Australian Combined Financial Services Pty Ltd v Fusion Realty Pty Ltd

CATCHWORDS : CORPORATIONS - directors duties - allegation that sole director of one company caused that company to make gratuitous transfer of assets of that company to another company of which he was also the sole director - first company in liquidation - proceedings by first company and liquidator against the director - plaintiffs fail to show that the assets were assets of the first company as distinct from a wholly owned subsidiary of the first company

LEGISLATION CITED : Corporations Act 2001 (Cth), Division 2, Part 5.7B, ss 181, 182, 588FE, 588FF, 598

CASES CITED : Universal Communication Network Inc v Chinese Media Group (Aust) Pty Ltd [2008] NSWCA 1

Australian Combined Financial Services Pty Limited (in liquidation) - First Plaintiff PARTIES : David Gregory Young - Second Plaintiff Fusion Realty Pty Limited - First Defendant Graeme Michie - Second Defendant

COUNSEL : Mr M J Dawson - Plaintiffs Ms F A Sinclair - Defendants

SOLICITORS : Kennedys Law Firm - Plaintiffs Second Defendant in Person

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

5094/07 AUSTRALIAN COMBINED FINANCIAL SERVICES PTY LIMITED (IN LIQUIDATION) & ANOR v FUSION REALTY PTY LIMITED & ANOR JUDGMENT 1 The first plaintiff is Australian Combined Financial Services Pty Ltd ("ACFS"), a company in liquidation. The second plaintiff is its liquidator, Mr Young. 2 The winding up of ACFS was ordered by this court on 14 December 2006, following its restoration to the register of companies. It had been deregistered on 8 January 2006. 3 The second defendant, Mr Michie, is a real estate agent by occupation. He became a director of ACFS in June 1999 and continued in office up to the commencement of the winding up. Mr Michie became a director of the first defendant, Fusion Realty Pty Ltd ("Fusion"), on its incorporation on 8 November 2005. He was, at all material times, the sole director of each of these companies. 4 The plaintiffs allege liability of both Mr Michie and Fusion on account of what they view of a transfer of assets of ACFS to Fusion without consideration. The liability is said to arise in various ways to which I shall come. 5 On 5 May 2004, ACFS entered into an agreement with Ms Joy Bayley to purchase the whole of the issued share capital of Joy Bayley Real Estate Pty Limited ("JBRE"), a company that conducted a real estate agency business at Newtown. At that time, JBRE acted as property manager and collected rents for a number of landlords in return for payments of commission. ACFS itself had for some time carried on a similar business in the course of which it managed properties and derived income by way of commission on rents and rents for other landlords. 6 Recital A to the agreement of 5 May 2004 was in these terms: "The Company [ie, JBRE] is the proprietor of the Rent Roll comprising the properties managed by the Company as set forth in the schedule annexed hereto and marked 'A' (hereinafter referred to as 'the Rent Roll')." 7 The annexed schedule A listed numerous properties and included for each the address of the property, the name of the owner (landlord), the name of the tenant, the date of lease expiry, the weekly or monthly rent and the percentage rate of commission payable to JBRE. It is this schedule A that was referred to during the hearing as the "rent roll". 8 The purchase price under the agreement of 5 May 2004 was $240,000 but this was subject to reduction in certain events. Provision was made, in particular, for reduction if "the management of any property on the Rent Roll has been lost by the Company from the date of Completion to the period ending three (3) months from Completion", where the loss was, in broad terms, not attributable to neglect or mismanagement of JBRE. 9 The price was payable as to $90,000 on completion and, as to the balance, by two equal instalments, one due one year after completion and the other due two years after completion, and with each carrying interest in the meantime. 10 On one version of events, completion of the sale and purchase of the shares in JBRE took place on 5 May 2004. On another, completion occurred in June 2004. The first payment of $90,000 was made upon completion. 11 The vendor, Ms Bayley, died on or about 1 February 2005. ACFS did not make any payments for the shares in JBRE beyond the initial $90,000 paid on completion. 12 It is the contention of the plaintiffs that, at some point after May or June 2004, ACFS itself, having acquired the whole of the share capital of JBRE, took possession and assumed control of JBRE's rent roll. As a result, the plaintiffs say, ACFS operated and enjoyed the rent roll directly, instead of "through" JBRE. The plaintiffs further say that, from some time after May or June 2004, ACFS, which, as I have said, already had a real estate agency business of its own, came to conduct also the property management and rent collection activities of its wholly-owned subsidiary, JBRE. 13 Mr Michie gave evidence about how ACFS came to be deregistered on 8 January 2006. In a report as to affairs furnished by him to the liquidator of ACFS, Mr Michie said that he became aware in June 2005 that ACFS had a liquidity problem. He further said that the action he then took was "decide to close the company down". There was also reference to a dispute with the company's accountant. Mr Michie said in cross-examination that he "didn't really decide to close it down, I just let it go because what I wanted to do was sort out things with the accountant". 14 At all events, having realised in June 2005 that AFCS had a liquidity problem and decided either to "close it down" or "let it go", Mr Michie allowed ACFS to reach a state in which ASIC caused it to be deregistered on 8 January 2006 for non-payment of fees or non-lodgment of documents. As sole director, he could have prevented this. Meanwhile, on 8 November 2005, Mr Michie had caused Fusion to be registered with himself as sole director and shareholder. 15 Mr Michie also gave evidence about the commencement of the activities of Fusion. He accepted in cross-examination that Fusion began to carry on a real estate agency business in "the next financial year", by which I understood him to mean some time after 1 July 2006. He also accepted that income of Fusion as shown in a summary for the period July 2007 to June 2008 included income from management fees. The cross-examination continued: "Q. At least in part the income Fusion Realty derived was a result of the rent roll, correct? A. Of the combined created rent roll.

