CENTURIAN CONSTRUCTIONS PTY LTD v BECA DEVELOPMENTS PTY LTD

LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT FILE NUMBER(S) : 1600/96; 1513/92 LOWER COURT JUDICIAL OFFICER : Young J

COUNSEL : Appellant - G Pselletes (In person) Respondent - J Chippindall SOLICITORS : Appellant - G Pselletes Respondent - Michael Sillar CATCHWORDS : BANKRUPTCY - liquidation - family companies - mutual dealings - set-off - limitation on debt Bankruptcy Act 1966 Corporate Law Reform Act 1992 ACTS CITED : Corporations Law Limitation Act 1969 Supreme Court Act 1970 Akins v National Australia Bank (1994) 34 NSWLR 155 AMP Society v Specialist Funding Consultants Pty Ltd (1991) 24 NSWLR 326 Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85 CASES CITED: Lord v Direct Acceptance Corporation Ltd (Receiver and Manager Appointed) (In Liquidation) (1993) 32 NSWLR 362 McDonnell & East Ltd v McGregor (1936) 56 CLR 50 Norton v Ellam (1837) 2 M & W 461; 150 ER 839 Sidney Raper Pty Ltd v Commonwealth Trading Bank of Australia (1975) 2 NSWLR 227 The Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 DECISION : No. 40067/98; Appeal dismissed with costs.; No. 40070/98; 1. Appeal allowed; 2. Set aside the judgment of Young J; 3. Dismiss the liquidator's notice of motion with costs; 4. Respondent to pay the appellants' costs of the appeal

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40067/98; 40070/98 ED 1600/96; 1513/92 PRIESTLEY JA SHELLER JA STEIN JA

CENTURIAN CONSTRUCTIONS PTY LIMITED v BECA DEVELOPMENTS PTY LTD (IN LIQUIDATION) and PSELLETES v BECA DEVELOPMENTS PTY LTD (IN LIQUIDATION)

1 PRIESTLEY JA: I have had the benefit of reading the reasons of Sheller JA in draft. 2 In regard to the Centurian (sic) claim, I agree with Sheller JA that the proper inference from the evidence is that the amount alleged to be owing to Centurian by Beca was in fact owing. Sheller JA however found that the debt was extinguished by the Limitation Act. In this respect I have considered whether the facts of this claim might fall into the category described by Wood in English and International Set-Off (1989) as current account set-off (pp 91 and following) or be sufficiently analogous to it to produce the same result (which would defeat the limitation point). However, upon looking further at the facts I do not think they fall within either category. I therefore agree with Sheller JA that the appeal in the Centurian claim fails. 3 For the reasons given by Sheller JA in the appeal in the Pselletes claim, I think that appeal should be upheld. 4 I agree with the orders proposed by Sheller JA. 5 SHELLER JA: Background

On 28 April 1992 Beca Developments Pty Ltd (Beca), was wound up on the application of Duke Pacific Finance Ltd (In Liquidation) (Duke Pacific). Hugh Jenner Wily was appointed the liquidator. From 28 September 1971 the sole directors of Beca were Gary Pselletes and his wife, Malama Pselletes. These appeals concern two claims by Beca or its liquidator to recover money alleged to be owing to Beca, in the one case, by Centurian [sic] Constructions Pty Limited (the Centurian claim) and in the other, by Mr and Mrs Pselletes (the Pselletes' claim). 6 On 15 March 1996 in proceedings 1600/96 Beca applied by summons to have Centurian wound up and a liquidator appointed. The application was based on a creditor's statutory demand which required payment of the amount of $534,945 claimed, in accordance with the books of the companies concerned, to be owing by Centurian to Beca. Beca, a development company, and Centurian, a construction company, worked closely together. Mr and Mrs Pselletes were directors and shareholders of Centurian. 7 On 18 March 1996 by notice of motion in proceedings 1513/92 the liquidator of Beca sought the following declarations and orders against Mr and Mrs Pselletes: "1. A declaration that Mr Gary Pselletes is indebted to Beca Developments Pty Ltd (In Liquidation) in the sum of $621,820.57. 2. Judgment in favour of Beca Developments Pty Ltd (In Liquidation) as against Mr Gary Pselletes in the sum of $621,820.57. 3. A declaration that Mrs Malama Pselletes is indebted to Beca Developments Pty Ltd (In Liquidation) in the sum of $621,820.57. 4. Judgment in favour of Beca Developments Pty Ltd (In Liquidation) as against Mrs Malama Pselletes in the sum of $621,820.57."

