CORPORATIONS - winding up - unreasonable director-related transaction - Corporations Act 2001 (Cth), s 588 FDA - transfer of unit in development project to company owned by sole director - consideration of $1 - whether disposition "for the benefit of" director - Vasudevan v Becon Constructions
[2020] NSWSC 1769
Supreme Court of NSW|2020-12-08|Before: Leeming JA
[1993] HCA 15
Crowe-Maxwell v Frost (2016) 91 NSWLR 414
Q M Noakhtar (Plaintiffs)
Source
Original judgment source is linked above.
Catchwords
[1993] HCA 15
Crowe-Maxwell v Frost (2016) 91 NSWLR 414Q M Noakhtar (Plaintiffs)
Judgment (2 paragraphs)
[1]
EX TEMPORE Judgment
HIS HONOUR: By originating process dated 20 October 2020, Gondon Five Pty Ltd (in liq) and its liquidator Mr Patrick Loi seek orders directed to the transfer by the company in liquidation of an apartment in a residential building development to the defendant Cui Holdings Pty Ltd dated 27 or 28 January 2017 for $1.
Cui Holdings has not, at any stage in this litigation, appeared. I am satisfied that personal service was effected upon the company, whose registered office is in Sydney. Although there is a considerable volume of material before me in support of this application, which is largely directed to the variety of ways in which the plaintiffs, I do not suggest other than entirely properly, have propounded their case for the orders sought, on the view I take, a relatively abbreviated summary of the background can be given. I also take the view, as raised with Mr Karam who, with Mr Noakhtar, appeared for the plaintiffs, that in the absence of other parties and having regard to other transactions undertaken by the company prior to its being wound up, a minimalistic approach is preferable.
Gondon Five owned land in North Ryde which was the subject of a residential development of some 179 apartments. Most have been sold. The company is in creditors' voluntary liquidation, with the liquidator being appointed on 24 August 2018. The two largest external creditors of the company seem to be the Australian Taxation Office and the builder retained to perform the development, Arise Construction Pty Ltd, which is also in liquidation, coincidentally with Mr Loi as its liquidator.
The liquidator's report to creditors discloses his view that there has been sustained and material breaches of the company's obligation to maintain books and records. He considers that the financial records of the company he has recovered are unreliable. He also explains that the sole director of the defendant Cui Holdings is Mr Guojin Cui, who is the father of Mr Jinsong Cui. The latter is the sole director and secretary of Gondon Five, which was a wholly owned subsidiary of Cui Family Assets Management Pty Ltd, a company of which Mr Jinsong Cui was also sole director and secretary.
Most relevantly for present purposes, Mr Jinsong Cui is the one hundred percent shareholder of the defendant Cui Holdings. He was also its secretary.
The transfer which is the subject of this application was apparently stamped for ad valorem duty of $20,240 on 28 January 2017. That amount of duty corresponds to a purchase price of $550,000. The transfer itself is expressed to be for consideration of a dollar and is signed by each of Mr Jinsong Cui in his capacity as Director of Gondon Five and Mr Haiyan Cui in his capacity as Director of Cui Holdings Pty Ltd. The transfer appears to have been registered with Land Registry Services on the previous day, 27 January 2017.
The plaintiffs have propounded three alternative bases upon which the transfer should be set aside and Cui Holdings directed to reconvey the lot to the company in liquidation: (a) an insolvent transaction within the meaning of s 588FC of the Corporations Act 2001 (Cth), (b) an unreasonable director-related transaction within the meaning of s 588FDA, or (c) an uncommercial transaction within the meaning of s 588FD.
The first and third of those alternatives are available only if the court makes a finding of insolvency. I have already mentioned the difficulties the liquidator has encountered having regard to the way in which the books and records of the company appear to have been kept. Even so, there is in the evidence before me some considerable basis for thinking that in December 2016 and January 2017 the company was unable to pay its debts as they fell due. The liquidator has in particular drawn attention to what flows from two documents in his possession. One is a balance sheet taken from the company's MYOB accounting records dated 22 December 2016 which discloses GST collected of $10,857,433.22. I interpolate that is consistent with what the liquidator has elsewhere described as the sale of most of the apartments in the development in around mid-2016, corresponding with the influx of a deal of GST collected by the vendor Gondon Five. That large amount is to be compared with what emerges from the Australian Tax Office's "business portal" and in particular an entry reflecting an obligation to pay $3.324 million GST which was processed according to the evidence before me on 6 November 2017, but reflected an "effective date" of 25 November 2016.
