Clout v Sing

… (2) Nothing in this section affects: (a) the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or … (3) The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection. (4) For the purposes of this section: … (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect: (i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and (ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors. … (8) For the purposes of this section: (a) transfer of propertyincludes a payment of money; and … (c) the market valueof property transferred is its market value at the time of the transfer. 4 The issues in these proceedings have narrowed to whether or not the respondents acted in good faith when they demanded repayment of their loans; and whether the transaction involving the repayment was one in the ordinary course of business, within the meaning of the section. It is conceded that the respondents gave consideration and otherwise it is accepted that all the statutory indicia for a preference are present. 5 The three agreements for loan organised by the respondents' financial advisor showed the Sing Family Superannuation Fund to be the lender and Mr Dexter, trading as the Wattle Group in Queensland, to be the borrower. Pursuant to it, the borrower was to have the right to repay the loan at any time; but the lender had the right to demand repayment of the loan and any accrued interest by giving 30 days notice in writing no earlier than six calendar months from the date of the agreements. The agreements were entered into on 28 November 1997, 19 December 1997 and 13 January 1998. The schedule to the agreements provided for interest to be paid and the first of those payments was received by the respondents on 12 January 1998. The second was received on 12 February 1998. 6 Mr Sing had been a Commander with the Australian Federal Police and was experienced in the investigation of fraud. He retired early, in November 1997. In January 1998 he commenced employment with KPMG Chartered Accountants, initially on a part time basis and as a consultant. Later he became the senior manager of the forensic accounting practice. 7 The respondents concerns about their investment were first raised by a newspaper article published on 18 January 1998. Mrs Sing brought it to the attention of her husband. The article was in these terms: 'PUBLIC MEETINGS WARN OF GET-RICH SCHEMES Byline: By ALEX MITCHELL GULLIBLE investors in NSW have poured almost $100 million into investment schemes which promise impossibly optimistic returns of up to 50 per cent. GULLIBLE investors in NSW have poured almost $100 million into investment schemes which promise impossibly optimistic returns of up to 50 per cent. Slick salesmen have enticed about 2,300 investors into the schemes over the past six months, targeting cities and towns along the coast between Sydney and the Gold Coast. Now, the Australian Securities Commission (ASC) is going on the warpath to warn investors against putting money into get-rich schemes. The ASC's first public meeting will be held in Port Macquarie on Thursday following a local advertising campaign which carried a photo of a salesman at a front door above a headline, "Not all thieves come through the window". It continued: "in the last 10 years, over 100,000 Australians have lost their life savings in high-return investment schemes. "Smooth-talking salesmen can make any investment seem like the opportunity of a lifetime. But the reality is, the higher the return, the higher the risk of losing all your money." The ASC's director of enforcement, Tim Phillips, gave this simple advice yesterday for potential investors: "If the sales pitch sounds too good to be true, stay away from it - it is too good to be true." He said schemes to avoid usually carried telltale signs: *Impossibly high returns of 40 or 50pc. *Salesmen not licensed by the ASC as investment advisers. *No written prospectus. *Very little public promotion in newspapers or other media. *Emphasis on the scheme's substantial growth in a relatively short time. Mr Phillips said some schemes being investigated had similarities with the operations of fugitive fraudster Christopher Skase. "He offered investors a pot of gold which he couldn't deliver," Mr Phillips said. "Now he is bankrupt owing about $150 million in personal debt which is virtually unrecoverable." The high-yield schemes are perilous because, if they fall into difficulty, hapless investors have little or no chance of recovering their money. Late last year the ASC narrowly missed apprehending Vaucluse financier George Balos, whose self-styled British Marine Bank trousered $12 million from investors who had been promised a 48 per cent return on their money. Balos fled the country on September 28 and his whereabouts are being investigated by the Australian Federal Police and Interpol. Mr Phillips said aggressive investment schemes were a sign of the times. Record low interest rates and people retiring early with big superannuation pay-outs provided a feeding ground for unscrupulous operators. "If someone comes along and offers you a 50pc return when the banks can only offer 5 or 6pc, then people are bound to be interested," he said. "There have been cases of people taking out a loan on their homes to invest in these schemes. But people should remember that the highest-risk funds operating in the regulated, registered sector can only offer a 20pc return, so how can these people be offering 50pc? It can't be done. "High returns means a high risk that you will lose some or all of your money." Seven steps to safe investing 1. Shop around 2. Ask plenty of questions 3. Choose an ASC-licensed adviser 4. Get a good plan 5. Check for danger signs 6. Act on the advice 7. Keep an eye on your investments.' 