MATTER : Section 588FF of the Corporations Law of Western Australia

BETWEEN : DIANA DENISE NEWMAN as liquidator of RIVERVIEW HEIGHTS PTY LTD (IN LIQ) (ACN 059 020 138)

Corporations Act - Action by liquidator to recover payment made when corporation insolvent - Turns on own facts

Bankruptcy Act 1966, s 121

Corporations Act, s 565, s 588FA, s 588FC, s 588FE

Air Services Australia v Ferrier [1996] HCA 54; (1996) 14 ACLC 1403

ASC v Forem-Freeway Enterprises Pty Ltd [1999] FCA 179; (1999) 17 ACLC 511

Barton v DCT [1974] HCA 43; (1974) 131 CLR 370

Cannane v Official Trustee (1996) 65 FCR 453

Cuthbertson v Thomas (1998) 28 ACSR 310

David Grant & Co Pty Ltd v Westpac Banking Corporation (1994) 12 ACLC 895

Dubolo Pty Ltd v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723

Duke Pacific Finance Ltd v Beca Developments Pty Ltd (1992) 10 ACLC 732

Electrical Enterprises Retail Pty Ltd v Rodgers (1989) 15 NSWSLR 473

George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 7 ACLC 838

Lehmann Brothers Inc v Phillips [1998] 1 All ER 577

Nece Pty Ltd v Riteck Inc (1997) 15 ACLC 813

Panasonic Australia Pty Ltd v Wily (1997) 15 ACLC 613

Powell v Fryer [2000] SASC 97; (2000) 18 ACLC 480

Re Mackay (1951) 16 ABC 18

Re Maran Distributors Pty Ltd (1994) 2 Qd R 45

Re Mid East Trading Ltd [1997] 3 All ER 481

Re Toowong Trading Pty Ltd [1988] 6 ACLC 436

Re Weiss [1970] ALR 654

Rees v Bank of NSW [1964] HCA 47; (1964) 111 CLR 210

Rock Bottom Fashion Market Pty Ltd v HR & CE Griffiths Pty Ltd (1997) 15 ACLC 1744

Trautwein v Richardson [1946] ALR 129

Walker v Midlink Nominees Pty Ltd [2000] WASC 112; (2000) 18 ACLC 565

Western Suburbs Electrical Supplies Pty Ltd v Russell Electrical Services Pty Ltd [1994] FCA 1240; (1994) 12 ACLC 719

World Expo Park Pty Ltd v EFG Australia Ltd (1995) 129 ALR 685

1 MASTER SANDERSON: By amended originating process filed 21 December 2000, the applicant seeks the following orders (omitting the marking up):

"1.1 (a) Transactions whereby payments in the amount of $21,466,98 by Riverview Heights Pty Ltd (In Liquidation) ('the Company') to the Respondent and payments in the amount of $100,000.00 diverted from the Company to the Respondent between February 1993 and 23 June 1993 are voidable transactions pursuant to section 565 of the Corporations Law and s 121 of the Bankruptcy Act 1966; and

(b) Transactions whereby payments in the amount of $162,375.61 by the Company to the Respondent and payments in the amount of $100,000.00 diverted from the Company to the Respondent between 1 July 1993 and 30 April 1999 are voidable transactions pursuant to section 588FE(5) of the Corporations Law.

1.2 Further or in the alternative, payments made to the Respondent between 1 May 1995 and 30 April 1999 in the amount of $65,700.00 are voidable transactions pursuant to Section 588FE(4) of the Corporations Law."

2 Riverview Heights Pty Ltd ("the Company") was incorporated on 9 February 1993. At the time of incorporation, the directors of the Company were Michael Herbert Reginald Powell ("Powell") and his wife, Yvonne Mary Buller. The Company had two issued $1 shares, one held by Powell and the other by Ms Buller. By Deed of Trust dated 11 February 1993, between the Company as trustee and the respondent to this application, Coropean Pty Ltd, as unitholder, the Hospitality Investment Unit Trust ("the HIU Trust") was established. Between 25 February 1993 and 4 November 1998, the Company carried on business running the Swanbourne Hotel. This was done in its capacity as trustee for the HIU Trust. On 30 April 1999, an application was brought to wind up the Company. On 16 June 1999, a winding-up order was made and the applicant was appointed as liquidator of the Company. As at the date of the applicant's appointment, the Company had unpaid creditors totalling $271,044.17.

