In the Matter of Lesvos Pty Ltd [2012] NSWSC 1288

Supreme Court of NSW|2012-09-25|Before: Brereton J

Judgment (ex tempore) 1HIS HONOUR: By originating process filed on 15 August 2011, the plaintiff Lesvos Enterprises Pty Limited (in liquidation) and its liquidator Mitchell Warren Ball seek orders against the defendants Maria Alexiou and Arthur Alexiou, that they pay to the company the sum of $326,131.52, being an amount equivalent to amounts paid to the defendants from funds of Lesvos. The proceedings are brought pursuant to (Cth) Corporations Act 2001, Pt. 5.7B, and in particular s 588FDA (unreasonable director related transactions). The first defendant, Ms Alexiou - who is also known as Maria Mihas - is and was at all relevant times the sole director of Lesvos and the second defendant is her husband.

Background 2On 10 October 2000, the second defendant transferred a property, which, so far as I can ascertain from the evidence, is the property at XXXX ("Lot 158"), to Lesvos, for a consideration of $165,000. On the same date Lesvos mortgaged Lot 158 to Permanent Custodians Limited, securing advances of $100,000. This was said to be collateral security, implying that there was other security for the same advance. 3On 8 December 2000, Lesvos and an associated entity commenced proceedings in this Court against Penrith White Water Stadium Limited. 4By 17 September 2002, the first defendant was the owner of a property at XXXX ("Lot 19"). 5By August 2004, the defendants were jointly indebted to Wizard Home Loans for a total of $386,525. These were said to be mortgage loans, and were attributed registration numbers in some of the documentation, but were not registered on the title of Lot 19, and the probability is that they were secured on Lot 158. 6On 20 August 2004, a residential loan agreement was made between St George and the defendants for an advance of $432,000. It was a condition of the loan that existing loans from Wizard, totalling $386,525, be discharged, which therefore leaves a surplus of approximately $48,000. The security for the St George loan was the property at Lot 19. The purpose of the loan was said to be "refinance". The resultant loan constituted account XXXX ("Home Loan 70.00"). 7On 3 August 2005, Lesvos mortgaged Lot 158 to Permanent Custodians for $300,000, said to be a refinance. It is not entirely clear whether this was additional to, or inclusive of, the original $100,000. 8On 7 September 2006, a further residential loan agreement was made between St George and the defendants, for an advance of $150,000. The purpose of the loan was said to be "access equity". The security again was Lot 19. The defendants signed a business purpose declaration, to the effect that the purpose of the loan was for business or investment purposes. The loan made pursuant to this agreement constituted account XXXX ("Home Loan 70.01"). In connection with this loan, an internal instruction sheet of St George, made on 8 September 2006, contained an annotation: "Very very urgent, customer needs money Tuesday morning (court issue)". On 11 September 2006, St George issued a bank guarantee in favour of the Supreme Court, by way of security for costs in the Penrith White Water proceedings, in the sum of $187,500. On or about 13 September 2006, pursuant to an order of the Court in the Penrith White Water proceedings, Lesvos gave security for costs by that means and in that sum. 9Lesvos succeeded in the Penrith White Water proceedings at first instance, pursuant to a judgment given on 12 April 2007; however, that was overturned by the Court of Appeal, on 15 August 2007. 10In connection with a further application for finance, made in November 2007, St George conducted a review of the defendants' position on 15 November 2007. It recorded that the purpose of the finance application then made was: Provide commercial bill for $650,000 to refinance Wizard loan for $300,000, clear [Home Loan 70.01] of $150,000 and reduce [Home Loan 70.00] by $200,000 to $218,000. Provision was also made for reduction of credit card debt by $15,000. The analysis of group exposure included an exposure of Lesvos Pty Limited of $187,500, which corresponds with the amount of the security for costs, and a cash security deed for that amount given by the defendants. 11On 11 December 2007, St George made a facility offer to Lesvos, which was accepted on behalf of Lesvos by the defendants, for a "commercial bill acceptance discount" facility of $520,000. This offer stipulated that the security was: (1) First registered fixed and floating charge offer the assets, undertakings of Lesvos Enterprises Pty Limited (proposed), (2) First registered property real property mortgage by Lesvos Enterprises Pty Limited over [Lot 158] (proposed), (3) Guarantee and indemnity limited to the amount of $708,000 given by Arthur Alexiou and Maria Alexiou (proposed), (4) Cash security deed for $104,000 given by Arthur Alexiou and Maria Alexiou (proposed). The reference to the sum of $708,000 as the limit of the guarantee and indemnity suggests that the total indebtedness of Lesvos to St George exceeded the facility amount of $520,000. 12On 14 December 2007, the High Court of Australia refused Lesvos' application for special leave to appeal from the judgment of the Court of Appeal in the Penrith White Water proceedings. 13On 7 January 2008, St George made advances to or as directed by Lesvos under the commercial bill facility. The net proceeds were deposited into account XXXX ("the 833 Account"), which other evidence shows to be an account in the name of the first defendant. From that account, various disbursements were made, including to Permanent Custodians Limited in the sum of $302,870. Although I can not be sure, the coincidence of references to Wizard and Permanent Custodians suggests that Permanent Custodians was the nominee or mortgagee on title in the interests of the Wizard loan. In any event, no claim is made in respect of that payment, which presumably discharged the encumbrance on Lot 158. 14However, payments were also made from that account, described as follows: 1.Close/payout [Home Loan 70.01] - $152,131.52. 2.Deposit to [Home Loan 70.00] - $70,000. 3.Deposit to term deposit account XXXX ["the 749 Account"] - $104,000. 15It is these payments that are the subject of the present application. As will be recognised, Home Loan 70.00 and Home Loan 70.01 are the accounts in respect of the two residential loan agreements to which I have referred. The amount deposited to the 749 Account corresponds with the amount stipulated for in the offer of 11 December 2007 to establish the cash security deed to secure the advance, and presumably other exposure of Lesvos to St George. 16On 24 April 2008, Lesvos transferred Lot 158 to Erica Mihas, apparently for $520,000. While the coincidence of that amount and the amount of the bill facility, and the coincidence of the surname of the transferee with that of the name that the first defendant has sometimes used, is striking, this transaction is not impugned in the present proceedings. 17On 29 May 2008, Lesvos was informed that its estimated costs liability as a result of its ultimate failure in the Penrith White Water proceedings was $1.2 million. Those costs were ultimately assessed, on 12 September 2008, at $866,858.55. Meanwhile, on 16 September 2008, the shareholders of Lesvos resolved that it be wound up, and the second plaintiff was appointed its liquidator. On 30 April 2009, the security for costs guarantee was called up and paid out to the successful defendants, in the sum of $187,500.