Q. In part it resulted from the rent roll that came from Joy Bayley, is that right? A. Partly correct, part." 16 Mr Michie was then taken to a corresponding income statement of Fusion for the earlier period, July 2006 to June 2007. He again accepted that part of the income came from the rent roll that had belonged to JBRE: "Q. Again, part of the fees recorded on a month by month basis there is from management fees, that's correct? A. That's correct.

Q. And part of those management fees are at least from the rent roll formerly owned by Joy Bayley Real Estate Pty Ltd, that's true, isn't it? A. Correct." 17 Mr Michie sought to retreat from these statements in the course of re-examination. Because confusion then arose, I allowed both further cross-examination and further re-examination. In the course of the further cross-examination, Mr Michie was taken to lists of properties managed by Fusion as at September 2008. The lists were annexures to an affidavit sworn by Mr Michie but not read by his counsel. The content of the cross-examination on the lists is exemplified by what was said about the last of these lists: "Q. There is another listing of properties, 43 properties, do you see that, and a total of seven owners? A. Yes.

Q. And rental income, $489,595.43, correct? A. That's what is on the page, yes.

Q. It is your document, sir, that's true, isn't it, annexed to your affidavit is explaining what occurred with the rent roll, isn't it? A. Yes.

Q. The total management income derived was $29,247.24, that's true, isn't it? A. Yes.

Q. The properties listed on that page were part of the rent roll owned by Joy Bayley Real Estate, weren't they? A. They were.

Q. If you could go back to page 87 of annexure B, annexure A to your affidavit, have you got that, it is the end of annexure A to your affidavit of 15 September, do you see that, and total rental income from those properties of which you accept were part of the rent roll of Joy Bayley Real Estate was $597,290.56, correct? A. Yes.

Q. And the management fees entered by Fusion Realty on those fees was $31,241.52, that's true, isn't it? A. Yes.

HIS HONOUR: That was in September 2008, is that right?