3 The respondent is a duly incorporated company. On 1 March 1990, Powell and Ron Norbert Gajewski ("Gajewski") were appointed its directors. Gajewski remained a director of the respondent until 5 June 1996, when he resigned. Upon his resignation, he transferred his shares in the respondent to Powell's brother (Jeremy John Powell). Powell is, and has been since 5 June 1996, the sole director of the respondent and continues to hold 50 per cent of the issued shares in the respondent. The respondent is recorded on the register of unitholders as holding 100 per cent of the issued units in the HIU Trust as at 11 February 1993. As a result of further issues and transfer of units recorded on the register of unitholders, the respondent is currently recorded on the register for the HIU Trust as holding 25 per cent of the issued units in the HIU Trust.

4 All of these matters are uncontroversial and are relevant only to provide background to what is to follow.

5 Prior to February 1993, Powell and Gajewski were directors of a company known as Chereeba Pty Ltd ("Chereeba"). Through a rather complex arrangement, Gajewski and Powell, or family trusts associated with them, were beneficiaries of trusts run by Chereeba. There were two other directors of Chereeba - John Langford and Domenic Martino. Chereeba ran a number of businesses, including a night-club known as "Boko's" and the Swanbourne Hotel. By early 1993, Chereeba was in severe financial difficulties. It had what in evidence was referred to as a "group debt" of $1.26 million and was paying interest on the outstanding debt at between 23 and 27 per cent. It also had a large number of unpaid trade creditors. It was clear that Chereeba was not able to service the debt, and it was in imminent danger of collapse.

6 Part of the borrowings of Chereeba were with the State Bank of South Australia ("the State Bank"). Gajewski and Powell, along with their fellow directors, had provided personal guarantees for the debt owed to the State Bank. Notices of demand had been issued by the State Bank for repayment of the debt. Along with all of the other problems closing in around the directors of Chereeba, there was a problem with the lease on the Swanbourne Hotel. It was in arrears in an amount of around $75,000 and there was a danger that if the arrears of rent were not paid, the lease would be terminated. That would effectively extinguish the Swanbourne Hotel as an asset in the hands of Chereeba. It was apparent to all of the directors of Chereeba that they needed to take steps to rationalise the company's affairs.

7 For some time prior to February of 1993 Powell had been managing the Swanbourne Hotel. He had formed the view that the hotel could be profitable as a stand-alone venture and he had discussions with third parties about joining him in the Swanbourne Hotel enterprise. But before doing anything he had to deal with the problem of the arrears of rental. For this reason, and on behalf of Chereeba, he entered into negotiations with NS Nominees Pty Ltd ("NS Nominees"), the owner of the hotel site. The result of these negotiations was a document titled "Variation of Lease" which is dated 27 January 1993. The document appears as annexure "GDT2" to the affidavit of Glenn Douglas Trinick sworn 20 February 2001. (Mr Trinick is an associate of the applicant. Although the applicant was appointed liquidator of the company, most of the investigation work appears to have been undertaken by Mr Trinick. He swore a number of affidavits in support of this application and he was cross-examined on those affidavits. It was clear from the cross-examination of both the applicant and Mr Trinick that the applicant left most of the day-to-day work of the liquidation of the company to Mr Trinick.)

8 Powell says in his evidence that one of the matters which concerned him in relation to the Swanbourne Hotel was the provisions in the lease relating to rent reviews. He was anxious to reach agreement with NS Nominees to ameliorate the harsh effects of these provisions. By the deed of variation, the parties agreed that the rent for the hotel would be reviewed on 28 January 1993, according to the terms of the lease, and they agreed on a minimum annual rental. That agreement was conditional upon payment to NS Nominees on or before 28 January 1993 of an amount of $25,000, being part payment of the arrears of rent. The agreement was also conditional upon Chereeba paying to NS Nominees an amount of $75,000 which was to be paid by weekly instalments of $500 for a period of 150 weeks commencing on 1 February 1993. The deed further provides that if all the conditions were met, the minimum annual rental would be fixed for a period of five years from January 1993 at the amount of the minimum rental without any increase in the rental pursuant to the terms of the lease. These provisions require further explanation by reference to the actual figures involved.