The unfair preference case 18The plaintiffs' case, in short, is that the three sums paid out from the 833 Account on 7 January 2008, to which I have referred, were paid into accounts in the name of the defendants, being directors of Lesvos, for their benefit and for no apparent benefit to the company, which, on the other hand, incurred the detriment of the liability to repay those amounts to St George. The defendants' case, though the evidence barely articulated it, was that these amounts were paid to them by way of repayment or reimbursement of moneys that they had expended from their personal resources to fund the Penrith White Water proceedings for the benefit of Lesvos. 19Corporations Act, s 588FDA, provides as follows: Unreasonable director-related transactions (1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if: (a) the transaction is: (i) a payment made by the company; or (ii) a conveyance, transfer or other disposition by the company of property of the company; or (iii) the issue of securities by the company; or (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and (b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or (ii) a close associate of a director of the company; or (iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and (c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (i) the benefits (if any) to the company of entering into the transaction; and (ii) the detriment to the company of entering into the transaction; and (iii) the respective benefits to other parties to the transaction of entering into it; and (iv) any other relevant matter. The obligation referred to in subparagraph (a)(iv) may be a contingent obligation. Note: Subparagraph (a)(iv) - This would include, for example, granting options over shares in the company. (2) To avoid doubt, if: (a) the transaction is a payment, disposition or issue; and (b) the transaction is entered into for the purpose of meeting an obligation the company has incurred; the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred). (3) A transaction may be an unreasonable director-related transaction because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction 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. 20Section 588FE provides as follows: Voidable transactions (1) If a company is being wound up: (a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and (b) a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003. ... (6A) The transaction is voidable if: (a) it is an unreasonable director-related transaction of the company; and (b) it was entered into, or an act was done for the purposes of giving effect to it: (i) during the 4 years ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began. 21Section 588FF relevantly provides as follows: Courts may make orders about voidable transactions (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; ... (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction; ... (4) If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between: (a) the total value of the benefits provided by the company under the transaction; and (b) the value (if any) that it may be expected that a reasonable person in the company's circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c). 22As the plaintiff correctly submits, a liquidator claiming relief under s 588FDA is not required to establish insolvency, and defences such as good faith and reasonable grounds are not applicable. Each of the payments to which I have referred was a payment made by the company, and/or a disposition by the company of property of the company. Each of those payments was made, if not to a director or close associate of a director, at least to a person, namely the relevant bank, on behalf of, or for the benefit of, a director (being the first defendant) or a close associate of a director (being the second defendant). 23Section 588FDA(2) requires that where the transaction is a payment entered into for the purpose of meeting an obligation the company has incurred, the test under paragraph (1)(c) as to whether it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction is to be applied taking into account the circumstances as they exist at the time when the payment is made, rather than when the obligation was incurred. 24Prima facie, the evidence is that each of the payments was made to an account of which the defendants were the owners, and benefit to the company is not apparent. However, the defendants contend that a hypothesis not less probable than that the payments were not for the benefit of the company can be established by reference to a number of elements of the evidence. In this respect, it is useful to address each of the payments separately.

