Investwell Pty Ltd (in liquidation) v Daryl Leon Roberts

EX TEMPORE Judgment 1HIS HONOUR: The second plaintiff ("the liquidator") is the liquidator of the first plaintiff company ("the company") which was placed under winding up by order of the Court on 12 March 2007. At all material times the directors and shareholders of the company were the first defendant Daryl Leon Roberts ("Mr Roberts"), the first respondent James Patrick Normoyle ("Mr Normoyle") and the second respondent Anne-Maree Elizabeth Huxley ("Ms Huxley"). 2On 21 June 2001 the company purchased land at 1 Midway Drive, Maroubra, New South Wales with a view to developing on it five home units ("the project"). The company funded the purchase price of $815,000 by a combination of its own funds, money advanced by purchasers of the units and money borrowed from Holiday Coast Credit Union ("the credit union"). 3The company entered into contracts of sale for the units at the following prices: unit 1, $439,000; unit 2, $435,000; unit 3, $412,500; unit 4, $412,500 and unit 5, $433,500. Apparently, the loan from the credit union was obtained on the basis of these prices. However, the purchase price actually received from the purchasers was somewhat less, apparently as a result of private arrangements between the company and the purchasers of properties in relation to stamp duty. It is not presently necessary to delve further into that course of conduct. 4On 25 July 2001 the company contracted with a builder to build the units and building thereafter commenced. 5On 22 April 2002 Mr Roberts, Mr Normoyle, Ms Huxley and the company entered into a Directors & Shareholders Agreement ("the agreement") which recorded, amongst others, that the project required a higher level of funding and supporting security than the directors originally anticipated and that Mr Roberts had agreed to use his best endeavours to provide such further funds and security for the project as he may in his absolute discretion be able to raise or provide on the company's behalf from time to time. 6Clause 4 of the agreement provided that the company must repay to Mr Roberts on demand the outstanding amount detailed in annexure A to the agreement and that the company must also repay to Mr Roberts on demand all other amounts that Mr Roberts paid or directed to be paid to or on behalf of or at the company's direction for the project from time to time after the date shown in annexure A. 7Annexure A was entitled "Roberts' Funds as at 16/4/02". The agreement defines Roberts' Funds to mean all of the moneys or debts due and payable to Mr Roberts or at his direction from time to time under cls 3, 4 and 5 of the agreement. The agreement referred to the company as Investwell. 8Clause 21 of the agreement is in the following terms: The parties agree that if requested by Roberts at any time Investwell must at its own expense immediately grant to Roberts a mortgage over the land, an equitable mortgage or charge over Investwell's assets and undertakings and/or such other security as Roberts may consider necessary. Any such securities must be in a form acceptable to Roberts' legal advisers. 9Clause 22 of the agreement is in the following terms: Normoyle and Huxley agree to jointly and severally indemnify Roberts against any claim, action, damage, loss, liability, cost (including legal costs on an indemnity basis), expense or payment that Roberts suffers or incurs following any failure of Investwell to pay all or part of Roberts' Funds or to comply with any of its other obligations under this Deed or any failure of Normoyle or Huxley to comply with any of their respective obligations under this Deed. Normoyle and Huxley also agree to charge any real property they may own now or in the future to secure any amounts they owe to Roberts from time to time. 10On 5 September 2002 the builder issued a final progress claim for $104,191. 11On or about 14 October 2002 the company purported to terminate the building contract and offered the builder $20,000 in settlement of his claim. 12In January 2003 the builder commenced proceedings against the company and lodged a caveat on the title to the land. 13On 25 February 2003 the company completed the sales of units 3, 4 and 5 and it completed the sale of unit 2 the following day. 14On 12 March 2003 the company settled the sale of unit 1 for a purchase price of $409,000 from which it discharged the outstanding balance owed to the credit union and paid to Mr Roberts the sum of $164,306.83 ("the Roberts' payment"). By this time the company had incurred a significant amount of expenses which had not been anticipated by its directors. 15In February 2003, in proceedings between the company and the builder concerning the caveat, Mr Roberts swore an affidavit that the company was paying interest to the credit union on the outstanding amount of $1,501,517.19 pursuant to a first registered mortgage. The caveat was thereafter removed allowing the settlement of the sale of the units to proceed. 16On 26 April 2006 the builder obtained judgment for $101,773 against the company. 17On 16 January 2007 the Australian Taxation Office issued a Statutory Demand against the company which led to its winding up on 12 March 2007. 18By these proceedings the liquidator and the company seek to recover from Mr Roberts an amount equivalent to the Roberts' payment by way of an order under s 588FF(1)(a) of the Corporations Act 2001 (Cth) ("the Act") which provides that where, on the application of a company's liquidator, a Court is satisfied that a transaction of the company is voidable because of s 588FE of the Act, the Court may make 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. 19The liquidator and the company pleaded, in addition, a claim based on an asserted breach by Mr Roberts of fiduciary duty, but this was correctly abandoned. 20Section 588FE(4) of the Act provides that the transaction is voidable if it is an insolvent transaction of the company, a related entity of the company is a party to it and it was entered into, or an act was done for the purpose of giving effect to it, during the four years ending on the relation-back day. Mr Roberts is a related entity of the company and the relation-back day in the present case is 22 February 2007 when the winding up application was filed. There was no issue between the parties that the Roberts' payment was made within the relation-back period 21Section 588FC of the Act provides, relevantly, that a transaction of a company is an insolvent transaction if it is an unfair preference given by the company. 