Iliopoulos v BM2008 Pty Ltd

Background Circumstances 7 I can for present purposes oversimplify somewhat the factual setting. 8 (i) On 25 June 2008 BM sold its business to interests controlled by Mr Iliopoulos. A significant part of the purchase price was paid but several million dollars remained outstanding. 9 (ii) On 22 December 2008 a liquidator of BM was appointed pursuant to a members' voluntary winding up. By an agreement of 11 March 2009 an arbitrator was appointed to hear disputes between the parties to the sale agreement. It resulted in an award in the order of $2.5 million in favour of BM. On 19 November 2009 the award was made enforceable as a judgment of the Supreme Court of Victoria in the sum of $2,577,072.49. A costs order was also made. This judgment founded the bankruptcy notice. 10 (iii) The nominal share capital of BM (which has been registered for 30 or more years) comprised 100 A-class $2 shares and 99,900 B-class $2 shares. By February 1991 when a Mr Sartori purchased one A-class share for $2,500, only four such shares had been issued. Subsequently further shares of both classes were issued. Mr Sartori then acquired 1,249 B-class shares. The validity of those subsequent issues is to be contested in the Perth proceedings. Mr Sartori sold his one A-class and his B-class shares to Mr Iliopoulos and two of his companies "as joint proprietors" on 28 November 2009 for $2,500. On the same date Mr Sartori assigned to the same three purchasers "as joint proprietors" for the sum of $20, all his beneficial interests in all causes of action he had against BM, its directors and former directors and against another company, Ataquil Pty Ltd. It is noteworthy that the deed of assignment of the causes of action described particular claims Mr Sartori was entitled to bring against BM's directors and former directors and against Ataquil as "derivative actions" in the absence of those claims being brought by BM. This would appear to be a reference to the statutory derivative action of Part 2F.1A of the Corporations Act 2001 (Cth). I would note in passing that despite the terms of the share sale and of the assignment, Mr Iliopoulos has been treated by the parties both before his Honour and on this appeal as being the full beneficial owner both of the share for liquidation purposes, and of the choses in action.

"The cross-demand or set-off" 11 The cross-demand set up by Mr Iliopoulos is his entitlement to receive the proceeds of the distribution to members consequent upon the completion of the winding up of the respondent. As such, it is said, it is a contingent creditor of the respondent, the contingency being the completion of the winding up and the distribution of the surplus. That surplus, it seemingly is said, will be contrived by (inter alia) the realised product or value of causes of action vested in the company against its directors, former directors and Ataquil. 12 The two issues raised before the Federal Magistrate and on this appeal are (i) what was the proportional entitlement of Mr Iliopoulos to share in the distribution of the surplus in the hands of the liquidator on completion of the winding up; and (ii) will his "share" be equal to, or exceed, the amount of the judgment debt.