The payment to Home Loan 70.01 25The first is the payment of $152,131.52, which was applied to discharge Home Loan 70.01. To identify whether the payment in discharge of that loan was for the benefit of Lesvos, or the benefit of the directors personally, it is necessary to appreciate for what purpose the indebtedness reflected in that account was incurred in the first place. The timing of the opening of the account, a few days before the security for costs was paid into Court on 13 September, and the guarantee that provided that security was issued on 11 September; the stated purpose being to "access equity", as distinct from "re-finance" or "home loan"; the amount of $150,000, which is less than the amount of the security for costs of $187,500; and, particularly, the contemporaneous instruction sheet, which refers to the moneys being required very urgently in connection with a Court issue, together provide a sound basis for a hypothesis that those funds were borrowed and applied for the purposes of funding the security for costs required to be given by the company in the Penrith Whitewater proceedings. 26On the whole of the evidence, notwithstanding the paucity of that offered by the defendants, I am not satisfied that it is more probable than not that the purpose of that loan was for the benefit of the defendants personally as distinct from for the benefit of the company. It follows that I am not satisfied that repayment of that loan was other than the discharge of a debt due by the company to the defendants, arising from their having advanced funds to the company in order to enable it to provide security for costs. Bearing in mind that while the company had failed in the proceedings, and that while it would have been foreseeable that it would have a costs liability as a result, there was then no quantified liability for the costs of the other party. I do not think it can be said that a reasonable person in the company's circumstances would not then have made a payment that had the effect of discharging a debt of the company. The benefit to the company of the transaction was the discharge of a debt, which it owed in an amount equal to the amount paid. 27This payment is not shown to have been other than a full value transaction. I am therefore not satisfied that the payment of the $152,000 was an unreasonable director related transaction.

The payment to the 749 Account 28So far as the payment of $104,000 to the 749 Account is concerned, bearing in mind the correspondence of that amount with the amount required to establish the security for the advance, there is a strong basis for a reasonable hypothesis that the $104,000, though paid into an account in the name of the defendants, was so paid in order to enable them to give the security stipulated for, so that the company could procure the advance and retain its other facilities with St George. Again, the timing and the concurrence of the amount provide a reasonable basis for that hypothesis, notwithstanding the paucity of the defendants' evidence. 29I am not satisfied that the $104,000 was applied otherwise than to provide security for an advance to the company, and therefore was of benefit to the company equivalent in value to the amount of the transaction. Again, it can not be said that a reasonable person in the position of the company at that time would not have entered into that transaction, or made that payment, which is not shown to be other than a full value transaction.

The payment to Home Loan 70.00 30So far as the $70,000 is concerned, this was paid into Home Loan 70.00. That loan account appears to have had its origin in the refinance of earlier Wizard loans. There is nothing in the evidence to provide a basis for a supposition or hypothesis that that loan account was used to fund the Penrith Whitewater proceedings. To the contrary, so far as the evidence goes, the more probable hypothesis is that it refinanced a home loan with which the subject property was purchased. I am unable to find any reasonable basis for a hypothesis that there was any benefit to Lesvos, as distinct from the defendants personally, from that payment, or any basis for thinking that it discharged any liability of Lesvos to them. 31It seems to me that the plaintiffs have established that a reasonable person in the company's circumstances would not have entered into the $70,000 transaction. There was no benefit to the company in entering into the transaction. There was detriment to the extent of $70,000. There were benefits to the directors, and only to the directors, from entering into that transaction. 32Accordingly, it seems to me that the plaintiffs succeed in respect of the payment of $70,000.

Orders 33For the above reasons, my orders are: (1)Declare that the transaction comprising the payment of $70,000 made on or about 7 January 2008 to Account 70.00 was an unreasonable director related transaction for the purposes of (Cth) Corporations Act 2001, s 588FDA, and a voidable transaction for the purposes of Corporations Act s 588FE(6A). (2)Order pursuant to Corporations Act s 588FF(1)(a) that the defendants pay to the first plaintiff the sum of $70,000 together with interest pursuant to (NSW) Civil Procedure Act 2005, s 100, of $29,706.36, being a total of $99,706.36.

Costs 34The plaintiffs have succeeded in the proceedings, although only for about 25 per cent of the amount that they originally claimed. On the other hand, there is no indication that any offer was ever made by the defendants, so the plaintiffs had to come to Court to obtain such success as they did. 35The plaintiffs repeatedly explained in correspondence the basis of their application, and offered the defendants an opportunity to explain their position, and those requests did not elicit meaningful responses, nor did notices to produce elicit documents that explained the position, nor did the defendants' evidence really explain the position. 36Insofar as the plaintiffs have proceeded in respect of the parts of the claim on which they failed, I think that must be largely attributable to the defendants' failure at any earlier stage to proffer any satisfactory explanation of how the funds had been applied. In those circumstances, I do not think there is reason to deprive the plaintiffs of the costs that they incurred in bringing the proceedings, in which they have been at least partially successful. 37I order that the defendants pay the plaintiffs' costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 May 2013

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