaintiff had made no arrangements to attend to its tax liabilities, whatever they were;
  1. the first plaintiff, through his control, did not intend to do anything about those tax liabilities;
  1. after the payments were made, the first plaintiff’s available funds would be limited, and any ability to pay a substantial sum on account of the tax liabilities to date would depend at best on future receipts and profits; and
  1. yet another “Ashala” company was to become involved in conducting the business.

Findings as to the voidable transaction

  1. In my view, the transaction comprising and including the challenged payments clearly had the effect of an unfair preference as between the first plaintiff and the first defendant who were both parties to it. The is because the first defendant received from the first plaintiff in respect of the rent for the Albert Street property more than he would have received if he had proved for the rent in a winding up of the first plaintiff.
  1. Second, in my view the inferential finding is available and should be made that the first defendant was aware at the time of the challenged payments that he would be paid as a creditor, leaving the ATO or any other creditors to remain unpaid in the winding down of the first plaintiff’s operations and in any winding up of the first plaintiff that followed.
  1. Accordingly, the transaction of making the challenged payments was an uncommercial transaction within the meaning of s 588FB.
  1. Next, in my view, the first plaintiff was insolvent at the time when the challenged payments were made or became insolvent by making the challenged payments.
  1. Accordingly, the transaction was an insolvent transaction within the meaning of s 588FC.
  1. The first plaintiff became a party to the transaction (at the latest) by making the challenged payments. In my view, in light of the findings particularly at [177] and [178] above, the inference is available and should be drawn that one of the first defendant’s purposes in causing the first plaintiff to make the challenged payments was to defeat, delay or interfere with creditors (particularly the ATO) and that accordingly one of the first plaintiff’s purposes was to do the same.
  1. There is no question that the payments were made during the 10 years ending of the relation-back day.
  1. Accordingly, in my view, the transaction was a voidable transaction under s 588FE(5) of the CA.

Defence under s 588FG(1)

  1. The first defendant pleaded a defence under s 588FG(1) of the CA. That subsection provides, in part, as follows:

“(1)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…”

  1. The first defendant submitted that he had not received a benefit because of the transaction when the Quay West unit was transferred to Ms Marks as the trustee of the KJM Family Trust.
  1. It is not necessary to consider whether the first defendant received a benefit under s 588FG(1)(a). That is because, as discussed above, he was a party to the transaction as he received the benefit of the challenged payments in payment of the rent and he is not, therefore, “other than a party to the transaction.”

Application of s 588FF(1)(d)

  1. As previously found, I am satisfied that the transaction of the first plaintiff in making the payments is voidable. Therefore, I may make an order under s 588FF(1).
  1. The purchase price for the Quay West unit of $460,000 was funded by the challenged payments to the extent of $458,010. The first defendant will have procured the balance of $1,990 as well as stamp duty, conveyancing expenses and any adjustments. Nevertheless, in my view, this difference is relatively small and so the Quay West unit prima facie “fairly represents” the application of the money the first plaintiff paid under the transaction.
  1. There is no evidence as to the present value of the Quay West unit. If the value exceeded the amount of the payments together with damages or interest representing the value of the loss of the use of the money, it might have been possible and appropriate to order that the first defendant transfer a charge over the Quay West unit to the extent of that value. However, the first defendant did not plead or prove any facts or make any submissions directed to that form of relief.

Application of s 588FF(1)(g)

  1. Although the first defendant neither pleaded nor made any submissions about the point, s 588FF(1)(g) of the CA provides that the court may make an order providing for the extent to which, and the terms on which, a debt that was released or discharged to any extent by or under the transaction may be proved in the winding up.
  1. The debt owed by the first plaintiff to the first defendant for the rent, in the amount of either $480,150 or $460,000 was discharged by or under the transaction. If the transaction includes the 4 August Agreement, it seems to me that the debt that was discharged by or under it was $480,150. Despite the first defendant’s disentitling intent and purpose in causing the challenged payments to be made, it seems to me that the rent which was payable on demand was $480,150 at the time of the transaction. In the absence of any challenge to the validity of the lease and variation agreement, the first defendant should be restored to the usual position of a creditor required to disgorge a preference and an order should be made that he is entitled to prove for the rent in the winding up of the first plaintiff.