8 Mr Sing said that the article caused himself and his wife great concern because the description it gave of the investment schemes sounded remarkably similar to the Wattle Scheme. He rang the journalist and asked whether Wattle was one of the investment schemes referred to in the article and was told that the journalist suspected it, but was unable to confirm that that was so. The Australian Securities Commission had not concluded its investigations. 9 The following day, 19 January 1998, Mr Sing telephoned Mr Sinclair, a private investigator whom he had known for some time, and enquired about Mr Dexter. He was told that he was a convicted fraudster and a former bankrupt. He was advised to withdraw his funds immediately as Mr Dexter was not to be trusted with other people's money. 10 Mr Sing also made enquiries of the Health Insurance Commission ('HIC'). Their financial advisor had told the respondents that one of the means by which the high investment returns were achieved was because the Wattle Group factored fees due to medical practices. He was informed by the HIC that this could not occur. 11 Mr Sing says that he strongly suspected Mr Dexter may have been involved in some form of criminal activity and could be planning to flee the jurisdiction and place their investment funds beyond their reach. He made a number of calls over the next several days to the financial advisor and left messages, but none were returned. 12 On or around 10 or 11 February 1998 Mr Sing had a conversation with Mr Philip Hennessy, a partner in KPMG's corporate recovery division. Mr Sing said that Mr Hennessy produced a document and asked him for his comments upon it. The document was not produced in these proceedings. Mr Sing says that he noticed the name of Mr Dexter and his wife on the document and immediately gave the document back to Mr Hennessy, advising that he could not continue reading it as he may have a conflict of interest. Mr Sing did not refer to this conversation in his statement of evidence but did in answer to interrogatories. He also added under cross examination that he understood either from what was said at the meeting, or the document itself, that the Australian Securities Commission was involved in investigations of Mr Dexter or his group. 13 Mr Hennessy does not have a recollection of the meeting. He agreed generally with Mr Sing's account. He believed, but did not recall, that he would have also explained the nature of his involvement with the document when he handed it to Mr Sing. Mr Sing said that Mr Hennessy did not do so, although he conceded he may have said that he had been approached by the ASC. Mr Hennessy says that he was in fact approached by the ASC to provide a consent to act as the receiver of Mr Dexter and his group and also to assist in its investigations of the prescribed interest provisions of the Corporations Law by Mr Dexter and others. He believes that this occurred 'prior to March 1998'. The consent form is dated 19 March 1998. Mr Hennessy says that he approached Mr Sing because of the ASC's allegations that false, misleading and deceptive conduct had been involved. 14 Mr Sing said that he finally managed to contact his financial advisor on 12 February 1998 and met him that day. The advisor was in a state of agitation as he was due to give evidence that afternoon to the ASC. It is not necessary to detail the entire conversation. Mr Sing elicited from the advisor, with the assistance of further information provided by Mr Sinclair by telephone during the course of the meeting, that the advisor had misled the respondents in the information he had given about Mr Dexter. In particular the advisor had represented that he had conducted a due diligence enquiry of Mr Dexter when in fact he knew of Mr Dexter's background of bankruptcy and involvement in fraud. He tried to explain the latter activities as having occurred many years ago. The financial advisor told Mr Sing that the ASC investigation was about whether the loans made to the Wattle Group were prescribed interests. 15 The financial advisor nevertheless attempted to assure Mr Sing that their investment was safe and the investigation was about a technicality. He said that he, his associates and his family had invested large sums of money. He believed that the Wattle Group had a cash flow of $800,000 per month and several million dollars in assets, and he said that was more than enough to service loans from investors. His own firm had written about $22 million worth of the Wattle Group business. He suggested it would be a mistake to withdraw the funds. 16 Mr Sing insisted that their loans be repaid immediately, despite the advisor reminding him that under the loan agreement the money was required to be invested for a minimum of six months. Mr Sing replied that they had entered into the agreement following a misrepresentation by the advisor and their money should be reimbursed. The advisor said that he would speak to someone in the Wattle Group and arrange the return of the funds. He asked whether Mr Sing was 'prepared to keep quiet'. It was not said that Mr Sing's made any reply. 