The claims were based on Beca's balance sheet, which showed that the "Directors' Advance Account - G & M Pselletes" was in debit at the time of liquidation to extent of that amount. 8 Both applications were heard concurrently by Young J on 14 and 15 April and 17 July 1997. His Honour gave judgment in each on 21 August 1997.

The Centurian Claim 9 Centurian did not dispute that it owed Beca the amount claimed but said that it had off-setting claims to the value of over $1million and opposed the making of a winding up order, unless the off-setting claims were decided against it. Of the off-setting amounts alleged, Young J found $316,414 established. The amounts allowed were $152,000 for moneys lent to Beca by Centurian and $164,404 the proceeds of sale of real estate owned by Centurian paid to Beca. Young J refused to allow $680,000 described as the payment of profits made in a building contract at 10 Campbell Street, Hunters Hill or $282,390 described as the proceeds of the sale of partitions and furniture. Since Beca's claim exceeded $316,404, Young J wound Centurian up. 10 On 16 February 1998 the Court granted Mr and Mrs Pselletes leave to appeal from this decision. When notified of the application, the liquidator of Centurian indicated to the Court that he did not wish to take part in the appeal. On condition that his costs to date of $3,780 were paid, the liquidator did not oppose the grant of leave. The Court imposed this condition which has been satisfied. The appeal was limited to the claim to set-off $282,390.

The Pselletes' Claim 11 Mr and Mrs Pselletes did not dispute the debit shown in the directors' advance account the subject of the claim by Beca's liquidator against them but alleged an off-set of $1,117,021.55. They claimed that the amounts received on the sale of three properties and the income earned from two of them had found its way to Beca as loans from directors. The three properties were:

• six home units at 39 York Street, Coffs Harbour (the Coffs Harbour property) owned by Mr Pselletes;

• two home units at 8-12 Gloucester Road, Hurstville (the Hurstville property) owned jointly by Mr Pselletes and his mother Constance; and

• a home unit in Anzac Parade, Maroubra (the Maroubra property) owned by Anthony Developments Pty Ltd (Anthony). 12 On 5 July 1991 the whole of the net proceeds of the sale of the Hurstville property, namely $243,611, were paid to Australian Guarantee Corporation (AGC) in discharge of part of Beca's indebtedness to AGC. On 2 October 1991 the Coffs Harbour property was sold. The net proceeds of $243,255.09 were similarly paid to AGC in discharge of Beca's indebtedness. 13 On 20 July 1993 the Maroubra property was sold for $168,853. Of this $124,013 was paid to FPM Finance Limited (FPM), a creditor of Beca. Mr and Mrs Pselletes were the guarantors of Beca's liability to FPM. 14 Mr and Mrs Pselletes also claimed to set-off rents paid into Beca's account, namely $103,090 from the Coffs Harbour property and $38,751 from the Hurstville property. 15 Finally, Mr and Mrs Pselletes claimed wages each of $25,000 a year for 10 years, a total of $500,000. 16 Young J found that the amount of $486,866.09, being the sum of the net sale proceeds of the Coffs Harbour and the Hurstville properties, should have been credited against the liability shown in the directors' loan account. His Honour held that the liquidator was entitled to be paid the sum sought in the notice of motion of $621,820.57 less $486,866.09, that is, $134,954.48, and gave judgment against each of Mr and Mrs Pselletes for this sum. In so reducing the amount to which the liquidator was entitled Young J took no account of the fact that Mrs Pselletes had apparently no interest in either the Coffs Harbour or Hurstville properties. His Honour seems to have treated Mr Pselletes' interest in those properties as also the interest of Mrs Pselletes. In the circumstances of the way in which Beca made its claim against Mr and Mrs Pselletes this may have been justifiable. But more importantly the liquidator has not challenged this approach. Accordingly, I will proceed on the same basis. 17 His Honour said that the evidence was insufficient to find in favour of Mr and Mrs Pselletes on the rent payments and allowed no deduction for wages. His Honour observed that Mr and Mrs Pselletes had acknowledged that there was an agreement that Beca would manage the properties in return for one-third of the rent so that one-third of the rent could not be claimed back. So far as the proceeds of the Maroubra property were concerned, Young J said that if there was a claim it should have been one by Anthony. 18 On 15 June 1998 the Court granted leave to appeal out of time. Mr and Mrs Pselletes' appeal challenged his Honour's disallowance of the $124,013 and the amounts of the rental income as set-offs. 19 Beca cross-appealed on the ground that because Mr Pselletes' mother had a joint interest in the Hurstville property Young J should have credited only half of the net proceeds of the property or $121,805 against the liability shown in the directors' loan account.