The inferences to be drawn are twofold. The first is that there was a considerable delay (the exact extent of which cannot reliably informed on my present understanding of the company's operations but which must exceed nine months) in the lodging of a GST return which reflected an indebtedness to the Australian Taxation Office in GST (this derives from the two dates, the process date and the effective date, recorded on the portal). The second is the prima facie discrepancy between GST collected of some $10.857 million and GST presumably self-reported to be owed to the Australian Taxation Office of some $3.324 million, this being at a stage when in all likelihood (occupation certificates presumably having issued) there was little by way of taxable supplies being paid for by the company in liquidation.
However, as mentioned above, the task of finding insolvency is made somewhat complex by the state of the books and records to which the liquidator has referred. I propose, as raised during the hearing with his counsel, not to make a finding of solvency or insolvency. I take that course not because I am unpersuaded that there has not been a proper basis presented which may be capable of sustaining a finding that Gondon Five was insolvent, but rather because it is, on the view I take, unnecessary and for that reason inappropriate to do so in order to resolve this application.
The second way in which the plaintiffs seek orders today is that the transfer to Cui Holdings in January 2017 was an unreasonable director-related transaction within the meaning of S588FDA. That section relevantly provides as follows:
"588FDA Unreasonable director‑related transactions
(1) A transaction of a company is an unreasonable director‑related transaction of the company if, and only if:
(a) the transaction is:
(i) a payment made by the company; or
(ii) a conveyance, transfer or other disposition by the company of property of the company; or
(iii) the issue of securities by the company; or
(iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company; or
(ii) a close associate of a director of the company; or
(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.
The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.
Note: Subparagraph (a)(iv) - This would include, for example, granting options over shares in the company."
It will be seen that s 588FDA contains three conditions which are necessary and sufficient in order for there to be an unreasonable director-related transaction of the company, in paragraphs (a), (b) and (c).
As to the first, plainly the transaction impugned by the plaintiffs is a "conveyance, transfer or other disposition by the company of property of the company" within the meaning of s 588FDA(1)(a)(ii).
Reliance was placed, in relation to the second condition, upon subparagraph (b)(iii), that the disposition be to:
"a person on behalf of or for the benefit of a person mentioned in subparagraph (1) (ii)."
It is sufficient for present purposes to consider whether the transfer is "for the benefit of" Mr Jinsong Cui, who at the time was the director of the company in liquidation and who signed the transfer expressed to be for consideration of $1.
I have, helpfully, been taken to the decision of the Court of Appeal in Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46, where Beazley P reproduced a deal of authority on this section at [70]-[79]. In particular, her Honour reproduced, with evident approval, what Nettle JA had said writing for the Victorian Court of Appeal in Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14 at [24]. In that decision, his Honour reviewed a number of first instance decisions of this Court which had taken a narrow approach to the meaning of "for the benefit of". Speaking very generally, those decisions had required there to be a direct benefit to the director or his or her close associate, such that a benefit to companies they controlled, even if they were the sole shareholder, was insufficient. These decisions were reviewed in Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 at [28]-[46].
In Vasudevan, Nettle JA gave a broader meaning to those words, and referred to the "objective of the section of preventing directors stripping benefits out of companies to their own advantage". His Honour said at [24] that
"given the ease with which an errant director might channel benefits from a company under his charge to another company in which he is financially although not legally or equitably interested, there is every reason to suppose that Parliament intended not to confine the meaning of the expression to something in the nature of an equitable interest".
The Court of Appeal, in Crowe-Maxwell v Frost, did not in terms overturn the narrow construction given to "for the benefit of" in earlier decisions. Even so, and notwithstanding the earlier first instance decisions of this Court, I should follow the decision of the Victorian Court of Appeal on the construction of federal legislation, unless I am convinced it is plainly wrong: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492; [1993] HCA 15. I am far from being convinced it is plainly wrong. I note further that, more recently, Black J, in SX Projects Pty Ltd (in liq) v Battaglia [2018] NSWSC 1830 at [57] and in In the matter of HPack Investments Pty Ltd [2020] NSWSC 1638 at [53], followed the broader approach taken in Vasudevan, stating that a disposition might be "for the benefit of" a director where it "legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director".