17 On 13 February 1998 the respondents forwarded letters to a person in the Wattle Group to whom they had been directed. They demanded withdrawal of the loan funds and payment into their bank account 'as a matter of urgency'. They did not require any accrued interest to be paid. The payment was made on about 20 February 1998. 18 Whether a payee has acted in good faith and whether a transaction was in the ordinary course of business are separate issues: Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 at 219 [B-C], 271 [A] ('Harkness v Partnership Pacific'), although some evidence may be common to them. Clarke JA in that case considered (at 218 [C]) that both enquiries are essentially concerned with the reasons which led the debtor to pay (was it in the ordinary course of business?) and the creditor to accept (was it in good faith?). 19 The existence of knowledge or suspicion of insolvency negatives good faith: Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 287 ('Queensland Bacon'), a case which dealt with the former s 95 of the Bankruptcy Act which contained the same terms as those under consideration. The payee is not however required to negate the inference, although they must bring themselves within s 122(2). If the court is otherwise satisfied of good faith and has no or insufficient material from which to draw the inference referred to in s 122(4), or if in doubt whether or not the inference should be drawn, the preference should not be avoided: Queensland Bacon at 287-8. Barwick CJ in Queensland Bacon said (at 291-2): 'It is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the subsection, to my mind are quite clear that it is the fact of actual insolvency which must be known or suspected. … It is one thing to suspect a man's solvency in the sense that one doubts whether he is solvent or insolvent. It is another to suspect that he is in fact insolvent. It is of the latter that s. 95(4), in my opinion speaks'. Kitto J said (at 303) that: 'A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence", … . Consequently a reason to suspect that a fact exists is more than reason to consider or look into the possibility of its existence.' 20 The test for the requirement that a transaction be in the ordinary course of business is 'not whether the act is usual or common in the business of the debtor or of the creditor, but whether it is "a fair transaction, and what a man might do without any bankruptcy in view"': Robertson v Grigg (1932) 47 CLR 257 at 267 per Gavan Duffy CJ and Starke J ('Robertson v Grigg'). It is concerned with the character of the transaction: Robertson v Grigg per Evatt J at 273; Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) (1948) 76 CLR 463 at 477 ('Downs Distributing'). In Downs Distributing, Rich J went on to say that the provision refers to the course of business in general, not that the transaction shall be in the course of any particular trade, vocation or business. It assumes that in the affairs of business there is an ordinary course. It was in this context that his Honour said: 'It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation'. 21 Priestley JA in Harkness v Partnership Pacific (at 267 [G]-268 [B]) considers that this oft-quoted sentence has been misunderstood to suggest that anything done differently between creditor and debtor cannot be something done in the ordinary course of business. In his Honour's view, this is too literal an approach and inconsistent with an approach which looks to business generally and not just the business of the debtor and the creditor. 22 The reference in Robertson v Grigg to the transaction being undertaken without a view to bankruptcy is not apt to refer to the payee. In Harkness v Partnership Pacific neither Priestley JA (at 270 [E]) nor Clarke JA (at 224 [D]) considered that the payee's knowledge, intention or motive to be relevant to this issue, although they were to that of good faith. 23 Mr Sing said that the reason he requested the money urgently on 12 February 1998 was due to his discovery that Mr Dexter was a former bankrupt and a convicted criminal and he was concerned that the funds were at risk, combined with the revelation that he and his wife had been induced to enter into the loan agreements on the basis of the advisor's lies about the probity of Mr Dexter. At no time were they aware of the financial position of the Wattle Group nor did they understand it to be insolvent. He believed the investigation by the ASC related to whether the scheme involved prescribed investments. Further, he believed the advisors' reassurances that Wattle had substantial investments. The prompt repayment of the monies also led them to believe that Wattle was solvent. 24 It was put to both respondents that the newspaper article itself pointed to the prospect of insolvency, given the reference to Christopher Skase's bankruptcy, and that they must have been suspicious at that time. Both said that the article caused them concern, in the sense that their investment might be lost, assuming Wattle was one of the schemes they referred to. It was the risk of the loss of investment by reason of the nature of the scheme Mr Sing considered at the time. He did not identify the scheme as one which would 'go bust'. Because the journalist was unable to confirm that the Wattle group was such a scheme, the urgency he then felt was to obtain more information. It was put to Mrs Sing that because the article referred to Mr Skase going bankrupt and leaving large amounts of creditors without their money, that she too would have had such a fear. She replied that it was a concern. 