Appeals and Cross-Appeal 20 Before dealing with the substance of the appeals it is convenient to note the following general comments and findings made by Young J.

A basic issue was how far Beca and Centurian were bound by the way in which Beca's accountant entered figures in the books from which the annual accounts and income tax returns, particularly of Beca and Centurian, were prepared.

Beca's books and records appeared to have been well kept.

It was easy to see how, in a small company, even though the amounts were large, the accounts would not pick up the fact that by virtue of the sale of properties owned by the directors, Beca's mortgage liability to AGC had been reduced. In particular, with common directors and common shareholders understandably Beca and Centurian worked very closely together and some matters of accounting could get confused.

Mr Wily was not affected by cross-examination. Young J accepted his evidence, but observed that the only weakness of the evidence was that Mr Wily had to rely on the books and records of the companies. His Honour accepted that Mr Pselletes was basically an honest man, though one who had re-constructed what in his mind was a meritorious claim to compensate him for a lot of work he put into Beca over a number of years.

Mr Qureshi was an investigating accountant, employed after Beca went into liquidation to endeavour to provide the material to back up Mr and Mrs Pselletes' claim against Beca. He did a lot of work examining the books and records of Beca and Centurian. Young J did not consider his credit was affected at all but his evidence was only as valuable as the history Mr and Mrs Pselletes, usually the former, gave him.

Mr Stavrou did the accounting work for Beca. His employee, Mr Hopkin Lowe, attended to the day to day book work. Mr Lowe was not affected in cross-examination but was more of a bookkeeper who received second-hand instructions through Mr Stavrou, his employer, and Mr Pselletes. 21 At the hearing of the appeals Mr Pselletes appeared in person, effectively for himself and his wife. Mr Chippindall of counsel appeared for the respondent Beca in both appeals.

Appeal 40067/98 in the Centurian Claim 22 It is convenient to deal with the appeal from the decision on the Centurian claim first. The factual background can be stated shortly. On or about 11 February 1988 Centurian sold assets described as items of office furniture and equipment to Duke Leasing Co Pty Ltd (Duke Leasing) for $282,390. The sale was evidenced by an invoice No 1001 under the letterhead of Centurian and addressed to Duke Leasing. At the bottom of the invoice appeared: "For delivery to St George Medical Centre, 32-38 Montgomery Street, Kogarah."