9 As at 28 January 1993, the minimum annual rental for the hotel was $204,073.44 per annum. The parties agreed that, if the rent had been adjusted in line with the rent review provisions in the lease, after 28 January 1993 the minimum annual rental would have been $220,399.32. As a result of the agreement, the rental was fixed at the pre-January 1993 level of $204,073.44 and would not be reviewed for five years. The upfront cost to Chereeba of fixing the rent for the five-year period was $75,000. Although neither party calculated precisely what savings would flow to Chereeba as a consequence of this variation of the lease, it is apparent that it was a reasonable commercial transaction. It is not difficult to see why Powell was concerned about the rent review provisions in the lease. Although he was committing to $75,000 paid over three years, there was no doubt that over the full five-year period Chereeba would have been significantly better off as a consequence of this agreement.

10 As is to be expected, the deed of variation contained a number of provisions which ensured that it intermeshed with the lease agreement. It also contained default provisions. Of particular importance is the provision in relation to any assignment of the lease. This is cl 5 of the deed and it is in the following terms:

"5.1 If the Lessee wishes to assign its interest in the Lease at any time prior to full payment of the sum of $75,000 it shall be a condition of that assignment that the outstanding balance of that sum and the interest thereon up to the date of payment shall be paid to the Lessor prior to the Lessor consenting to any assignment PROVIDED THAT the Lessee may assign its interest in the Lease to Michael Herbert Reginald Powell and/or his nominee ('Powell') subject to the assignment provisions of the Lease without the said condition applying and the parties hereto acknowledge that Powell may subsequently assign his interest in the Lease at any time thereafter subject to the assignment provisions of the Lease.

5.2 Should the Lessee assign its interest in the Lease to Powell, the parties agree that other persons or entities may join with him as assignee or Lessee as the case may be. At any time during the term of the Lease provided that Powell holds at least 50% interest in the Lease and those parties are acceptable to the Lessor on the terms specified in the assignment provisions of the Lease."

11 During the course of the hearing it was suggested on behalf of the applicant that the deed of variation was either an uncommercial transaction, in the sense that it was not a transaction which a prudent businessman would enter into, or that Powell personally acquired a liability pursuant to its terms.

12 As I have indicated above, I am satisfied that the terms of the deed of variation were reasonable and very much to the benefit of Chereeba. Furthermore, I can see no basis upon which it can be said that Powell assumed a personal liability pursuant to the deed of variation. The parties to the deed are Chereeba and those persons who gave guarantees pursuant to the terms of the lease. Chereeba took on the liability for payment of the $75,000 premium, but in doing so it gained the benefit of a fixed rental for five years. The result may have been of benefit to Powell and the other guarantors, but that was nothing more than an incidence of a reasonable commercial arrangement. It is undoubtedly the case that, when Powell negotiated this agreement, he had determined that he personally would take on the Swanbourne Hotel business. But that fact in no way alters the effect of the deed of variation. In my view, it was a sound commercial agreement.

13 As I have indicated above, in late 1992 Powell had determined that on the break-up of Chereeba's assets he would take over the Swanbourne Hotel. The precise terms of the break-up of Chereeba's assets are not in evidence. However, it would appear that the four individuals involved resolved that the assets would be liquidated and each of the four directors would be personally responsible for part of the outstanding debts of Chareeba. It was then up to each of them to make their own arrangements with the State Bank or other lenders for repayment of their individual share of the borrowings. It seems clear that so far as Powell was concerned, his fellow directors were prepared to allow him to take over the Swanbourne Hotel provided he accepted responsibility for the debts of the hotel and his share of the personal liabilities of Chereeba. There seems to have been no suggestion that Chereeba would actually be paid by Powell for the transfer to him of the Swanbourne Hotel lease and the business. It is perhaps worthy of note that Powell says that Chereeba had acquired the Swanbourne Hotel in 1988 for the sum of $450,000. As at February 1993, the lease had 24 years left to run. Powell says that between the date of acquisition of the hotel and the date of its sale Chereeba had spent $250,000 making improvements to the property. No-one, it seems, thought fit to obtain any independent valuation of the value of the Swanbourne Hotel business. The directors of Chereeba were content to see the business transferred to Powell or his nominee provided he took responsibility for the accumulated debts attributable to the hotel.