The Perth Federal Court proceedings and extending time 13 I have not been taken to the original application and statement of claim in this proceeding. From the affidavit of Mr Dye, the liquidator, it would appear that it was commenced in Mr Sartori's name on or about 16 December 2008. If they were not then, Mr Iliopoulos and his two "joint proprietors" are now parties to that proceeding. The statement of claim before his Honour alleged that the issue of further A-class and B-class shares beyond the 3 A-class shares issued when Mr Sartori acquired his share were invalidly issued in the breach of articles of association which, to put the matter inexactly, gave a right of first refusal to existing A-class shares. The object of this claim, as the Federal Magistrate appreciated, was to enhance greatly the extent of Mr Sartori's - hence Mr Iliopoulos' share in the surplus after winding up. It was a claim that he "owned" a third of BM. In the present proceedings, it is now conceded by the applicant that 4 A-class shares were validly issued and the claimed entitlement is one fourth of the surplus. 14 At the hearing of the appeal the appellant read an affidavit which exhibited a proposed further amended statement of claim. Leave to further amend has not yet been given by the docket judge in Perth. The burden of the claim now made is more far reaching than that before his Honour. Put shortly it alleges that at all relevant times there were only four lawful shareholders; the register of shareholders should be amended accordingly; the resolution of the "purported" members to put the company into voluntary liquidation was invalid; the liquidator was never lawfully appointed and did not have authority to commence the arbitration, issue a bankruptcy notice, etc. It is said the judgment was unlawfully entered in the Supreme Court of Victoria and should be set aside. An order is sought under s 482(1) of the Corporations Actterminating the winding up of BM. The claim now is said to be, amongst other things, one to set aside the judgment founding the bankruptcy notice. 15 I should indicate immediately that neither party has made submissions on this proposed pleading. The respondent has contended that it is irrelevant to the issues in this appeal which does not arise out of a s 41(6A) application. This said, the appellant has not sought to explain how the Federal Court in the Perth proceedings would have jurisdiction to set aside a judgment of a superior court of a State in what is in substance a proceeding under the Corporations Act: cf Residual Assco Group Ltd v Spalvins (2000) 202 CLR 629 at [72]-[75] and footnotes. The proposed claims are based, first and foremost, on the alleged invalidity of shares issues in breach of article 41 of BM's articles of association: see Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1. Accepting for present purposes the invalidity of the share issues, it has not been indicated what effect, if any, s 505 of the Corporations Act may have if the validity of the acts of the liquidator were to be called into question: see generally McPherson's Law of Company Liquidation [8.1360]. 16 At the hearing of this appeal, as I have noted, the appellant sought leave to amend its notice of motion to extend time to comply with the bankruptcy notice until the determination of the Perth proceedings. That application is opposed by the respondent. 17 For my own part, I do not consider that the appellant now should be granted any such extension. No application has to date been brought by Mr Iliopoulos under s 41(6A) of the Bankruptcy Act. If the proposed Perth claim be said to be in essence a claim to set aside the judgment in respect of which the bankruptcy notice was issued, it does not in form satisfy the requirements of s 41(6A)(a) and it appears in substance to be attended with considerable doubt at least in relation to the consequential relief sought, for example in relation to setting aside the judgment of the Supreme Court of Victoria or the alleged invalidity of the liquidator's acts. Moreover, though the validity of the share issues has been in question from late 2008, the consequential relief proposed to be sought has, without satisfactory explanation, only now been raised. The appellant has to date - and even on the appeal - relied upon his "set-off" etc to have the bankruptcy notice set aside. He is now seeking in effect to change horses in mid-stream. 18 I refuse the application to raise this new application for an extension of time to comply with the bankruptcy notice. I would, as a matter of discretion, have refused such an extension in any event.

The Appellant's Entitlement and the Distributable Surplus 19 These were the two issues before the Federal Magistrate and embody the issues on appeal. For present purposes I am prepared to assume that Mr Iliopoulos (and the other "joint proprietors") is entitled to a one fourth share in the distributable surplus. I do so because I am satisfied on the very slight material before me that Mr Iliopoulos has a sufficiently arguable case for rectification of BM's register under s 175 of the Corporations Act that, for the purposes of s 40(1)(g) of the Bankruptcy Act, it should be taken as providing the measure of his entitlement to participate in the distributable pool. 20 The Federal Magistrate, it ought be said, took a less benign view of Mr Iliopoulos' John Grant claim - he considered it faced "some very real forensic problems". I would have to say, though, that his reasons betray both misconceptions about the nature of nominal capital in a company and about the consideration given by Mr Sartori for his $2 share ($2,500). I would also note that the scope of the John Grant claim to set aside the share issues differs significantly from what the appellant now seeks to propound. That difference is of some significance in appreciating (a) how the liquidator arrived at his less generous view of Mr Iliopoulos' entitlement to share in the distributable surplus: see Dye, Affidavit 28 April 2010, [15]-[16]; and (b) how his Honour came to take a diminished view of the import of the John Grant claim. I need not enter further upon these matters. 21 Turning now to the distributable surplus after completion of the winding up, it was the evidence of Mr Dye, the liquidator, that at the time of swearing his affidavit BM had cash at the bank of $5,360,347. The total of the judgment debt ($2,577,072.49) and interest ($110,108.07) was $2,687,180.56. 22 I would note in passing that, in the distinctive circumstances of this matter, where the judgment debtor is also a contributory, the respondent has submitted that the judgment debt cannot be assumed to be an amount which is actually available for distribution, absent evidence that the debt will be paid. The Federal Magistrate observed that it was "a question of some considerable debate … whether [the debt] would be recoverable". 23 There are, on the appellant's case, three further "assets" of BM which need to be brought into the distributable pool. These are: (i) $1,000,000 held on trust for BM by a Ms Cox; (ii) a loan of $2,953,649.05 to PFL Properties Pty Ltd; and (iii) $1,836,848.54 held by Ataquil. It is necessary to deal with each of these separately.

