73 Under cross-examination the liquidator accepted that the amount of $5,759.80 in respect of non-preferred superannuation was a duplication and should be disregarded. He also accepted that the amount of $101,274.10 was part of a larger amount of $134,294 payable to the Wollongong Council and that the full amount was paid to the Council on 21 March 2005 by the Company having paid $44,036.90 out of the settlement monies and the purchaser of the Company's properties having paid the balance.
74 He also accepted that the amount of $19,402 reflected as being owed to the Office of State Revenue for land tax was not due on 17 March 2006 but rather on 20 March 2006.
75 He was challenged with respect to the amount of $4,516.05 to M&E Equipment Traders Pty Ltd on the basis that the invoices from that supplier were addressed to "MGB Chadd (Herd Bars & Bodies)" and that the amount was owed to Herd rather than the Company. His evidence was that he had ascertained that the items in the invoices were not things that Herd would have used in its armoured vehicle and bull bar business. They were predominantly products for electrical or computer installations and more likely to have been used by the Company as the owner of the business premises. The challenge accordingly did not succeed.
76 In his reports the liquidator opined, on the financial material available to him, that the Company was insolvent as at 17 March 2006 immediately after the transactions.
77 Immediately after the transactions the Company's position was that it had entirely disposed of the proceeds of the sale of its properties by paying the lender and the Wollongong Council.
78 That left the various debts due as at 17 March 2006 which (subject to the concessions which the liquidator made) the Company had no cash or other readily available resources available to pay. Leaving the Wollongong Council aside those debts amounted to $100,000.
79 Moreover further amounts totalling $1.5 million were due six days later and further significant amounts were due a few weeks or months after that.
80 The only assets which it was put the Company had were the demountable building claim and the loan account claim against the defendant. On no realistic view were those assets available to pay the Company's creditors.
81 Up until the date of the hearing the defendant was disputing liability in verified Notice of Grounds of Defence (including those filed on 13 August 2008) in which she was claiming part ownership with the deceased of the demountable building and was claiming that the liquidator had failed to account to her for moneys paid by the purchaser, and she was denying having ever borrowed any money from the Company and rather was asserting that the books and records of the Company evidencing the liability were not true and correct.
82 Evidence not previously the subject of affidavits by the defendant was elicited in chief from her to the effect that if on 17 March 2006 Mark had asked her to make available the sum of, say $200,000, given a little bit of notice and a request from him as the Company's director, she would have been able to seek funds on the basis that the Fawcett Revesby property and the Abbottsford property were unencumbered, and would have done so.
83 It was put that this represented a resource available to the Company which should be taken into account in assessing its ability to pay its debts as and when they fell due and that it meant that the Company was not insolvent.
84 That submission is not accepted for the reasons which follow.
85 Firstly, I do not accept the defendant's evidence that she would have done so. The evidence was not the subject of any affidavit despite directions having been made and was elicited from the defendant orally in chief two years after the event. Apart from the fact that an ex post assertion of what she would have done should in any event be treated with circumspection (see eg. Rosenberg v Percival (2001) 205 CLR 434 and Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 581), I found the defendant to be an unsatisfactory witness and I do not accept her evidence as to what she would have done.
86 Her evidence was unsatisfactory in a number of significant respects including the following: under cross-examination she sought to recant from her evidence-in-chief that Mark had told her she did not have to worry about the debt because the sale of the property would pay out the loans; she gave unconvincing evidence that she had not borrowed money from the lender even though she accepted she was advised by solicitors as to her obligations as a borrower; she gave an unconvincing explanation for why it became necessary three days before the Company closed its doors to lodge a caveat on the property of her son and his wife; her evidence that she did not know that the Company was in any financial difficulty cannot stand with her completion of the forms which responded that the employees had been terminated because the Company was unable to pay them; and she gave implausible evidence of not having asked Mark why the business was being closed rather than being sold (if it was profitable) when, according to her, he had been offered $6 million for it just twelve months before.
87 Secondly, even if such an amount was available it was far exceeded by amounts which would become due only a few days later and which must in the present circumstances be taken into account in assessing the Company's ability to pay its debts as and when they fell due.
88 Thirdly, her subsequent conduct in refusing to pay the demountable building claim and the loan account claim when the Company demanded them, even via these proceedings, (which amounts she now accepts were payable) is hard to reconcile with her avowed willingness to have lent money to the Company to pay its creditors if Mark had asked.
89 Fourthly, as a matter of commercial reality, such a resource would only be available if there was a realistic possibility that the Company would ask for it. That was a matter for Mark and he never asked. Rather, he was the steward of a transaction which had the effect of discharging his parents' obligations leaving unsecured creditors without any prospect of payment.
90 On any commercially realistic view of things no such resource was available to the Company on 17 March 2006 and in any event, the Company became insolvent because of the transaction or because of the payments it made including the transaction on 17 March 2006.
91 Further, and in any event, the liquidator gave evidence which was not challenged that the Company failed to keep books and records. In addition the plaintiffs read paragraph 48 of an affidavit sworn by Mark on 22 February 2008 to the following effect:
"I am aware that the financial documents that Giles Woodgate has in his possession and control are not an accurate reflection of the financial state of MGB Chadd. Until 2004, MGB Chadd's financial accounts were prepared by its internal accountant, Ian Heggie. Ian Heggie's employment was later terminated as a consequence of misappropriation of funds and failing to keep accurate financial reports and recording and general incompetence. I then engaged Eldridge & Co to find out what amount Ian Heggie had misappropriate and what amounts he had fabricated on the financial records of MGB Chadd. I also engaged an accounting firm by the name of Mortimer & Co to reconstruct several years of accounting due to Ian Heggie's incompetence."