14 In late 1992 Powell had discussions with two acquaintances, Dean Hewett ("Hewett") and Timothy Walsh ("Walsh"), about the prospect of their joining him in the Swanbourne Hotel business. Both Hewett and Walsh were friends of Powell's and what passed between the three individuals was informal. There are no written notes of discussions which took place, nor did they ever conclude a written agreement. So far as Hewett and Walsh were concerned, this remarkably casual approach was to have disastrous consequences.

15 By January of 1993, Powell says he had reached agreement with Hewett and Walsh in relation to the acquisition of the Swanbourne Hotel. The essential elements of the agreement were as follows:

1. A shelf company would be acquired by Powell. This was ultimately done and is the Company.

2. Hewett and Walsh, along with Powell, would become directors of the shelf company.

3. The lease for the Swanbourne Hotel would be acquired by the shelf company.

4. Hewett and Walsh would each contribute $100,000 for a 25 per cent interest in the Swanbourne Hotel. Powell would hold the other 50 per cent interest but would not pay any contribution for that interest.

5. Powell was to be responsible for the management of the hotel and Hewett and Walsh were to be silent investors.

16 There is no dispute in these proceedings about the fact of the agreement between Hewett, Walsh and Powell and its terms. By implication, Hewett, Walsh and Powell had agreed that the Swanbourne Hotel business, being essentially the lease, the goodwill and the fixtures and fittings, was valued at $400,000. There is nothing in the evidence to suggest that that figure was actually discussed between the parties. But the fact that Hewett and Walsh were each to pay $100,000 for a 25 per cent interest makes clear the agreed purchase price.

17 In the circumstances, it does not seem to me that a value of $400,000 for the Swanbourne Hotel business was unreasonable. Powell says, and it is not contested, that it was purchased in 1998 for $450,000 and $250,000 had been spent on improvements. Clearly the trading history was not such as to suggest to an impartial observer, acting with the benefit of hindsight, that purchase of the hotel was a sound investment. But it is not unreasonable to suppose at the time all parties, Hewett, Walsh and Powell, saw the acquisition of the business as a reasonable commercial transaction.

18 The way in which the sale of the business took place is somewhat confused. Appearing as annexure "DDN10" to the affidavit of the applicant sworn 29 September 2000 is a document described as "Agreement to Purchase a Business". It shows as purchaser the Company in its capacity as trustee for the HIU Trust and as the vendor Chereeba. The "gross purchase price" is said to be $367,500. Of that amount $16,783 is assigned to fixtures, $29,391 to stock and $7,775 is said to be cash and bonds/deposits. No amount is specified as goodwill. The agreement shows the annual rental as $204,073.44, plus $500 per week. The next rent review is said to be on 28 January 1998.

19 Subsequent to that agreement the parties, that is, Chereeba and the Company, entered into what is described as a "Supplementary Purchase Agreement". This document is to be found as annexure "DDN11" to the applicant's affidavit. It is dated 25 February 1993. The terms of the purchase agreement are recited and then there appears the following three clauses:

"4. The purchase price is $367,500 on the basis that outstanding creditors at 22 February 1993 were $105,730. Should creditors at this date (including interest penalties incurred on the group tax debt after this date) be greater or lesser than this amount, then one third of the excess or reduction shall be added or deducted to the purchase price as appropriate.

5. The purchase price shall be paid by the purchaser as follows:

(a) The payment of an amount of one hundred thousand dollars ($100,000) to the State Bank of South Australia ('SBSA') on behalf of the Vendor, in settlement of monies owed by the Vendor to SBSA;

(b) An amount of thirty-five thousand dollars ($35,000) shall be paid by the Purchaser to the R and I Bank of Western Australia Limited, Kalgoorlie Branch in settlement of a debt owed by the Vendor to the said Bank;

(c) Payment of an mount of eighty seven thousand four hundred and ninety dollars ($87,490.00) (or such greater or lesser sum as adjusted as per clause 4.0), representing amounts owed to its creditors by the Vendor (the amounts and the identity of which shall be agreed by the Purchaser and the Vendor) and payment of which amounts shall be assumed by the Purchaser.

6. The Purchaser acknowledges that in addition to the purchase price set out in Clause 3 above it will takeover the leases set out below:-

..."