25 It was put to Mr Sing that if he was not suspicious by reason of the newspaper article, he would have been when Mr Hennessy approached him. He denied that the fact that Mr Hennessy was an insolvency partner who was being asked to assist the ASC in its investigations meant that Mr Dexter was insolvent. He did not associate the ASC with insolvency but with an investigation into prescribed interests. 26 The meeting with the financial advisor was said not to raise concerns about Mr Dexter's solvency. Mr Sing said that he just did not wish to be involved with that person. He said that he was reassured by the figures the advisor bandied about. 27 I accept that the respondents were not alerted by the newspaper article to the prospect that Mr Dexter may be, or was about to become, insolvent. The average reader would not infer from the fact that their investments were said to be at risk of not being repaid that that was because those running the schemes were personally insolvent. The article gave something of a mixed message and spoke of other risks including the risk inherent in schemes offering high, unrealistic returns. More importantly perhaps for readers it implied that the schemes were run by persons who were no better than thieves and fraudsters. The thrust of the article was certainly that peoples' investments were in peril. It did not however suggest this would follow upon the bankruptcy of the schemes' creators. Its point was that the schemes were not bona fide. Even with his experience, I do not consider Mr Sing could be taken to have made the connexion the applicant points to upon reading the article. 28 In context I do not think Mrs Sing's answer about the reference to Mr Skase's bankruptcy as causing a concern means that she was really alert to this as a possibility with respect to the Wattle scheme. In any event it would not amount to a suspicion in the sense of a positive misapprehension that Mr Dexter may be insolvent, as the authorities require. 29 The respondents did not seek to withdraw their funds, although Mr Sinclair had advised them to do so. They could not have been confident about leaving their money there. It may be that they were aware of the six month limitation on their demanding repayment. This was not really gone into. It is not something which weighs either way. It is obvious that it was not until they saw their financial advisor, Brian Wood, on 12 February 1998, that Mr Sing felt that he was in a position to demand repayment. It took some time to have this meeting but I have no doubt, given the level of the respondents' concerns after reading the newspaper article, that Mr Sing left numerous messages for the advisor to return his call but that this did not happen. They appear to have regarded seeing the advisor as the necessary next step in determining their course of action. This is understandable. It could hardly be said that they were fully apprised of matters relating to the Wattle Group scheme at this time. 30 It was suggested to Mr Sing that, as a person with forensic accounting experience, what he had gleaned from the newspaper article and heard from Mr Sinclair would have alerted him to the possibility that the scheme might be insolvent. I think that rather overstates Mr Sing's experience which appears to have been more concerned with methods of detecting fraud. It was not suggested to him that a common outcome in cases involving fraud is insolvency of the perpetrator. Mr Sing's concerns were more likely to be his remaining involved with a person such as Mr Dexter and that the respondents might lose their money because of the nature of the scheme and the background of the person running it. 31 There is no suggestion that anything was said to Mr Sing by Mr Hennessy about Mr Dexter which clearly bespoke his insolvency. Reliance was placed upon the fact that Mr Hennessy was to be appointed a receiver to the Wattle Group, although this did not in fact come to pass. It is suggested that he was likely to have told Mr Sing this when he approached him with respect to the ASC investigation. Being told that Mr Hennessy was to be appointed receiver would obviously have alerted Mr Sing to a problem with solvency. Mr Sing understood what such an appointment meant. But there are factors which suggest that Mr Sing was not told this. Mr Hennessy on his evidence, wished to speak to Mr Sing because of the prospect of fraudulent conduct being involved in the scheme, not because he was being appointed as a receiver. Mr Hennessy is unable to fix a date when he was approached to become a receiver and one cannot be sure that it was prior to seeing Mr Sing on or around 10 or 11 February 1998. The date of the consent to act as receiver, 19 March 1998, is consistent with it occurring later. All that is likely to have been discussed was that there was an investigation by the ASC, as there was in fact. It did not follow, from Mr Sing's point of view, that insolvency was involved. And the fact that an insolvency partner was working with the ASC would not in my view make the issue of insolvency arise. It is quite possible for a partner with that experience to be involved in issues such as whether loans amount to prescribed interests and how they were obtained, at least in the early stages of an investigation. 