This was, amongst others, Beca's address. On the invoice was stamped: "This account has been checked, found correct and has not previously been paid. All documentary formalities have been completed. 11/2/88"

The stamp bears an indecipherable signature. 23 In evidence was a document dated 11 February 1988 headed with Duke Pacific's name and logo and described as a Lease/Purchase Agreement (Commercial Hire Purchase) whereunder Duke Pacific leased goods described in a schedule to Beca for 36 months at a total rent of $377,393.04. Beca's address was shown as Suite 3, 32-38 Montgomery Street, Kogarah. The attachment to the agreement which described the equipment leased included as the first 18 items the items set out in the Centurian invoice. Some of the other items were included in a separate contract for sale dated 10 February 1988 by Beca to Duke Pacific for $15,810.20. According to a duplicate deposit slip, apparently prepared by Mr Pselletes on 12 February 1988, a cheque drawn by Duke Pacific for $282,390 was deposited to the account of Beca with Advance Bank. This deposit is shown in Beca's bank statement and is recorded in Beca's journal under the heading "Duke Pacific (re Finance Medical Centre)". Also noted in the journal under this head is the amount of $15,810.20. 24 In para 5 of his affidavit of 11 April 1997 Mr Pselletes deposed: "I am able to say that the defendant [Centurian] sold chattels to Dukes for $282,390 and the proceeds of sale paid directly to Beca to assist the plaintiff in developing the Hunters Hill property."

This paragraph was objected to but admitted on the basis that it was a statement of opinion. What Mr Pselletes said accords with the most likely inference to be drawn from the documentation. Duke Pacific drew a cheque in the exact amount owing by Duke Leasing to Centurian and that amount instead of being paid to Centurian was paid to Beca. To my mind, the inference to be drawn is that Centurian agreed to make this amount owing to it available by way of loan to Beca. There is no suggestion that Duke Leasing in some other way discharged its liability in respect of its purchase of goods from Centurian. By this device Beca was able to obtain the advantage of a loan raised by the sale not of its own equipment to the financier but by the sale of Centurian's equipment to the financier. In addition Beca obtained the advantage of the use of the equipment for at least a period of three years subject to its making the agreed lease payments. Its failure to do so gave rise to the debt on the basis of which Duke Pacific wound up Beca. 25 Of Mr Pselletes' claim that the property which was sold to Duke Leasing and transferred to Beca was the property of Centurian and that the amount of $282,390 should be set-off against the debt owing by Centurian to Beca for money lent, Young J said there was no evidence of this and, in any event, as the liquidator had said, if it were the case, the cause of action by Centurian "may well have become statute barred". His Honour refused to allow any off-set for the claim. 26 His Honour observed that there is a grey area of law where a liquidator sues in respect of a matter that occurred many years ago, the defendant seeks to answer the demand with a transaction of the same age and the liquidator seeks to invoke the Limitation Act 1969 in respect of the alleged set-off. His Honour said: "If the matter came down to one of decision perhaps the court should direct its officer, the liquidator, not to take the limitation point."

See generally Derham on Set-Off, 2nd ed, (1996) p181. 27 In Derham at 181 the learned author said: "A creditor may not prove in a bankruptcy or a company liquidation for a debt owing to him which is unenforceable, as, for example, because of the expiration of a limitation period. Further, because the set-off section only applies when the creditor has a provable debt, this unenforceable debt similarly cannot be subject to a set-off. Consider, however, that it is the debt owing to the bankrupt, or the company, which is unenforceable. There is nothing in the language of the set-off section itself to suggest that this may not be set-off. While the debt may not be enforceable, it is still an existing debt, and, if the person liable on the debt in turn has a provable claim against the bankrupt or the company, it may well be said that there are mutual debts which, according to the set-off section, must be set against each other. …… The effect of setting off the unenforceable liability against the provable debt would be to deprive him of the dividend that he otherwise would have received. While the set-off section on its face appears to apply, the courts may nevertheless may incline against this result on the ground that the purpose of the set-off section is to do substantial justice between the parties, and a set-off in this situation is hardly just."

28 Section 553 in Div 6 of Pt 5.6 "Winding Up Generally" of the Corporations Law, as in force before the commencement of s57 of the Corporate Law Reform Act 1992 (the 1992 Reform Act), provided as follows: "Proofs of debts (1) In every winding up, subject in the case of insolvent companies to the application in accordance with the provisions of this Law of the Bankruptcy Act 1966, all debts payable on a contingency and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value. (2) Subject to sections 206RD, 279 and 556, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the Bankruptcy Act 1966, in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section."