Q. So when one adds the fees from properties formerly on the Joy Bayley Real Estate in annexure A of $31,000, and the management fees from the properties in annexure C which are also part of Joy Bayley Real Estate of $29,000, Fusion Realty earned about $60,000 in management fees from properties formerly on the Joy Bayley Real Estate rent roll, didn't it? A. They were formerly on the Joy Bayley rent roll." 18 In the course of the further re-examination, Mr Michie said, in relation to the several landlords identified that they had "terminated their contracts", which I understood to mean that they had severed their connection with the pre-existing property manager in order to enter into a new and equivalent contractual relationship with Fusion. 19 This, to my mind, is no more than recognition of the reality that there cannot sensibly be two management contracts concurrently with two managing agents; and that for a new managing agent to begin to act for a landlord, that landlord must cease to be in a contractual relationship with the original managing agent. 20 At all events, Mr Michie accepted that, after 30 June 2006, Fusion began to derive management fees from property management contracts with landlords for whom JBRE had performed property management services under contracts between the landlords and JBRE. 21 I should mention now certain aspects of the pleadings. Paragraph 15 of the plaintiffs' points of claim is as follows: "Following 8 November 2005, the First Defendant [Fusion] assumed control and possession of the Rent Roll and treated the Rent Roll and any receipts and profits derived therefrom as its own." 22 The defendants' response is: "Paragraph 15 is not admitted, because the transfer of the Rent Roll without Notice of any Claim, was not commenced until the 30th June 2006, and not completed until November 2006, because no notice of any claim was pending was had by either of the defendants." 23 There is thus an admission that Fusion assumed possession and control of the rent roll and treated the rent roll and receipts and profits from it as belonging to Fusion. What is not admitted is the timing. The defendants' position is that the migration of the rent roll occurred progressively between 30 June 2006 and November 2006. 24 The plaintiffs' case proceeds on the footing that the rent roll held and enjoyed by JBRE at the time of completion of the share purchase in May or June 2004 - in essence, the contractual rights enjoyed by the managing agent and the advantage of the client connections - later became an asset of ACFS and that, still later, Mr Michie, with knowing involvement on the part of Fusion, caused or allowed ACFS to transfer control of the rent roll to Fusion without consideration. The assumption of possession and control referred to in paragraph 15 of the points of claim is thus an assumption by Fusion from ACFS. 25 The plaintiffs' points of claim include the following: "21. In causing the First Plaintiff [ACFS] to transfer control of the Rent Roll and in causing the First Defendant [Fusion] to to assume control of the Rent Roll, the Second Defendant [Mr Michie] breached his Director's Duties owed to the First Plaintiff. Particulars of Breach of Director's Duties (a) the Second Defendant preferred the interests of himself and the First Defendant to that of the Plaintiff (including the interest of creditors, actual contingent and future); (b) the transfer of the Rent Roll was not for the benefit of the First Plaintiff but rather for the benefit of the First Defendant and the Second Defendant; and (c) the Second Defendant knew that the effect of transferring the Rent Roll was to transfer assets of the First Plaintiff for no consideration. 