20 It is difficult to know what to make of this supplementary agreement. It is not apparent from the agreement itself why it was necessary. Its most confusing aspect is cl 4. The purchase price of the Swanbourne Hotel was said to be $367,5000. That amount was said to be on a "walk-in walk-out basis". There is no suggestion that the company would be responsible for the then outstanding debts of $105,730 or any amount. If that were the case, the actual acquisition price of the Swanbourne Hotel would have been $473,230 - the purchase price of $367,500, plus the debtors of $105,730.

21 During the course of the hearing counsel for the applicant laid great emphasis on cl 5 of the supplementary agreement, submitting that it demonstrated diversion of funds from the Company for the benefit of Powell. With respect, cl 5 is, to my mind, unexceptional. It is frequently the case that upon a sale and purchase of property being completed, part of the purchase price is paid not direct to the vendor but to some third party. The sale and purchase of residential property provides a good example. If the property the subject of the transaction is mortgaged to a financial institution, then at settlement part of the purchase price is paid to the financial institution to allow for the discharge of the mortgage and the rest is paid to the vendor. The payment to the financial institution cannot be made unless and until the vendor provides written authority to the purchaser to make the necessary payment direct to the financial institution. Effectively that is what is being done here, particularly by cl 4(a) and cl 4(b). It is true that there was no security held by either the State Bank or the R and I Bank of Western Australia Ltd over the Swanbourne Hotel, but that does not prevent Chereeba, who were entitled to the funds upon sale, directing that part of those funds should be paid to particular institutions. Much the same can be said with respect to par 5(c). The vendor is simply directing payment of part of the purchase price to satisfy some of its creditors rather than it receiving funds which it then dispersed to those creditors.

22 There are, however, two elements of this supplementary agreement which are a little surprising. The payments to be made under cl 5 amount to $222,490. There is no indication of how the rest of the purchase price is to be paid. Further, it would appear that, pursuant to cl 5(c), the Company took on liability for the full $105,730 of outstanding debts. Quite how that can be reconciled with the requirement that the Company pay $87,490 to creditors is not clear. To that extent at least, the agreement is ambiguous.

23 Powell's evidence does not really clarify the question of why it was necessary for the parties to enter into the supplementary agreement, let alone what the agreement was intended to achieve. In his affidavit of 4 December 2000 Powell recounts the circumstances in which it was decided to create the HIU Trust: par 22. He then indicates that he sought legal advice and, as a consequence of that advice, both the agreement for purchase and the supplementary agreement were drawn up. Powell says (at par 26):

"... As a result of the contributions of $100,000 each by interests associated with Timothy Walsh and Dean Hewett, the business of the Swanbourne Hotel together with the chattels, glassware, stock, cash floats and all of the means of conducting business was acquired by the Company in February 1993 and it was a debt free business."

24 In my view, that assessment of the position is correct. It follows then that it could not be said that as at 23 February 1993 the Company was insolvent. True it is that it had no working capital, but it also had no creditors and an asset of some value. The fact that the circumstances in which the business was acquired by the Company are unclear, perhaps even murky, in no way corrupts the essentials of the transaction. Nor can I see anything untoward in the way that units in the HIU Trust were issued. Hewett and Walsh were each issued with 100,000 units. Given that Powell, it was agreed, would be the holder of a half interest in the business, he was entitled to the issue of 200,000 units. Although there is some minor discrepancy in the figures, this is what apparently happened. That being the case, Hewett and Walsh could not properly be characterised as creditors of the Company. Powell certainly was not a creditor, and all other creditors had either been met by payment pursuant to the supplementary agreement or perhaps were the responsibility of Chereeba. I could not conclude that the Company was insolvent as of February 1993.

25 In closing submissions counsel for the applicant maintained that the debts assigned to the Company by Chereeba totalled $341,571.75. This, it was said, was made up of $100,000 owed to the State Bank, trade creditors of $83,338.26, a debt to the R and I Bank of $35,000, the lease premium debt of $75,000, plus interest and a liquor licence fee balance of $52,733.19. As I have indicated above, the first three of these debts can be eliminated. The $200,000 contributed by Walsh and Hewett was used to discharge these debts (along with a further $18,000-odd contributed by Powell). I am not satisfied that the $75,000 could properly be seen as a debt. It was not immediately due and payable. The variation agreement anticipated payment in instalments and, in my view, properly characterised, it formed part of the rental payment. The liquor licence fee requires closer examination.