22Section 588FA(1) of the Act provides, relevantly, that 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 were set aside and the creditor were to prove for the debt in a winding up of the company (emphasis added) 23Relevantly, for present purposes, an insolvent transaction is only an insolvent transaction if it is an unfair preference given by the company and the transaction is entered into when the company is insolvent or is deemed to be, or the company becomes, insolvent by entering into it. Under s 95A(1) of the Act, 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. Under s 95A(2) of the Act, a person who is not solvent is insolvent. 24Under s 588E(3) of the Act, if a company is being wound up and it is proved that it was insolvent at a particular time during the twelve months ending on the relation-back day it must be presumed that the company was insolvent throughout the period beginning at that time and ending on at that day. 25The liquidator claims that the Roberts' payment was an unfair preference. 26By Originating Process and Amended Points of Claim, Mr Roberts cross-claims against Mr Normoyle and Ms Huxley under the indemnity provided in the agreement. He contends that to the extent that the claim against him is successful, the outstanding balance of the moneys owed to him will increase and that Mr Normoyle and Ms Huxley are obliged to indemnify him in respect of that amount. 27Mr Roberts had pleaded, in addition, the defence provided for in s 588FA(3) of the Act which is available where the transaction in question formed part of a continuing business relationship and contra-transactions can be netted off. However, he recently indicated to the other parties his intention to abandon that defence and reaffirmed his abandonment today. To the extent that this defence succeeded, Mr Normoyle and Ms Huxley would have been pro tanto benefited by a reduction in any liability they might have on the cross-claim. 28During the course of the hearing, counsel for Mr Normoyle and Ms Huxley informed the Court from the bar table that they had assumed that this defence would be run and now wish to plead as the sole defence to Mr Roberts' claim against them on the indemnity that Mr Roberts could and, acting reasonably, should have run this defence and that his failure to do so has the effect of pro tanto excusing them from liability under the indemnity. 29In the circumstances I ruled that there would be tried at the present hearing all issues between the plaintiffs and Mr Roberts but that there would be left over for later determination the sole issue (which Mr Normoyle and Ms Huxley must now plead) of whether they are excused from paying any amount otherwise payable under the indemnity because Mr Roberts abandoned the statutory defence. 30Against the plaintiffs' claim, Mr Roberts puts in issue only two matters. Firstly, he denies that the company was insolvent as at the date of the Roberts' payment. Secondly, he puts that his claim against the company was not unsecured (as required by s 588FA(1)(b) of the Act) because cl 21 of the agreement confers on him security for it. 31The security argument can be briefly disposed of. Clause 21 of the agreement provides for security to be given by the company to Mr Roberts if requested by Mr Roberts at any time. The evidence established that Mr Roberts at no time requested any such security. Absent such a demand, the company was not obliged to give it. The moneys owed to him by the company were therefore unsecured at all times. 32The evidence also clearly establishes that the company was insolvent as at the date of the Roberts' payment. 33The unchallenged evidence of the liquidator is that as at the date of the Roberts' payment the only assets of the company were the net proceeds of sale of the properties amounting to $164,306.83 and office equipment to the written down value of $4,955, resulting in total assets of $169,261.83. On the other hand, the debts of the company, all of which were payable at that time were outstanding GST of $55,399, loans to Mr Roberts, Mr Normoyle and Ms Huxley of $332,456.33, $7,739.79 and $23,358.09 respectively and $104,191 owed to the builder, making a total of $523,144.21. This is a significant deficit. 34Mr Roberts accepted that on payment of the Roberts' payment, the company had no cash to pay any of the debts which it then owed. 35The financial statements of the company as at 30 June 2002 reflect negative equity of $198,300 and a net loss for the year of $95,128. 36This evidence (taken together with Roberts' evidence in the caveat proceedings) establishes, whether on the traditional cash flow based test, an assets based test or a combination of the two, that the company was insolvent as at the date of the Roberts' payment; see Sims v Deputy Commissioner of Taxation (2007) 69 ATR 186 at [117] and following. 37In written submissions provided by Mr Roberts he put that the company was not solvent for the reasons that it had alternative sources of income, that apart from the one development in which it was involved, it was also working under a Licensed Real Estate Agent and was involved in selling investment properties off the plan and other completed properties. He submitted that the company was also acting as a loan broker through lenders and had the potential and good prospects for continuing this and future income streams by way of commissions from future sales and "bank loan trails and commissions". He submitted further that there were also potential funds available from the company's directors including himself. 38He accepted, however, that there was no evidence to substantiate these matters. 39Apart from this, it cannot be accepted in any event that there was any support available from the directors. This is confirmed by the fact that when it came to the company's denouement, none of the directors put up his or her hand to facilitate the payment by the company of its debts, at least those owed to the Australian Taxation Office and to the builder. 40In these circumstances, the liquidator is entitled to succeed against Mr Roberts and I will order accordingly. 41The plaintiffs and Mr Roberts are to bring in Short Minutes to record this outcome.