Erskine as liquidator of North Shore Property Developments Pty Ltd (in liq) v 72-74 Gordon Crescent Lane Cove Pty Ltd

1. The appeal be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background 1 The appellant (the plaintiff below) contends that the primary judge erred in excluding from his orders of 25 July 2018 an order extending the period for the making of any applications in relation to unreasonable director-related transactions under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act) the subject of a deed of release and settlement entered into by the former liquidator of the company, North Shore Property Developments Pty Ltd (in liquidation). 2 The facts are uncontentious. The primary judge's reasons, Erskine v 72-74 Gordon Crescent Lane Cove Pty Ltd, in the matter of North Shore Property Developments Pty Ltd (in liq) [2018] FCA 1094¸ identify all relevant facts. 3 North Shore Property Developments Pty Ltd (in liquidation) is referred to in the primary judge's reasons as the "company". The company carried on a property development business. Mr John Haddad was the director, secretary and sole shareholder. The company was ordered to be wound up on 11 February 2015. Mr Iannuzzi was appointed joint then remained as sole liquidator of the company: [3]. 4 Mr Iannuzzi resigned as liquidator after the Commissioner filed proceedings to have him replaced. The plaintiff became the liquidator of the company in place of Mr Iannuzzi: [4]. 5 Of the four defendants, only the first defendant took an active role in the proceeding. The director, secretary and sole shareholder of the first defendant is Mr Eddy Haddad, Mr John Haddad's brother: [7]. 6 The plaintiff has only had access to Mr Iannuzzi's files since 3 October 2017. She has limited funding but has carried out a preliminary review leading her to the opinion of a real and not merely speculative prospect that transactions related to a development of the company at Lane Cove may be voidable transactions: [9]. 7 The company sold four apartments and four garage spaces in the Lane Cove development to the first defendant: [19]. In early 2012 Mr Eddy Haddad told Mr John Haddad that the apartments would not sell because they had defects and were incomplete and offered $400,000 each for them. Mr John Haddad said he was under financial stress and needed to sell the apartments to meet the bank's deadlines: [20]. An option to purchase was then granted for a fee of $320,000 culminating in the sale of each apartment by the company to the first defendant for $400,000 in April 2014. Subsequently, four garage spaces were also sold for a total of $20,000. Mr Eddy Haddad undertook rectification works to the apartments to fix internal leaks. The first defendant then sold two of the car spaces for $10,000 each and the apartments for $940,000, $1,149,000, $900,000, and $1,060,000: [21] to [24]. 8 Mr Iannuzzi as liquidator of the company demanded a payment of $322,508 from Mr Eddy Haddad in respect of money said to have been received by Mr Eddy Haddad as an unreasonable director-related transaction. Later, Mr Iannuzzi demanded $7,550,000 "said to have been the value of uncommercial transactions entered into between the company and the first defendant in relation to the sale of the four apartments". Mr Eddy Haddad disputed both claims but indicated his willingness to negotiate a resolution of the claims without litigation: [26] and [27]. 9 In responding to the second claim, as the primary judge said at [28]: Mr Haddad's lawyers pointed out that Mr Iannuzzi had incorrectly treated the car spaces related to the four apartments as apartments in their own right and attributed values to them accordingly. They also said that Mr Iannuzzi had not taken into account the fact that Mr Haddad had been required to undertake rectification work of the apartments at his own cost. The lawyers also said that the Owners' Corporation at the Lane Cove development had made a claim for approximately $2 million in relation to defective building works. The implication of that statement is not made clear in the letter. In any event, Mr Haddad's lawyers argued that the four apartments had been purchased by the first defendant at fair value at the time. 10 Following negotiations "Mr Eddy Haddad and the first defendant entered into a Deed of Release and Settlement with the company and Mr Iannuzzi as liquidator. In consideration of the payment of $32,500, the company and Mr Iannuzzi, as liquidator, unconditionally released Mr Eddy Haddad and the first defendant from the claims that had been made": [29]. 11 The primary judge noted that "at this stage…the propriety of Mr Iannuzzi entering into the settlement, and in granting the releases in relation to the claims made against Mr Eddy Haddad and the first defendant, have not been called into question in the Commissioner's proceeding", referred to at [4] above. He noted also that a file note "records that a conclusion had been reached within Veritas Advisory [Mr Iannuzzi's firm] that, following discussions with Mr Haddad's and the first defendant's lawyers, it was unlikely that there was an uncommercial transaction claim against the first defendant in respect of the sale of the four apartments at an alleged undervalue": [33]. 