29 After the commencement of s57 of the 1992 Reform Act, s1383 of the Corporations Law provided in subs (2) that if, before the commencement of s57, the court ordered the winding up of a company, the old winding up law which meant, inter alia, Pt 5.6 as in force before the commencement continued to apply for the purposes of the winding up. Section 57 of the 1992 Reform Act commenced with effect from 23 June 1993. This means that s553 in the form that I have quoted it applies to the winding up of Beca. 30 Section 86 of the Bankruptcy Act 1966 provides as follows: " Mutual credit and set-off (1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy: (a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings; (b) the sum due from the one party shall be set-off against any sum due from the other party; and (c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he or she had notice of an available act of bankruptcy committed by that person."

No point seems to have been taken at the trial that the amount of $282,390, if it was a loan by Centurian to Beca, was not part of the mutual dealings between Beca and Centurian on which Beca's claims against Centurian were based. 31 The alleged loan was made in 1988 and the proceedings giving rise to the defence begun in 1996. "When the indebtedness of a plaintiff to a defendant is pleaded by the latter as an answer in whole or in part to the former's claim, lapse of time will not bar the answer unless the indebtedness accrued more than the statutory period before the issue of the plaintiff's writ"; per Dixon J in McDonnell & East Limited v McGregor (1936) 56 CLR 50 at 57. I have assumed, for present purposes, that the non-payment of the loan could be pleaded as an answer to Beca's claim rather than by way of counter-claim. I am by no means persuaded that this is so but, in any event, the six year limitation period expired before Beca's proceedings against Centurian began; see s14 (1) of the Limitation Act. There was no evidence of confirmation which would bring into play s54 (1). Unless otherwise agreed, a lender's cause of action to recover the amount lent accrues when the loan is made and time begins to run from that moment: Norton v Ellam (1837) 2 M & W 461; 150 ER 839, The Stage Club Limited v Millers Hotels Pty Limited (1981) 150 CLR 535. Relevantly, s63 (1) of the Limitation Act provides: "…..on the expiration of a limitation period fixed by or under this Act for a cause of action to recover any debt damages or other money, the right and title of the person formerly having the cause of action to the debt damages or other money is, as against the person against whom the cause of action formerly lay and as against his successors, extinguished."

32 It has been suggested (see Derham at 64) that an equitable set-off is a substantive defence which does not require an order of the court for its enforcement and may be asserted notwithstanding that the cross demand upon which it is based is no longer enforceable by action because of a time bar; see Australian Mutual Provident Society v Specialist Funding Consultants Pty Ltd (1991) 24 NSWLR 326 at 331-2. But there is nothing to suggest that Beca's failure to repay the loan gave to Centurian an equitable defence of set-off to the extent of the loan against Beca's claim; see generally Lord v Direct Acceptance Corporation Limited (Receiver and Manager Appointed) (In liquidation) (1993) 32 NSWLR 362 at 367, Parkinson, The Principles of Equity, (1996) at 992-993 and Sidney Raper Pty Limited v Commonwealth Trading Bank of Australia (1975) 2 NSWLR 227 at 236-238. In my opinion, the Limitation Act applied. 33 When Beca began winding up proceedings against Centurian the period of limitation within which Centurian could have begun proceedings to recover the loan from Beca had expired. Accordingly, the claim is not available as a defence to Beca's proceedings and should not be taken into account in determining whether Centurian should have been wound up on Beca's summons. This appeal should be dismissed with costs.

Appeal 40070/98 in the Pselletes' Claim 34 There was evidence before Young J that on the sale of the Maroubra property, which produced on settlement a total of $337,706.38, $124,013.09 should be paid to Anthony. There was also evidence that at that time Mr and Mrs Pselletes were guarantors of a loan made on or about 20 November 1990 by FPM to Beca. In his affidavit of 5 April 1997 Mr Pselletes deposed that $52,174.70 of the proceeds of sale of the Maroubra property were applied to discharge a mortgage held over the property by the ANZ Bank for moneys advanced to Beca (para 14). In para 16 he said: "A total of $124,013 was paid to me. I then paid $124,013 to FPM Finance Limited on 20 November 1990."