Orders

  1. Accordingly, the orders should be as follows:
  1. The plaintiffs’ claims against the third defendant are dismissed.
  1. Upon the second plaintiff’s claim for relief under s 588FF(1)(d) of the Corporations Act 2001 (Cth) it is ordered that the first defendant as trustee of the KJM Family Trust transfer Lot 106 on BUP 103388 in the County of Stanley Parish of North Brisbane Title Reference 50095706 to the first plaintiff.
  1. The first defendant is entitled to prove in the winding up of the first plaintiff for rent payable under the lease made between the first plaintiff and the first defendant dated 1 July 2007 to the extent of $480,150.
  1. I will hear further submissions on the question of costs by directing that the parties provide any submissions as to costs in writing, not exceeding five pages in length, on or before 14 days from the delivery of this judgment.

Footnotes

[1] The question of costs of that part of the claim remains.

[2] Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47, 69-77.

[3] See Corporations Act 2001 (Cth), s 95A.

[4] [2013] 2 Qd R 501.

[5] [2006] QCA 175, [112]-[115].

[6] [2014] QSC 60.

[7] [2014] QSC 60, [68].

[8] (1959) 101 CLR 298.

[9] [1976] 1 NSWLR 191, 201–202.

[10] (2007) 164 FCR 83.

[11] (2007) 164 FCR 83, 98 [74].

[12] (2011) 85 ACSR 87.

[13] (2011) 85 ACSR 87, 97 [34].

[14] Statement of claim, par 18(a).

[15] (1997) 23 ACSR 466.

[16] (1997) 23 ACSR 466, 473-474.  The decision was affirmed on appeal: Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363.

[17] [1998] 2 Qd R 92.

[18] [1998] 2 Qd R 92, 97.

[19] Bankruptcy Act 1966 (Cth), s 121.

[20] 13 Eliz 1 c 5 (1570); See The Trustees of the Property of Cummins v Cummins (2006) 227 CLR 278, 288 [22].

[21] Now s 228 of the Property Law Act 1974 (Qld).

[22] Law of Property Act 1925 (UK), s 172.

[23] Queensland Law Reform Commission, Bill to consolidate, amend and reform the law relating to conveyancing, property and contract and to terminate the application of certain imperial statutes, Report No 16 (1973) 111.

[24] (2011) 242 CLR 546.

[25] (2011) 242 CLR 546, 554 [19]-[20].

[26] (2011) 242 CLR 546, 558-559 [32].

[27] (2014) 118 SASR 408.

[28] (2014) 118 SASR 408, 429 [110]-[113].

[29] [1912] 3 KB 474.

[30] [1912] 3 KB 474, 484, 485 and 492.

[31] (2014) 118 SASR 408, 429 [110].

[32] [2015] NSWSC 397.

[33] [2015] NSWSC 397, [89].

[34] (2010) 238 FLR 384.

[35] (2010) 238 FLR 384, 432-433 [221]-[222].

[36] (2011) 81 NSWLR 47.

[37] (2011) 81 NSWLR 47, 63 [115]-[117].

[38] (2011) 81 NSWLR 47, 50-51 [5].

[39] (2006) 227 CLR 278, 292 [34]-[36].

[40] (1938) 60 CLR 336.

[41] (1938) 60 CLR 336, 362-363.

[42] (1938) 60 CLR 336, 368-369. 

[43] (2006) 227 CLR 278, 292 [34].

[44] (1956) 94 CLR 470.

[45] (1956) 94 CLR 470, 480-481.

[46] (1979) 143 CLR 284.

[47] (1979) 143 CLR 284, 301-302.

Close

Editorial Notes

  • Published Case Name:

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

  • Shortened Case Name:

    Ashala Model Agency Pty Ltd (in liq) v Featherstone

  • Reported Citation:

    [2017] 2 Qd R 1

  • MNC:

    [2016] QSC 121

  • Court:

    QSC

  • Judge(s):

    Jackson J

  • Date:

    06 Jun 2016

Litigation History

EventCitation or FileDateNotes
Primary Judgment[2016] QSC 12106 Jun 2016Judgment for the second plaintiff on the second plaintiff's claim to avoid a transaction entered into by the first plaintiff against the first defendant pursuant to s 588FF(1)(d) granted; plaintiffs' claim against third defendant dismissed; Jackson J.
Appeal Determined (QCA)[2017] QCA 260 [2018] 3 Qd R 14703 Nov 2017Appeal dismissed: Sofronoff P and Morrison JA (McMurdo JA dissenting).
Special Leave Refused (HCA)[2018] HCASL 4421 Mar 2018Special Leave Refused by Keane and Edelman JJ.

Appeal Status

Appeal Determined - Special Leave Refused (HCA)

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