92 In the circumstances and in any event the Company is deemed to have been insolvent by reason of s 588E(4) of the Act.
The statutory defence
93 The defence under s 588FG(2) of the Act has, relevantly, two elements in respect of both of which the defendant bears the onus. The first is that at the time she became a party to the transaction she had no reasonable grounds for suspecting that the Company was insolvent at that time or would become insolvent by reason of entering into the transaction or a person doing an act for the purposes of giving effect to it. The second is that a reasonable person in her circumstances would have had no such grounds for so suspecting.
94 In my view, the defendant established neither element. I do not accept her evidence that she did not suspect that the Company was or would become insolvent and I consider that she had reasonable grounds for so suspecting. In addition, any reasonable person in her circumstances would, in my view, have had grounds to so suspect having regard to the following facts all of which she knew:
a the Company was being closed down rather than being sold;
b its staff including family members were being let go in circumstances where the Company was unable to pay them;
c she had lodged a caveat on her son's property two days before to protect her position under an agreement which has never been produced.
95 Her statutory defence fails.
THE UNREASONABLE DIRECTOR-RELATED TRANSACTION CLAIM
96 It was not put in issue that the transaction met the requirements of ss 588FDA(1)(a) and (b). Clearly there was a payment made by the Company to a close associate, or for the benefit of a close associate, of Mark (the Company's only director) namely his mother.
97 The only issue is whether, as contemplated by s 588FDA(1)(c) it may be expected that a reasonable person in the Company's circumstances would not have entered into the transaction having regard to:
a the benefits (if any) to the Company of entering into the transaction; and
b the detriment to the Company of entering into the transaction; and
c the respective benefits to the other parties to the transaction of entering into it; and
d any other relevant matter.
98 The primary submission put on behalf of the defendant was that the Court should infer that in order for the Company to have been in a position to sell its properties it would have had to have discharged the Fawcett loans from the lender. This, it was put, was because the lender would not (in circumstances where the defendant had an annual income of only $165,000) have agreed to the discharge of its mortgages over the Company's properties on payment to it of the amount secured only over them, leaving it with a debt owed by the Fawcetts of over $2.5 million secured only over their properties. It was put that the Court should infer that this would necessarily have been the lender's position.
99 I do not consider that it is open to make a finding that the lender would have behaved as the defendant submits given that:
a it was accepted that there was no evidence of the value of the Fawcett's properties;
b it was also accepted that there was no evidence that Mark, who would have been the person in charge of the transaction from the Company's perspective had ever asked the lender. He was not called;
c a reasonable person in the position of the Company would have asked the lender in any event;
d no one from the lender was called as to its policy or the position it would have taken and no documentary evidence proffered on that subject even though the Company (and presumably Mark) had had a relationship with the lender spanning some years;
e there was no evidence of the financial position of the estate of the deceased.
100 The benefit to the Company was that it was able to sell its properties and discharge its debts both to the lender and to the Fawcetts (by discharging their obligations to the lender).
101 The detriment to the Company was that it was left in a position where it was unable to satisfy its other non-secured creditors.
102 The benefit to the Fawcetts was that they received payment of their unsecured obligation in full in preference to the claims of other unsecured creditors.
103 Apart from the benefits and detriments referred to, the Court is to have regard to any other relevant matter.
104 In Skouloudis v Planet Enterprises (2002) 41 ACSR 369 Windeyer J considered s 588FB(1) of the Act (which is in the same terms as s 588FDA(1)(c)). At p 374 [14] His Honour referred to s 109H of the Act which requires a purposive approach to be taken and to the explanatory memorandum to the Corporate Law Reform Bill 1992 which, with respect to s 588FB(1), said
"The provision is specifically aimed at preventing companies disposing of their assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice."
105 His Honour also referred to what Young J had said in McDonald v Hanselmann (1998)28 ACSR 49 at 56 to the following effect:
"Where the purchaser is a related entity in the corporate sense or a relation by blood or by law in the individual sense, then the Court should look at the transaction far more closely and be less inclined to excuse the sale at an undervalue because of some commercial factor."
106 Similar considerations apply here where the transaction was by a company under the control of a son, and it inured to the substantial benefit of his parents and to the prejudice of unsecured creditors.
107 This is not a case of a sale at an undervalue. It is, however, a case of the Company under the stewardship of the son having conferred a benefit on his mother (and the estate of his father) in circumstances where legitimate unsecured creditors have been prejudiced. The Company disposed of its most significant assets. The beneficiaries were a secured lender to it, the Council for rates (as to part) and his parents. Significantly, although he swore an affidavit in the proceedings, Mark was not called as a witness. It may be inferred that his evidence would not have assisted the defendant.
108 There is no evidence that the Company took any steps to obtain from any source, including the defendant (with whom Mark undoubtedly had a close relationship at the time), any funds to alleviate the position of the other unsecured creditors who were left hanging out to dry.
109 In my view, no reasonable person in the Company's circumstances would have entered into the transaction. It was an unreasonable director-related transaction within the provisions of s 588FDA(1) of the Act.
CONCLUSION
110 There will be an order pursuant to s 588FF(1)(a) that the defendant is to pay to the Company the amount of $2,593,295.44 together with interest calculated from 17 March 2006.
111 There will be judgment for the Company against the defendant in the amounts of:
a $45,000 together with interest from 15 March 2006 to the date of judgment; and
b $136,500 together with interest from 17 November 2006 to the date of judgment.
112 The parties are to bring in Short Minutes reflecting this result.
113 I will hear the parties on costs.
114 The exhibits are to be returned.