The date is obviously wrong. According to the transcript paras 13 - 17 of this affidavit of Mr Pselletes was objected to on the basis of form, relevance and hearsay and admitted "on a provisional basis". 35 I do not understand that there is any question but that the proceeds of the sale of the Maroubra property were paid to FPM. Mr Qureshi in his affidavit of 17 April 1996 said of the $124,013: "These moneys were advanced by Anthony Developments Pty Ltd to Mr and Mrs Pselletes to extinguish their personal guarantees signed on 20 November 1990 to support a Beca loan advanced by …… (FPM) mortgage manager for Perpetual Trustees Limited mortgagee." There seems no reason why Anthony should itself have discharged Beca's liability to FPM. There is good reason why Mr and Mrs Pselletes as guarantors should. Accordingly, the inference must be either that Anthony lent the money to Beca or lent the money to Mr and Mrs Pselletes, the guarantors. Mr Pselletes said it was lent to him and again there seems no reason not to accept this evidence. There is no record of its having been lent to Beca. 36 Mr Pselletes applied for leave to lead further evidence. Section 75A of the Supreme Court Act 1970 provides, on appeals to the Court, as follows: "(7) The Court may receive further evidence. (8) Notwithstanding subsection (7), where the appeal is from a judgment after a trial or hearing on the merits, the Court shall not receive further evidence except on special grounds. (9) Subsection (8) does not apply to evidence concerning matters occurring after the trial or hearing."

37 Beca opposed the application. Mr Pselletes relied on his own affidavit of 6 August 1999 in which he deposed that during 1997 his mother, Constance, lived with his wife and him at his former home in South Coogee. During the last 12 months of her life his mother was mainly bedridden and unable to bath, cook or care for herself. His wife undertook those functions until Constance's death on 22 August 1997. Constance was a director and shareholder of Anthony and over the years accumulated and stored paperwork related to the business she had directed since the death of her husband, Anthony Pselletes. Constance Pselletes died the day after Young J gave judgment. 38 Mr Pselletes said that it is a family and cultural tradition that all personal belongings stored in her room would remain untouched for a period of three months. Accordingly, during that time the mother's bedroom and sitting room remained just as she had left them. In early January 1998 Mr and Mrs Pselletes began tidying up the rooms his mother had occupied. This was an emotional experience which meant that the proceedings took some time with interruptions. On 26 March 1998 when Mr and Mrs Pselletes were going through the mother's old memorabilia they found a box containing commercial and legal documents. These included: (i) a certificate of indebtedness; (ii) a letter from FPM dated 20 September 1993 addressed to Gary Pselletes to repay moneys owed by Beca; (iii) an FPM statement dated 1 August 1995 showing moneys paid by Gary Pselletes and a copy of a bank cheque for the sum of $1,500 sent to FPM on 27 January 1995; and (iv) a record of minute of Anthony dated 15/7/93.

From these it appears that on 15 February 1993 Beca's indebtedness under the loan from FPM was $296,850 exclusive of costs and expenses. Upon a variation of security that occurred on 1 September 1993 a deed was executed confirming that the balance of moneys owed was $131,131.98. By 28 July 1995 further amounts totalling in excess of $142,000 had been paid. The minutes of 15 July 1993 record a resolution that Anthony would lend to Mr and Mrs Pselletes approximately $124,000 to pay out their responsibilities for having guaranteed advances made to Beca with borrowed moneys to support Beca's developments. 39 In Akins v National Australia Bank (1994) 34 NSWLR 155 Clarke JA, after referring to s75A (7) and (8) stated at 160 what in my opinion is an accurate account of the principles to be applied in the following terms: "Although it is not possible to formulate a test which should be applied in every case to determine whether or not special grounds exist there are well understood general principles upon which a determination is made. These principles require that, in general, three conditions need be met before fresh evidence can be admitted. These are: (1) It must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; (2) The evidence must be such that there must be a high degree of probability that there would be a different verdict; (3) The evidence must be credible."