26 Under s 139(1) of the Liquor Licensing Act (WA) 1998 the 1993 liquor licence fee became due and payable on 1 January 1993. Under the relevant section, as it applied at that time, the fee could be paid in quarterly instalments. That would mean payment was required on 1 January, 1 April, 1 July and 1 October. The licence fee for 1993 due and payable by Chereeba on 1 January 1993 was $70,310.92. The quarterly instalments then were $17,577.73. When it took over the lease of the Swanbourne Hotel, the Company became liable for $52,733.19, being the annual fee, less the January instalment. On that analysis, any payment of the liquor licensing fee was not due until 1 April 1993. It could not be said that there was a liability outstanding as at February 1993. The best that can be said is that there was a contingent liability. The question is whether that contingent liability, together with the lack of working capital, can be said to render the Company insolvent as at February of 1993.

27 Section 95A of the Corporations Act deals with solvency and insolvency. It is in the following terms:

"(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable."

28 This definition is sometimes referred to as a cash-flow test or a going-concern test. A debt is "due and payable" when the creditor may obtain a judgment: see Cuthbertson v Thomas (1998) 28 ACSR 310. On that basis the instalment due under the Liquor Licensing Act could not properly be said to be a debt. I accept that the lack of working capital and the apparently poor trading history of the hotel prior to February 1993 might cast doubt on the ability of the hotel to make a profit in the future. But on the evidence available I could not be satisfied that the Company was, as at February 1993, insolvent.

29 The amount of $100,000 referred to in par 1.1(a) of the amended originating process is in fact the $100,000 invested by Walsh in the venture. It is convenient to deal at this point with the applicant's argument in relation to that amount.

30 Section 565 of the Corporations Act is in the following terms:

"(a) A settlement, conveyance, or transfer of property, a charge on property, a payment made, or an obligation incurred, before the commencement of part 5.7B, by a company that, if it had been made or incurred by a natural person, would, in the event of his or her becoming a bankrupt, be void as against the trustee in bankruptcy, is, in the event of the company being wound up, void as against the liquidator."

31 This section embodies the relevant provisions of the Bankruptcy Act. Section 121 of the Bankruptcy Act is in the following terms:

"(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if:

(a) the property would properly have become part of the transferor's estate or would properly have been available to creditors if the property had not been transferred; and

(b) the transferor's main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor's creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor's creditors.

(2) The transferor's main purpose in making the transfer is taken to be the purpose described in paragraph 1(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

(3) ...

(4) Despite subsection (1) a transfer of property is not void against the trustee if:

(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b) the transferee did not know that the transferor's main purpose in making the transfer was the purpose described in par (1)(b); and

(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent."

32 It was the prime submission of counsel for the respondent that this was not a case where at the time of the transfer (that is, the payment of $100,000 to the State Bank) the transferor (the Company) was, or was about to become, insolvent. I accept that submission. I am satisfied that, as at the date of payment of the $100,000 to the State Bank, the Company was not insolvent. Further, I am satisfied that there is nothing in the evidence to indicate that it was about to become insolvent. That being the case, the applicant's claim with respect to the $100,000 in par 1.1(a) of the originating process fails.

33 It is convenient at this point to also deal with the claim in par 1.1(a) to an amount of $21,466.98. The evidence clearly establishes that an amount of $19,466.98, the proceeds of the sale of a house owned by Powell, were paid in error into the Company's account: see par 34 of the affidavit of Powell sworn 4 December 2001 and annexure "MHRP4". There was also a further sum of $2,000 paid into the Company's account by Powell.

34 In my view, it is clear that payment out of these amounts to Powell was not undertaken with a view to defrauding creditors. It was a repayment to Powell of moneys to which he was undoubtedly entitled.

35 On that basis the claim to the $21,466.98 fails.

36 The applicant's claim under par 1.1(b) relies upon s 588FE(5) of the Corporations Law. That section reads as follows:

(a) it is an insolvent transaction of the company; and

(b) the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on the winding up of the company; and

(c) the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day."