22. At the time of transferring the Rent Roll from the First Plaintiff to the First Defendant and collecting the receipts and profits derived therefrom, the Second Defendant knew that the First Plaintiff was indebted to the Vendor pursuant to the Share Sale Agreement." 26 The duties breached by Mr Michie are identified as general law duties and statutory duties (ss 181 and 182 of the Corporations Act 2001 (Cth)). The same breach of duty by Mr Michie towards ACFS is pleaded by reference to s 598 of the Corporations Act. 27 By their response, the defendants "deny absolutely" paragraphs 21 and 22 of the points of claim. 28 The plaintiffs' case is based squarely on the proposition, first, that ACFS controlled the rent roll and that Mr Michie transferred the rent roll from ACFS to Fusion; and, second, that there was a transfer of assets of ACFS to Fusion for no consideration. It is contended that the assumption of possession and control by Fusion was the result of a transfer of possession and control by ACFS. The result of those circumstances and a breach of duty owed by Mr Michie to ACFS in which Fusion was knowingly concerned is, on the plaintiffs' case, that Fusion holds the rent roll (and receipts and profits from it) on trust for ACFS. There is also a damages claim against Mr Michie. 29 An essential element of the plaintiffs' case is that, at the time of Fusion's admitted assumption of possession and control of the rent roll (following which Fusion treated the rent roll and the receipts and profits from it as its own), the rent roll was "owned" by ACFS, so that it was ACFS that made the "transfer" that caused possession and control to accrue to Fusion. The relevant concept of ownership goes, of course, to the contractual rights to receive commissions for services rendered by way of property management and rent collection. Essential to the plaintiffs' case is the proposition that the contractual rights to receive commissions were rights vested in ACFS and that ACFS ceded those rights to Fusion. 30 The balance sheet of ACFS as at 30 June 2005 shows as a non-current asset "Investment, Joy Bayley Real Estate P/L - 100 Ord. Shares" with a book value of $100,633. The same asset was recorded at 30 June 2004 at a book value of $99,173. Revenues for the 2004 and 2005 years from "tenancy commissions" are shown as $14,268 for 2004 and $13,200 for 2005". 31 The rent roll annexed as schedule A to the agreement for the sale of shares dated 5 May 2004 listed managed tenancies producing annual rentals of more than $1.4 million and annual management fees of $80,719.92. 32 It is clear, therefore, that ACFS did not, in either the year ended 30 June 2004 or the year ended 30 June 2005, come to enjoy management fee income of anything like the magnitude generated by the JBRE rent roll at the time of completion of the share purchase in May or June 2004. 33 There is no like documentary evidence for periods after 30 June 2006 from which it might be inferred that ACFS performed services and derived income by reference to the JBRE rent roll. It is, however, relevant to quote the following passage in Mr Michie's cross-examination: "Q. From May 2004 Australian Combined Financial Services Pty Ltd, a company in which you were the sole director and member, collected the revenue from the rent roll, the management fees, that's true, isn't it? A. Which rent roll?