(i) The Cox "trust" 24 This "asset" relates to a payment of $1 million made to Ms Cox a former director of, and a shareholder of, BM. It was, apparently, made shortly prior to BM being placed into voluntary liquidation and is said to be a redundancy payment. Mr Dye, the liquidator was appointed one of two joint and several liquidators on 22 December 2008. He became aware that there was an issue about this payment at the shareholders' meeting on that day. In cross-examination he said he had seen redundancy packages of similar amounts in similar circumstances in other liquidations and they were held not to be shams or automatically recoverable. He was also aware she was a shareholder. In his affidavit sworn on 28 April 2010 for the Federal Magistrates Court proceeding, Mr Dye indicated that he had not yet determined whether BM would commence proceedings against Ms Cox for the $1 million. He was of the opinion, though, that the proceeding would not produce any material return to shareholders - a view, I consider likely to have been influenced by his understanding of the scope of the Perth Federal Court proceedings. 25 The appellant's contention is that the payment received by Ms Cox was governed by s 200B of the Corporations Act which proscribed the giving of a benefit to a person in connection with that person's retirement from a board or managerial position in a company (not being a payment for past services exempted by s 200G) without member approval under s 200E. Under s 200J (in its 2008 form) the amount of the payment made in contravention of s 200B was to be taken as having been received by the person "in trust" for the company making the payment. 26 There is evidence, which was accepted by his Honour, that Mr Ladd (one of the former directors of BM) had put in place a mechanism to pay Ms Cox $1 million. Seemingly, this mechanism was abandoned and the payment was made instead by BM. Ms Cox was a director for s 200B purposes. There is no evidence that she has any of the "trust fund" still vested in her (if such it was). There is no evidence of any s 200E approval of the payment (if it was required). 27 I consider, on the evidence, that there may well be an arguable case that Ms Cox owes BM $1 million because of a contravention of s 200B, the payment seemingly not being a genuine payment of pension or a lump sum for past services under s 200G. However, that claim belongs to BM not to Mr Sartori (or Mr Iliopoulos as an assignee from him). Mr Sartori seems to have had some appreciation of this as evidenced by his references in the Deed of Assignment to the assignment of his rights to bring a "derivative action" should BM not make claims it allegedly had. Once BM went into voluntary liquidation, Mr Sartori lost his right to bring a derivative action under Part 2F.1A of the Corporations Act. The Court of Appeal of New South Wales has so held in Chahwan v Euphoric Pty Ltd (2008) 227 FLR 43. I am, for present purposes, required to follow that decision: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [135]. 28 Whether a claim is to be made by BM against Mr Cox is a matter for Mr Dye to decide: see generally Ford's Principles of Corporations Law, [11.265]. He had made no such decision at the time of the proceeding before the Federal Magistrate. As the Federal Magistrate observed (at [20]): The liquidator says he is not overly keen to sue, and if I may say so, I can understand why. He has about $5.5 million dollars to hand, and he says it is being eaten up somewhat rapidly by court cases. And that seems to me to be highly likely to be true. Be this as it may, if Mr Sartori/Mr Iliopoulos are dissatisfied with Mr Dye's reluctance to sue they can use the statutory procedures of s 477(6) and s 511 of the Corporations Act to request the Court to order the liquidator to begin proceedings. 29 The matter to be emphasised, though, is that I am not concerned in this appeal with such complaints as Mr Iliopoulos may have against Mr Dye. My concern is with determining whether he has a set-off etc equal to, or exceeding, the amount of the judgment debt. At the time of the proceeding before the Federal Magistrate - which is the time at which this is to be ascertained: Patane at [74]-[76] - it could not then (and it cannot now) reasonably be said that the $1 million ought in its entirety be included in the distributable pool of assets. One can only speculate as to what, in the circumstances, might be the likely realisable value to BM of such a claim against Ms Cox.