37 Clearly, if the transaction is to be voided, all three of the requirements of subs (5) must be met. That requires the transaction to be an "insolvent transaction". Section 588FC deals with insolvent transactions. It is in the following terms:

"A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into;

(ii) an act is done or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

(ii) a person doing an act, or making an omission, for the purposes giving effect to the transaction."

38 No evidence was led by the applicant in relation to uncommercial transactions. Rather, it was alleged that payments made by the Company to the respondent are unfair preferences. Unfair preferences are dealt with by s 588FA(1). That section reads:

"A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction was set aside and the creditor were to proof for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian Court or a direction by an agency."

39 The amount of $162,375.61 referred to in par 1.1(b) is calculated in this way: between 22 September 1993 and 27 February 1998 the Company paid to the respondent a series of payments which total the amount claimed. Many, but by no means all, of the payments were for an amount of $500. A schedule of these payments appears as annexure "DDN29" to the affidavit of the applicant sworn 29 September 2000. It is the applicant's case that when each and every one of these payments were made, the Company was insolvent.

40 In his evidence Powell says that these payments were made to him in payment for his services in running the Swanbourne Hotel: see par 60 of Powell's affidavit of 4 December 2000. He acknowledges that no directors' resolution formalising his appointment and remuneration were ever recorded. However, it is the fact that Powell ran the Swanbourne Hotel and that this formed part of the arrangement when Walsh and Hewett decided to invest in the business. In my view, not a great deal turns on how the payments made to the respondent are characterised. However, for present purposes I am prepared to accept that the payments were made pursuant to some informal arrangement which allowed for Powell to be remunerated for his management services. The fact that he chose to take that remuneration through a corporation he controlled is of no real consequence. What is important is that the payments were made by the Company to the respondent.

41 The first question is whether these payments could be characterised as unfair preferences. Clearly the Company and the respondent (creditor) are parties to the transaction, satisfying the requirements of s 58FA(1)(a). It is also clear that the transaction has resulted in the creditor (respondent) receiving from the Company in respect of an unsecured debt the Company owed the respondent (creditor) more than the respondent (creditor) would have received from the Company in respect of the debt, the transaction was set aside and the respondent (creditor) were to prove for the debt in the winding up of the company. That satisfies the requirements of s 588FA(1)(b). The payments then can be characterised as unfair preferences. In closing submissions counsel for the respondent denied that the payments could be so characterised. But he did not support that submission by further elucidation of the facts. In my view, it is plain that all of the payments are unfair preferences.

42 The next question is whether or not the unfair preference was given by the Company at a time when the Company was insolvent or the Company became insolvent by the giving of the unfair preferences. This second limb - an insolvent transaction falling within s 588FC(b) - can be put to one side. It was not submitted on behalf of the applicant that any one of the transactions complained of in and of itself led to the Company becoming insolvent. Rather it was said from February 1993 the Company was insolvent, thus satisfying the requirements of s 588FC(a)(i). I have already indicated I am satisfied that the Company was solvent as at February 1993. The question then is whether, as between February 1993 and February 1998, the Company became insolvent and, if so, when.

43 In answering this question, the respondent submitted that it was necessary to have regard to s 588FA(3). That section reads as follows:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be an unfair preference."

44 Counsel for the respondent in his submissions claimed that at all relevant times there was between the Company and the respondent a running account. I very much doubt that the nature of the transaction as between the Company and the respondent satisfies the requirements of a running account: see Panasonic Aust Pty Ltd v Wily (1997) 15 ACLC 613 adopting the principles set out by Santow J at (1994) 12 ACLC 936. Be that as it may, a running account is used only as an example in s 588FA(3)(a) of a transaction which is "an integral part of a continuing business relationship". In my view, that is what the relationship between the Company and the respondent was. It was the respondent's case that from time to time it made loans to the Company to provide necessary working capital. The applicant claimed that many, if not all, of these loans were shams. Even if that were the case, it would not seem to me to alter the fact that there was a continuing business relationship which led to fluctuations in indebtedness. Apart from anything else, it is clear that the Company could, and at times did, rely upon the respondent for the provision of working capital. That being so, I am satisfied that the various payments made by the Company to the respondent can be regarded as a single transaction.