12 Mr Eddy Haddad filed a second affidavit in which he said that, as the primary judge put it at [38]: in his original account, he had confused two conversations and treated them as one. He said that, in early April 2012, he had a conversation with his brother in which he agreed to advance $320,000 towards the Lane Cove development. This sum was to be treated as both an option fee in respect of an option to purchase four apartments in the Lane Cove development and as part payment of the purchase price for the four apartments. This arrangement was documented in Heads of Agreement signed by the brothers on 17 April 2012. 13 Mr Haddad also said this, recorded by the primary judge at [39]: Mr Haddad said that in late February/early March 2014 he had another conversation with his brother regarding apartments on the top floors of the development, where the building works were incomplete and defective. These were the top floor apartments being offered to the first defendant. This seems to have been a matter of contention at the time because Mr John Haddad expressed the view that, despite their present condition, the apartments would be worth more than $400,000 each, whereas, at the time, Mr Eddy Haddad expressed the view that the apartments being offered were "completely defective and uninhabitable" and not worth more than $400,000. Mr John Haddad would not give a further reduction in the purchase price (it seems, from $400,000 for each apartment) and told Mr Eddy Haddad that he could "take it or leave it". 14 The primary judge identified the relevant principles in orthodox terms attracting no criticism by the parties, including the following: (1) "The approach to exercising the discretion to extend time under s 588FF(3)(b) is not in contest. It has been formulated in the case law. The relevant factors to be considered include the explanation for the delay in bringing the proceedings; the merits of such proceedings; and whether the likely actual prejudice resulting from an extension of time is sufficiently substantial to outweigh the case for the extension": [13]. (2) "As to the second of these factors, the Court is only required to form a preliminary view of the merits of the proposed proceedings to gain an appreciation as to whether they are so devoid of prospects that it would be unfair, by granting an extension, to expose the prospective defendant(s) to the continuing prospect of suit. Where, however, the liquidator's purpose in seeking an extension is to put himself or herself into a position where he or she can properly decide whether or not to bring proceedings, a preliminary enquiry into the merits of any consequent proceeding may not always be necessary: Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 (Green) at [15].": [14]. 15 Having recorded the competing submissions at [40] to [52], the primary judge reasoned in these terms: (1) "The fact that the claims that the liquidator of the company might have against the first defendant in relation to the sale of the four apartments have been compromised, and that the first defendant has been released from such claims, is decisive of the fate of the present application in relation to those transactions. The plaintiff is unable to point to any material fact or matter that would provide an extant and arguable reason to set aside the Deed of Release and Settlement. I accept that, in that state of affairs, any claim under s 588FF(1) of the Act, as now foreshadowed, is devoid of any prospects of success": [53]. (2) While this made it unnecessary to deal with prejudice and delay the "first defendant's submissions in relation to both those matters are cogent and plainly support its case that the discretion to extend time in relation to those transactions should not be granted" : [54], other than the contention that the plaintiff had not moved with alacrity in bringing the application. "Mr Iannuzzi gave consideration to whether the four apartments were sold to the first defendant at an undervalue. Whilst initially advancing a claim in that regard, further investigation of that matter led him to conclude that the claim should be compromised. Mr Iannuzzi had power to do so under s 477(1)(d) of the Act. Apart from the fact that the Deed of Release and Settlement is a bar to bringing any further claim in relation to that matter, the fact that there has been an investigation and compromise, and that considerable time has since elapsed since the impugned transactions were entered into, point to real and substantial prejudice (as outlined at [48]-[51] above) should any extension now be granted": [54]. (3) At [48] to [51] the first defendant's submissions are recorded that: (a) The first defendant "has already acted to its detriment by compromising the claim brought by Mr Iannuzzi and paying the settlement sum of $32,500. Relatedly, it has also incurred legal costs in reaching that compromise": [48]. (b) "[G]iven the period of time that has elapsed, it would now be difficult for it to prove the fact and fair value of the rectification work it undertook on the apartments, which are now owned by third parties and not accessible for inspection": [49]. (c) "[G]iven the period of time that has elapsed, the reasonableness of the consideration it paid for the four apartments, in their state and condition in 2014, would be difficult to establish now": [50]. (d) "[T]hese aspects of prejudice must be balanced against the fact that the plaintiff has no present funding either to bring a s 588FF(1) claim or to set aside the Deed of Release and Settlement".