Q. The rent roll that is the subject of these proceedings. You understand the rent roll, don't you, what I refer to when I say rent roll, correct? A. Well, I was collecting management fees from my rent roll they had already brought along, that's correct.

Q. You collected management fees, didn't you, from the rent roll that was formerly owned by Joy Bayley Real Estate? A. Some, not all.

Q. You did that through Australian Combined Financial Services Pty Ltd; that's true, isn't it? A. That's right." 34 The emphasis here is on activities of Mr Michie - "I" and "you". He accepted that he collected management fees from the JBRE rent roll "through" ACFS. It is thus shown that ACFS played a role in those collections. But it was apparently some kind of intermediary role described by the word "through". The passage in the cross-examination does not establish that ACFS, as distinct from JBRE, had somehow come to own and enjoy the contractual rights that caused commissions to be paid by landlords. I note, in this connection, that JBRE continued to exist at the time of the actions of Mr Michie said to have involved a breach of a duty owed by him to ACFS. JBRE was deregistered on 4 May 2008 which was after the commencement of these proceedings. 35 The plaintiffs have not, to my mind, shown that the rights and advantages that constituted the JBRE rent roll ever came into the actual and direct ownership and enjoyment of ACFS. The evidence shows that a number of property management contracts between JBRE and landlords came to be replaced or superseded by property management contracts between Fusion and the same landlords. It also emerged in cross-examination of Mr Michie, in the way I have described, that ACFS collected rents and management commissions attributable to landlords who had been on the JBRE rent roll. What is not shown is that ACFS was ever a party to property management contracts with those landlords or that it was ever the beneficial recipient of the management commissions generated by rents collected for those landlords. 36 It follows, in my view, that it is impossible to make good against Mr Michie an allegation that, in breach of a duty owed by him to ACFS as the sole director of ACSF, he caused or allowed ACSF to cede to Fusion contractual rights and advantages properly belonging to ACSF. 37 The case pleaded at paragraphs 21 and 22 of the points of claim in the way set out at paragraph [25] above is formulated wholly on the basis that the contractual rights and advantages inherent in the rent roll were rights and advantages directly owned by ACFS and that Mr Michie, as a director of ACFS, acted in breach of the duties he owed ACFS by causing ACFS to transfer the rights and advantages to Fusion and causing Fusion to accept and assume them. It is ACFS's ownership of the rights and advantages that has not been established. 38 The principal case advanced by the plaintiffs against Mr Michie and Fusion - the case pleaded at paragraphs 21 and 22 of the points of claim - fails. It is necessary, however, to consider several alternatives put forward by the plaintiffs. 39 The plaintiffs plead at paragraph 30 of the points of claim: "In the circumstances that existed, the transfer of the Rent Roll, in whole and in part, comprised an alienation of property made with the intent to defraud creditors within the meaning of section 37A of the Conveyancing Act 1919 (NSW). Particulars (a) The effect of causing the transfer of the Rent Roll was to transfer assets of the First Plaintiff for no consideration." 40 Because this claim, like that already considered, is based on the proposition that assets of ACFS were transferred, it too fails for the same reason. 41 Finally, the plaintiffs contend that there was a "voidable transaction" within s 588FF of the Corporations Act so that the second plaintiff, as liquidator of the first plaintiff (ACFS), is entitled to an order under s 588FF. Those claims are pleaded at paragraphs 31 to 24 of the points of claim: "31. As a consequence of the transfer of the Rent Roll from the First Plaintiff [ACFS] to the First Defendant [Fusion], the First Plaintiff was, or became, insolvent. 32. The First Plaintiff and the First Defendant are related entities within the meaning of section 9 of the Corporations Act 2001 (Cth). 33. The First Plaintiff derived no benefit from the transfer of the Rent Roll and suffered detriment. Particulars (a) The effect of transferring the Rent Roll was to transfer assets from the First Plaintiff to the First Defendant for no consideration. 34. Further, the effect of the transfer of the Rent Roll was to defeat, delay or interfere with the rights of the creditors of the First Plaintiff; namely, the Vendor, within the meaning of section 588FE(5) of the Corporations Act 2001 (Cth)." 42 Paragraph 35 alleges that the "transfer of the Rent Roll" was within various provisions of Division 2 of Part 5.7B of the Corporations Act. It is then said in paragraph 36: "In the premises, the transfer of the Rent Roll is voidable at the instance of the Plaintiffs and is hereby avoided." 43 The several references in this part of the pleading to "the transfer of the Rent Roll" are, clearly enough, references to the "transfer" referred to in paragraphs 21 and 22 (see paragraph [25] above) and paragraph 30 (see paragraph [39] above). Again, therefore, the allegation is that "assets" of ACFS were transferred by ACFS to Fusion - an allegation I have found not to be supported by the evidence. 44 The claims based on s 588FE and s 588FF therefore also fail. 45 In the result, therefore, the plaintiffs have not made good their pleaded case. It cannot be said that, despite the way the case was pleaded, it was actually presented and pursued on some different basis: cf Universal Communication Network Inc v Chinese Media Group (Aust) Pty Ltd [2008] NSWCA 1 at [65] to [67]. 46 The proceedings must be dismissed with costs. 47 I note, in conclusion, that the plaintiffs did not seek to maintain an alternative case that Mr Michie was guilty of a breach of the duties he owed as a director of ACFS by causing and allowing Fusion to make inroads upon the asset base of JBRE, a wholly owned subsidiary of ACFS, and causing and allowing JBRE to succumb to those inroads, thereby preferring the interests of Fusion to the interests of ACFS in the maintenance of the integrity of its subsidiary's asset base. **********

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