45 The question then is whether or not the unfair preference is an insolvent transaction under s 588FC. More particularly, the applicant must establish that the transaction was entered into at a time when the Company was insolvent: see s 588FC(a)(i). The operative date then is 22 September 1993. On that date $1,500 was paid by the Company to the respondent: see page 117 of the affidavit of the applicant sworn 29 September 2000. Put another way, the applicant must establish that the Company became insolvent between February of 1993 and September of that year.

46 Much evidence was directed at this question of the solvency of the Company from time to time. For reasons which I will detail below, I do not propose to examine this evidence in detail. What is apparent is that from the first the Company lived a hand-to-mouth existence. It was clearly short of working capital. Powell juggled payments to creditors to allow the debts of the Company to be met from cash flow. This meant that from time to time creditors were paid late and on occasions only after threats of legal proceedings had been made. Against that, a number of matters must be borne in mind. First, the Company made profits for the years 1994 and 1995. The profits were small, but they were nonetheless profits. Secondly, the current assets of the Company exceeded the current liabilities until 1997. While the position was tight, it was not desperate to the point where I could be satisfied that the Company was, as at September 1993, insolvent.

47 But even were I to be satisfied that the Company was insolvent at the time that it entered into the transaction, I could not be satisfied that the Company had become a party to the transaction for the purpose of defeating, delaying or interfering with the rights of any or all of its creditors on winding up of the Company. That really is the crucial point. As I have indicated above, it seems to me that the Company and the respondent entered into a perfectly reasonable arrangement whereby Powell, through the respondent, would be remunerated for his management of the Company. Powell actually lived at the hotel and was responsible for all aspects of the day-to-day running of the business. It was only to be expected that he would be paid. By any objective standard, as at September of 1993, it could not be said that the arrangement was designed to defeat creditors of the Company.

48 I would dismiss this aspect of the applicant's claim.

49 The claim with respect to the $100,000 referred to in par 1.1(b) of the originating process is put in this way. By written agreement made 19 February 1994 the respondent purported to sell 100,000 unites in the HIU Trust to Santos and Associates Pty Ltd. A copy of the "transfer of units" appears as annexure "DDN20" to the affidavit of the applicant sworn 29 September 2000. The respondent was duly paid $100,000 by Santos and Associates Pty Ltd. It is said by the applicant that the full amount of $100,000 was, in reality, the property of the Company. This argument depends, for its efficacy, on it being established that the respondent had no right and entitlement to the 200,000 units it was issued when the Swanbourne Hotel was acquired by the Company. As I have indicated, I am satisfied that the units were properly issued. That being the case, there was no impediment to the respondent selling these units and retaining the proceeds of sale. That aspect of the applicant's claim must fail.

50 That then leaves the claims made in par 1.2 of the originating process. That claim is said to arise in this way. $65,700 of the $162,375.61 was paid by the Company to the respondent within four years of the relation-back day. That amount can then be recovered under s 588FE(4) of the Corporations Act. That section is in the following terms:

(a) it is an insolvent transaction of the company; and

(b) a related entity of the company is a party to it; and

(c) it was entered into or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day."

51 There is no doubt that the Company and the respondent are related entities. The two questions to be answered are, first, whether or not this was an insolvent transaction. That in turn requires consideration of ss 588FC and 588FA. Secondly, there is the question of whether or not an act was done for the purpose of giving effect to the transaction during the four years ending on the relation-back day. It is perhaps convenient to deal with this second point first. As I have indicated above, I am satisfied that the payments made to the respondent by the Company were part of a continuing business relationship under s 588FA. That means there was only one transaction under s 588FA(1), but the fact that as part of this one transaction there were payments made during the four years ending on the relation-back day means that there was an act done for the purpose of giving effect to the transaction during that four-year period. In other words, the requirements of s 588FE(4)(c) are satisfied.

52 That then leaves the question of whether or not payments made during the four-year period satisfied the requirements of "an insolvent transaction". In my view, they do not. What is required is that at the time the transaction was entered into the Company was insolvent. As I have already indicated, I am not satisfied that that is the case. In my view, the solvency or otherwise of the Company as at May 1995 is irrelevant. The operative date is the date that the transaction was entered into - September of 1993. I am not satisfied that the Company was insolvent as at that date. Therefore, it would seem to me that the requirements of s 588FE(5)(a) have not been satisfied.

53 For these reasons, I am satisfied that the applicant's claim in its entirety should be dismissed. I will hear the parties as to the appropriate form of orders and as to costs.