Pausing there, the evidence establishes that Mr Jinsong Cui controlled a general meeting of the defendant company. He was the sole shareholder. The enlargement of the assets of Cui Holdings by the transfer of the apartment to it was in that sense, directly to his benefit as owner of the company. He could, at a time entirely at his choosing, by members' resolution, cause the on-sale or further gift of the land to a recipient of his choice. He could also, again at a time of his choice, remove his father as director of the company. It will be seen that in Vasudevan, Nettle JA had in mind a much less immediate benefit, falling short of an equitable interest, as falling within the scope of the section. In my view, the present is a relatively straightforward case. The only reason by which it might be concluded that Cui Holdings is not the creature of Mr Jinsong Cui is the position of his father as director, but that by no means dilutes the conclusion I would draw that the transfer was for Mr Jinsong Cui's benefit. I conclude that the precondition paragraph 1(b) is satisfied.
The third condition is objective and asks whether a reasonable person in Gondon Five's circumstances would not have entered into the transaction having regard to the matters set out in subparagraphs (i)-(iv).
Once again, I regard this as a very clear case. Gondon Five's business was to construct, strata and sell 179 apartments on its land. This apartment, which for stamp duty purposes was valued at $550,000, was transferred to Cui Holdings for $1.
A reasonable person in the company's circumstances would not have entered into the transaction. Rather, like what appears on the evidence to be the overwhelming majority of the 179 apartments constructed by Gondon, it should have been sold in the ordinary way at a market price. So far as the evidence discloses, the transfer occurred when Gondon Five was seemingly failing to pay millions of dollars of GST to the ATO.
For those reasons I conclude that the transaction is an unreasonable director-related transaction of the company. I am also satisfied that the application has been made within the time provided by s 588FDA(3), and that the power to make one or more of the orders in 588FF(1) is engaged. The most appropriate remedy is that which was at the forefront of the application, namely, orders which will result in the retransfer of the property to the company in liquidation.
In a document provided to me at the commencement of the hearing, orders styled in the nature of a mandatory injunction to retransfer the property within 7 days were proposed. As raised during the hearing, the lack of involvement of Cui Holdings throughout the entirety of this litigation makes it on the cards, to say the least, that there would be non-compliance with such an order after the expiration of seven days and a further application would be necessary to be made. One consideration telling against orders formulated as a mandatory injunction is whether there is a realistic prospect of its being obeyed.
The preferable course is to permit the plaintiffs to slightly alter the orders which I would expect to be in a position to make today to achieve the purpose of notifying Cui Holdings of the conclusions that I have reached about the transaction being an unreasonable director related transaction of the company and the plaintiffs' entitlement to the return of the property and to inform it that in default of its executing a transfer back to Gondon Five Pty Ltd (in liq), the Court is both empowered to and minded to empower the Registrar in Equity to execute a transfer in its name, pursuant to s 94 of the Civil Procedure Act 2005 (NSW) to achieve that result. I will stand the matter down to permit the plaintiffs to formulate orders along those lines.
[The matter was stood down, and the following orders made later that day:
1. The Court declares that:
2. (a) the transfer by the first plaintiff of the property known as Folio Identifier 141/SP90401 (Property) to the defendant on 27 January 2017 was an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act 2001 (Cth); and
3. (b) the first plaintiff is entitled to the return of the Property.
4. If, within 7 days of service of these orders, the defendant has not transferred the Property to the first plaintiff, the plaintiffs have leave to approach the Associate to Leeming JA to seek orders pursuant to section 94(1) of the Civil Procedure Act 2005 (NSW) empowering a Registrar in Equity to execute, in the name of and on behalf of the defendant, a transfer in registrable form transferring the Property to the first plaintiff.
5. The plaintiffs are to serve a copy of these orders on the defendant.
6. The defendant is to pay the plaintiffs' costs of and incidental to the originating process filed 20 October 2020.
7. These orders are to be entered forthwith.]
[2]
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Decision last updated: 09 December 2020
Parties
Applicant/Plaintiff:
CORPORATIONS - winding up - unreasonable director-related transaction - Corporations Act 2001 (Cth), s 588 FDA - transfer of unit in development project to company owned by sole director - consideration of $1 - whether disposition "for the benefit of" director - Vasudevan