(ii) The loan to PFL Properties 30 From a document of unexplained provenance but said to be a balance sheet of BM of 31 December 2007, a loan to PFL Properties (a related entity) is recorded as a non-current asset. A copy of this document was exhibited to an affidavit of Ms Sideris an executive officer who has worked with Mr Iliopoulos since January 2006 and who says she is familiar with the books and records of BM and with documentation lodged with the Australian Securities and Investments Commission. 31 I note in passing that Mr Dye's evidence is that he does not have BM's books and records. Mr Dye said he was sure he had seen the 31 December 2007 balance sheet. The $2.953 million was not on the balance sheet at the date of his appointment 12 months later. He said in cross-examination: When I am given a balance sheet at the date of my appointment and it does not have that debt in there, you're asking me do I then go back through the records for the 12 months beforehand and see whether or not the trade receivables of $3 million were paid. No, I didn't. I didn't see that as my duty in a member's voluntary where there is no reason to suspect that what I'm given at the date of my appointment is not correct. He later said:

I'll say again, in a member's voluntary liquidation, you would accept the balance sheet that was produced to you as at the date of your appointment unless someone raised the question that you have just raised which is the first time it's been raised with me. 32 Put shortly, the appellant's contention is that as of August 2008 the sum in question had not been repaid and the cash position of the company is inconsistent with it having been repaid. It is to be inferred that the debt was written off by the directors for the benefit of PLF Properties and to the detriment of BM as a whole. The complaint seemingly, then, is one of breach of directors duties. 33 The Federal Magistrate accepted Mr Dye's evidence and, further, did not accept there was $2.953 million available to the company as asserted. 34 I am of a like view. Absent reason for suspicion in the context of a member's voluntary winding up Mr Dye cannot be criticised for his conduct - which is not in issue in any event. While there is an unsolved question as to what became of the debt, assuming there was one, there is no reason to suggest that BM was in consequence left with a bona fide claim against PLF Properties or its own directors in the amount of the debt. Even if there was, the claim would have been BM's not Mr Sartori's/Mr Iliopoulos'. And after BM went into liquidation neither of these gentlemen had any right to bring a statutory derivative action against PLF Properties or BM's directors on BM's behalf. 35 Having rejected the availability of the Cox trust and the PFL Properties loan as assets in the liquidation, the appellant's set-off and cross-demand fall short in any event of being equal to or exceeding the judgment debt. Nonetheless, I will consider briefly the third "asset" available to the liquidator. This also is an alleged composite of causes of actions available to BM against its directors and Ataquil though it is misleadingly described as "monies held by Ataquil".