40 On the basis that in the present case special grounds had to be shown the conditions for admission of the further evidence have been met. Mr Pselletes was not cross-examined in a way which undermined its credibility. The minutes of the meeting appear to be signed by the chairman, Constance Pselletes. I am satisfied on the balance of probabilities that the proceeds of the sale of Anthony's property to the extent of the $124,013 was lent by Anthony to Mr and Mrs Pselletes to be used by them to pay part of Beca's debt to FPM. The question is whether this is a set-off against the claims by Beca against Mr and Mrs Pselletes, Beca by then having been wound up. 41 For reasons already given this depends upon the meaning and application of s86 of the Bankruptcy Act. It was not and could not be denied that Beca's borrowing from FPM and Mr and Mrs Pselletes securing it by guarantee meant that relevantly there were "mutual credits, mutual debts or other mutual dealings" between the parties. The problem, if there be one, is that Beca's liability to Mr and Mrs Pselletes remained contingent until they paid the $124,013 as guarantors to FPM and that occurred after Beca was wound up. On this account, at the date of winding up, Beca was under no actual or fixed liability to Mr and Mrs Pselletes. 42 The relevant time for ascertaining whether there are mutual debts, mutual credits or other mutual dealings between the debtor and other persons for the purposes of s86 (1) as it applies under the Corporations Law is the date of liquidation of the company; see Day & Dent Constructions Pty Limited v North Australian Properties Pty Limited (1982) 150 CLR 85 at 98 and the cases there referred to. That date is the date the winding up order is made; see 99. The following passage in the judgment of Mason J, with which Stephen and Aickin JJ agreed, leads to the conclusion that once Mr and Mrs Pselletes are found to have discharged part of Beca's debt to FPM as guarantors they are entitled to set-off the amount paid against the claim by Beca against them. Mason J said at 109: "The important factor is that, by virtue of a guarantee given before bankruptcy or liquidation as the case may be, the surety has undertaken an obligation which on payment to the principal creditor will result in a debt owing to him (the surety) by the principal debtor. There is no reason why the liability thus undertaken, once payment is made, should not ground the right to set-off the debt created by the payment. In this case payment had been made by the respondent to Esanda at the time of the claim to the set-off. At that time there was clearly a debt 'due' from the appellant to the respondent. And it is at the time of the claim to the set-off, and no other, that the respondent needed to establish the existence of the debt. The respondent had also to establish the existence of mutual dealings at the date of liquidation. The existence of mutual dealings at that date was satisfied by the giving of the guarantee in the circumstances already outlined. The giving of the guarantee resulted in a debt which came into existence by the time when the account was taken and this was enough to ground a set-off."

In my opinion, Mr and Mrs Pselletes were entitled to set-off the amount of $124,013 against Beca's claim. 43 In para 4 of his affidavit, Mr Qureshi said that the Hurstville and Coffs Harbour properties were owned for approximately 20 years between 1971 and 1991. The total amount of rent received from the properties during this period was $461,301. The rental income from the properties was paid into Beca's bank accounts and treated as a loan. Mr Qureshi prepared a table showing how this total was arrived at. 44 Mr Pselletes now claims to set-off the estimated rents paid in what appear to be the financial years 1980 to 1986 both inclusive ending on 30 June in each of those years. In the case of the Coffs Harbour property these total $113,847 and in the case of the Hurstville property, $42,819. These totals exceed the amounts claimed before Young J. 45 Mr Pselletes' argument starts with a reference to the journal entries of Beca for the year ended 30 June 1987 which include an amount described as rent received $62,237.05 of which $16,270 is credited to the directors' advance account (York Street). This, it is said, could only be the rents for the Coffs Harbour property. By contrast it is pointed out that in the journal in previous years, and, in particular in the years 1980 to 1986 both inclusive, there has been no such credit to the directors' advance account and these rents were apparently simply treated as cash receipts. Thus it is said that, because of a bookkeeping oversight before Mr Lowe took over the bookkeeping, rents received by Beca for the Coffs Harbour and Hurstville properties were not credited to the directors' advance account. Para 4 of Mr Qureshi's affidavit was objected to but admitted. 46 Young J said: "The evidence is extremely weak on this part of the case. The onus is on the Pselletes to show that it is more likely than not that the rents from these properties flowed through to Beca and were not adjusted in the Directors' Loan Account. The evidence is insufficient for me to find in their favour."