32 The fact that Mr Sing met with the financial advisor a day or so following the meeting with Mr Hennessy was suggested as too coincidental. That is to say, the applicant would infer that Mr Sing suddenly arranged the meeting because of what he had gleaned from the meeting with Mr Hennessy. I have found however that he was likely told that the ASC was investigating Mr Dexter. The motivation for the culling of the meeting would not have been a belief in his insolvency. In any event there is no reason to believe Mr Sing was in a position to effect a meeting with the financial advisor when he chose to. He had made many telephone calls to arrange a meeting which had not been returned. He would have had the meeting earlier had he been in a position to do so. Whilst the timing of events might suggest a connexion, it is to be recalled that Mr Sing had made many telephone calls to attempt to arrange a meeting. There is no suggestion that he could have forced a meeting himself if he had wished to. He would have done so earlier had he been in such a position. 33 It was put to Mr Sing that the figures produced by the accountant could not have reassured him since they disclosed, to the contrary, financial difficulty. I do not think this is a fair summary of information of this type conveyed orally. The focus for Mr Sing would have been on the extent of the investments. 34 It was put that the respondents must have known that the entreaty 'to stay quiet' meant that there would be a rush of other claims if others knew this was possible. This contention assumes that what it conveyed was something about the corporation's solvency. The statement that it might produce a rush is equally consistent with a concern that those administering the scheme did not want to be required to repay the loans. I add that their evidence, that the receipt of payment of the monies led them to believe that the Wattle Group was solvent, appears to me to be most likely a reconstruction. It is certainly not in their interests to make these statements for it suggests that they may have considered the issue of Mr Dexter's solvency before and this was their reassurance. I am however satisfied that they had not. 35 The application was argued upon the basis that Mr Dexter was facing insolvency at the time of the payment. The applicant was appointed his controlling trustee in the following month. There is no doubt that the respondents had no actual knowledge that Mr Dexter was likely to become insolvent at the time they received payment. In my view they did not direct their mind to the question of whether Mr Dexter was in financial difficulty. The risks they associated with their losing their money related principally to the lack of good character of Mr Dexter as the perpetrator of the scheme and what he might therefore do with the money, including abscond with it. The inference in s 122(4)(c) cannot be drawn. 36 The applicant submits that the repayment of the loans before their due date could not be said to be in the ordinary course of business. This is not a realistic approach to commercial practice. There are many reasons why a borrower may wish to do so and Mr Dexter had the option in this case. One instance where a borrower may well consider it in their interests to repay at an earlier date, and upon demand, is to avoid litigation or publicity associated with a claim. It is not too difficult here to infer that repayment was made to avoid further publicity. Mr Sing's claim after all was that he and his wife had been fraudulently induced to invest in the scheme. It is not necessary to determine whether the financial advisor would have been held to be Mr Dexter's agent. Any publicity suggesting fraudulent conduct was not in Mr Dexter's interests. 37 It may be said that the motives of Mr Dexter in repaying were hardly pure. It was given rise to, one infers, by an acceptance that his activities and those associated with him would be further uncovered. Whilst this itself might not be fair or unremarkable conduct, the section is concerned with the characterisation of the payment rather than what gave rise to it. Crennan J made this point in Jones (trustee) v Southall & Bourke Pty Ltd [2004] FCA 539 at [42] where the monies repaid had been stolen. In the present case the payment should be seen as the repayment of a loan at an earlier date at the discretion of the borrower. Such a transaction occurs in the ordinary course of business. 38 I have not ignored the very real prospect that Mr Dexter was concerned about the prospect of a run of claims and the effect that would have upon him. He might not have been able to meet them all. It is known that there were over 3100 people who had loaned in excess of $155M. It is not however possible to conclude that at the time he made the payment to the respondents that he was doing so with a view to avoiding bankruptcy. More is necessary to be shown before such an inference could be drawn. 39 The application should be dismissed with costs. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel.

Associate: Dated: 3 August 2005 Counsel for the Applicant: Mr D Quayle

Solicitor for the Applicant: Mallesons Stephen Jaques

Solicitor for the Respondents: Hewlett & Company Lawyers