(iii) Monies held by Ataquil 36 The assertion here is of a further $1,836,848 being available for distribution in the liquidation. It is founded on an alleged "sham factoring scheme" (Ms Sideris' description) practised by the directors of BM which siphoned off funds equal to 4 per cent of the amount payable to subcontractors who elected to take a discount of that percentage in return for early payment. 37 The two factoring schemes operated by BM were described in the reasons of the arbitrator for the award which gave rise to the judgment debt as follows: The old factoring scheme operated for many years and ceased in September 2007. A driver when he completed his details form when first engaged by the vendor [BM] could indicate he wished to factor his debt. He would then complete a power of attorney in favour of Mrs Cox which enabled her to assign his debt to H.I. Investments and if he opted to do so at the end of the freight delivery he was then paid 96% of his debt within a few days of completion. H.I. Investments made 4% and the vendor charged it an administration fee which was recorded in its accounts. The scheme was a financial success for H.I. Investments which made about $100,000 plus profit each year and Mrs Cox who had units in the trust received one-third in the vicinity of approximately $30,000 each year. When the factoring scheme ceased, in September 2007, the vendor put in place an upfront payment scheme. Instead of the debt being assigned, the vendor paid the driver upon request, 96% of his debt. 38 The case put by the appellant is that, to précis the submissions filed: (i) it has recently been discovered in analysing the accounting records of BM which are in the appellant's possession that in fact the Scheme never operated in the manner described by Mr Gillard QC [the arbitrator]. Mr Gillard understood that when a driver wanted payment under the scheme, that his debt would be assigned to HI Investments, that HI Investments would pay the subcontractor, that the vendor company (BM) would in accordance with its usual trading terms pay the full debt less an administration fee to HI Investments, whereupon HI Investments would make a 4% profit on the transaction. (ii) What is now known is that prior to September 2007, the debts were not factored by HI Investments as HI Investments did not pay the sub-contractors the 96%, but rather it was BM that paid the 96% and the 4% "profit" was skimmed off and paid by BM to HI Investments. HI Investments did not have a bank account, and the transactions were put through as journal entries once a year. (iii) After September 2007, BM continued to pay the 96% and all that changed was that the 4% profit was made, as should it always have been the case, rather than being skimmed off and diverted to the directors through their own company Ataquil trading as HI Investments. (iv) The turnover represented by the 4% is what was diverted; it should be noted that this is not the same as the profit made by Ataquil as the directors of Ataquil could put through whatever expenses they considered could be put through Ataquil to reduce its taxable income. In the hands of BM however, the lost profit was equal to the 4%. (v) The 4% skimming raises a classic Barnes v Addy claim and forms part of the assets of BM to which the appellant is entitled to share. In the period 1 July 2000 to 30 June 2007 the Company diverted at least $1,836,848.54 in payments to Ataquil. 39 The Barnes v Addy claim as put is seemingly a claim that Ataquil knowingly received and became chargeable with trust property, being fully aware of the directors of BM having diverted 4 per cent of the turnover of the scheme to Ataquil in breach of their fiduciary duty to BM. 40 The documentation relied upon by the appellant are BM's books and records which are in Mr Iliopoulos', not BM's or Mr Dye's, possession. Exhibited to an affidavit of Ms Sideris of 14 May 2010 is a 225 page document (said to be prepared by her from BM's accounting records) which she describes as a "Summary of Sub-Contractors that Utilised the "Factoring" arrangement with HI Investments For the Period 1 July 2000 to 30 June 2007". Additionally there is a voluminous document which is described as the "Handwritten factoring register" maintained by BM. What Ms Sideris' description of these documents illustrates is the aptness of Mr Dye's evidence that running a factoring scheme itself would cost money. 41 There are four comments I wish to make about the "skimming" claim. First, it seems to assume that there are assets in Ataquil's hands representing some or all of BM's diverted money. There is no evidence of this. It is more than likely that most, if not all of any claim BM may have against Ataquil will be for equitable compensation. Given the length of the period concerned it may well be very expensive to prosecute. There is no evidence of whether Ataquil is a deep pocketed defendant. Secondly, the documentation produced or relied upon by Ms Sideris was only supplied to the respondent the day before the hearing before the Federal Magistrate and was only provided to Mr Dye at the hearing. He was understandably in no position to make informed observations upon what was alleged. Thirdly, as I have indicated previously in relation to the Cox trust and the PFL Properties loan, it is for Mr Dye, not Mr Sartori/Mr Iliopoulos to decide whether in the circumstances a claim against Ataquil or others would be warranted. The appellant cannot bring a derivative action in respect of the claim. Having said this it may or may not be the case that the alleged "factoring" arrangements excite suspicion. This is a matter for Mr Dye. Even assuming the arrangement was other than it appeared and was accepted to be by the arbitrator, it may well be the case that all appropriate disclosures had been made for fiduciary law purposes. What may appear to be guilty, may prove to be innocent. Finally, what cannot be said on the evidence before me is that such claims as BM may have against Ataquil or others will realise a net accretion to the distributable pool of $1,836,848.54 as the appellant contends. I would anticipate that the costs of prosecuting a claim for equitable compensation would, in any event, be significant. Mr Dye has indicated in his affidavit (prepared before he was shown Ms Sideris' documents) that BM does not intend to commence a proceeding in respect of this claim. He did not see much merit in the claim or as being in the interest of BM. If Mr Iliopoulos wishes to enforce another course on Mr Dye, his remedy lies elsewhere, not in this proceeding.

Conclusion 42 I am not satisfied that any of the three "assets" relied upon by the appellant will as of course add to the value in the distributable fund in the sums contended for by Mr Iliopoulos. I equally am not satisfied that at the time for meeting the s 40(1)(g) requirement that the set-off and cross-demand be equal to or exceed the amount of the judgment debt, the requirement was met. Accordingly I refuse the application to set aside the bankruptcy notice. 43 I am conscious I have said little of the Federal Magistrate's reasons for decision and of the grounds of appeal propounded by the appellant. Both have largely fallen by the wayside. Much in the notice of appeal has little bearing upon the issues that have been agitated before me. As I said at the outset, the matter has metamorphosed somewhat since the hearing before his Honour. 44 The extension of time for compliance with the requirement of the bankruptcy notice was until the hearing and determination of this appeal. It will not be further extended. 45 I will order that the appeal be dismissed and that the appellant pay the respondent's costs of the appeal. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.