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Featherstone v Ashala Model Agency Pty Ltd (in liq) & Anor  
Unreported Citation: [2017] QCA 260
EDITOR'S NOTE

This matter concerned whether two payments made by the respondent company to the appellant were uncommercial transactions within the meaning of s 588FB of the Corporations Act 2001 (Cth), and whether they were transactions to which the company was a party for the purpose of defeating, delaying or interfering with the rights of creditors on winding up (for the purposes of s 588FE(5)).  Briefly, the payments were made in satisfaction of a liability to pay rent but the company was indemnified by the appellant for that liability.  At the time of the payments, the company had a known tax liability and the effect of the payments was to render the company insolvent.   

Sofronoff P and Morrison and McMurdo JJA

3 November 2017

The respondent was a company carrying on business as a model agency. The sole director and shareholder on the record of the company was Ms Marks, however, she held the shares on trust for the appellant and agreed to transfer the shares to him on request. [2].

The company occupied premises in Brisbane as the tenant of the appellant, Mr Featherstone. [143]. The lease was entered into in July 2005. [3]. The terms of that lease included that rent was due and owing in advance at the beginning of each lease year or “as otherwise agreed to in writing by [the appellant]”. [3]. On the day the lease was executed, the appellant signed a letter to Ms Marks informing her that the rent payable under the lease would not be payable unless he asked for it. [4]. Further, by execution of a deed, the appellant indemnified the company against “all costs, claims and expenses” to which it might be subject. [5]. The effect of this was that while the company had a right to exclusive possession under the lease, and a liability to pay rent, the company had been indemnified against that liability by the appellant – the party that had the right to call for payment. [6].

In 2007, the appellant agreed to buy an apartment in Brisbane for $460,000. [11]. At the time, the company held in excess of $400,000 in its bank accounts. [144]. It made two payments to facilitate the purchase of the apartment: (i) $23,000 on 1 August 2007, and (ii) $435,010 a few weeks later. [144]. These amounts were, pursuant to an agreement entered into between the company and the appellant, accepted as full and final payment for the rent owing from the inception of the lease until 30 June 2008. [12]. Although the apartment was originally held on trust by a person other than the appellant, from the time of purchase it was the appellant’s home and he later became the registered proprietor. [144].

The company ceased carrying on business and was de-registered in 2008. [145]. In 2012, it was re-registered and wound up as an insolvent company. [145]. The liquidator, who was the second respondent, lodged Business Activity Statements with the Australian Taxation Office, which was the major creditor of the company. [145]. At no point had the company paid any GST or income tax. [145].

At first instance, the liquidator successfully argued that the two payments were “voidable transactions” under the Corporations Act 2001 (Cth) because they were “insolvent transactions”, as defined in s 588FC of the Act, to which the company was a party for the purpose of defeating, delaying or interfering with the rights of creditors on winding up (see s 588FE(5) of the Act). [146]. The transactions were held, at first instance, to be “insolvent transactions” because they were “uncommercial transactions”, as defined in s 588FB of the Act – relevantly, payments which a reasonable person in the company’s circumstances would not have made. [146]. Importantly, the liquidator did not allege that the payments constituted unfair preferences. [33].

The appellant raised several arguments on appeal. The two key issues were (i) whether the payments constituted an uncommercial transaction, and (ii) whether they were made for a purpose of defeating, delaying or interfering with the rights of creditors on winding up. [149]. A majority of the Court of Appeal (Sofronoff P, with whom Morrison JA agreed, McMurdo JA dissenting) answered both of these questions affirmatively.

Sofronoff P, after analysing the history of the voidable transactions provisions, noted that “while the Act distinguishes between unfair preferences and uncommercial transactions, there is nothing in the Act that would justify a conclusion that the two categories could never overlap”. [69]. As for whether the payments were uncommercial transactions, his Honour agreed with the primary judge that they were, noting that “[n]o reasonable person would have made them knowing what Mr Featherstone knew”. [76]. These matters included: (i) that the company had never lodged any tax return, remitted GST, or paid any income tax; (ii) that it was insolvent or would become insolvent; (iii) that the payments would leave the company with less than $4,000 in liquid funds; and (iv) that the payee was the real owner of the company receiving the money as a trustee of a trust that could benefit himself. [76]. His Honour also stated that although the company would obtain the benefit of the discharge of the debt owed by way of rent, “that discharge would be effected only by making a preferential payment”. [76]. Furthermore, “a reasonable person considering payment of all the rent would have regard to the existence of the indemnity granted by [the appellant] which protected the company against that liability. [76].

As for the second issue, his Honour emphasised that the appellant knew that the company had a “not insubstantial tax liability”, and that the appellant had caused the company to pay him all but a few thousand dollars of its money while disguising his interest in the acquisition of the apartment, by causing it to be registered in another person’s name as trustee. [89]. The appellant then “let the company die leaving it liable to pay … a substantial sum of tax”. [89]. His Honour also noted lies that had been told by the appellant in the course of the trial, which “reinforced strongly the inference that his purpose [which was attributed to the company] had been to defeat the creditors of the company”. [94]. That the appellant had another purpose which might be attributed to the company, namely, to buy an apartment for himself, was of no moment because this purpose “only reinforce[d] the inference of intent to defeat the interests of others”. [95].

For these reasons, his Honour agreed with the conclusions of the primary judge. [97]. His Honour also dismissed the appellant’s remaining 10 grounds of appeal. [98]–[111].

Morrison JA agreed with Sofronoff P. On the uncommercial transaction issue, his Honour said that, in his view, “a reasonable person in the company’s circumstances would not have made the payments in question, knowing that it would render the company insolvent and cause a payment to one creditor (Mr Featherstone) of 100 per cent of his debt, when the tax creditor would receive nothing like that, if anything”. [132].

McMurdo JA would have allowed the appeal. His Honour emphasised that the agreements by which the rent was due and payable had not been impugned by the liquidator. Each payment was payment of a debt which was due and owing to the appellant. In addition, “the company’s entitlement to occupy the premises for the next 10 months or so depended upon” payment of the second amount. [226]. His Honour considered therefore that the second payment “had a commercial explanation: a reasonable person in the company’s circumstances could have decided to make the payment”. [226]. His Honour also did not consider that the first payment was an uncommercial transaction. [227].

As for the second issue, McMurdo JA explained that the question was not whether the appellant was aware that the payments might have an impact upon creditors, but rather that the impact must have been one of his purposes, and thereby the company’s purposes, in making the payments. [241]. His Honour considered that the company’s immediate purpose in making the payments was to discharge a debt which was owing. [244]. To the extent that the appellant’s purposes should be attributed to the company, his purpose was to enable the payment of the purchase price for the apartment. [244]. McMurdo J said that although the appellant was aware that the company had substantial tax liabilities, and recklessly indifferent as to whether the company could pay them, his Honour was not prepared to infer that he had the company pay the vendor in order to defeat, delay or interfere with the rights of the ATO or any other creditor. [244].

In the result, however, the appeal was dismissed with costs. [112].

J English