47 Mr Pselletes and his mother jointly owned the Hurstville property. The journal entries of Beca for the year ended 30 June 1987 include an amount as rent received of $12,890 credited to G and C Pselletes "(Gloucester)". Gloucester Road was the Hurstville property. In his affidavit of 14 April 1997 Mr Lowe said that using information provided by "the client", presumably Beca, it was his invariable practice to enter the rental income from the Coffs Harbour and Hurstville properties "into the Beca ledger and credit them to the directors' loan accounts." Mr Lowe's oral evidence threw no greater light on what had happened. 48 In evidence were partnership income tax returns for Mr Pselletes and his mother beginning with the year ended 30 June 1988. From those it appears that the income of the partnership which included the rent from the Hurstville property was divided equally between Mr Pselletes and his mother. The income tax returns of Mrs Pselletes in evidence which also begin with the year ended 30 June 1988 do not disclose any interest in the rent from the Coffs Harbour or Hurstville properties. It follows that at most the rent from the Coffs Harbour property and half the rent from the Hurstville property could be treated as advances by Mr Pselletes to Beca. 49 There was some evidence to support the conclusion that the rents from the Coffs Harbour and Hurstville properties had been paid to Beca during the financial years 1980 to 1986 both inclusive and that they should have been treated as advances by Mr Pselletes and, in the case of the Hurstville property, by Mr Pselletes and his mother and recorded in the journals accordingly. What Mr Pselletes and Mr Qureshi say is not challenged and gains some support from a comparison of the earlier and later journal entries. In my opinion, there is sufficient to support the off-set of the rents of the Coffs Harbour property and half the rents of the Hurstville property to the account of Mr Pselletes. 50 In evidence was an agreement made on the 4 July 1990 that Beca manage the Coffs Harbour property for a fee of one third of the gross rentals. There was no evidence of any such agreement for the Coffs Harbour or Hurstville properties during the period 1980 to 1986.

Cross-Appeal 51 The respondent submitted, I think correctly, that Young J should have reduced the set-off for the proceeds of the sale of the Hurstville property by one-half to take account of Mr Pselletes' mother's interest in the proceeds. On the material before us the respondent's contention is, in my opinion, unanswerable. 52 Young J in the Pselletes' claim allowed a deduction of $486,866.09 against the liquidator's claim. The amount of the deduction should have been the sum of $243,255.09 (the proceeds of sale of the Coffs Harbour property) $121,805.50 (half the proceeds of the sale of the Hurstville property) $124,013 (the proceeds of the sale of the Maroubra property lent by Anthony to Mr and Mrs Pselletes and used by them to pay Beca's creditor FPM) $113,847 (the rents of the Coffs Harbour property for the years 1980 to 1986 both inclusive lent by Mr and Mrs Pselletes to Beca) and $21,409.50 (half the rents of the Hurstville property for the same period lent by Mr and Mrs Pselletes to Beca) making a total of $624,330.09 which exceeds the amount of $621,820.57 claimed by Beca against each of Mr and Mrs Pselletes. Accordingly, the liquidator's claim against Mr and Mrs Pselletes should have been dismissed.

Centurian Constructions Pty Limited v Beca Developments Pty Limited (In Liquidation) - No. 40067/98

Pselletes v Beca Developments Pty Limited (In Liquidation) - No. 40070/98 1. Appeal allowed;

2. Set aside the judgment of Young J; 3. Dismiss the liquidator's notice of motion with costs; 4. Respondent to pay the appellants' costs of the appeal.

54 STEIN JA: I agree with Sheller JA. *****

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