The claim under Pt 5.7B: consideration
90 The appellants submitted that the judge was in error in saying in his [31] that the plaintiff's allegation was in terms that the $555,000 was paid to Mr Baloglow by Mr Kalls and not by KE, an error which they said flowed from the emphasised portion of his description of element (c) in the composite transaction involving payment by Mr Kalls to Mr Baloglow. They said that the allegations in the amended statement of claim had not characterised the payment as a payment by Mr Kalls, but rather as a payment of money received by KE in satisfaction of the obligations of Mr Kalls and Mr Kaliaropoulos under the December 1995 deed; that the judge had misled himself into characterising what happened as payment by KE to Mr Kalls followed by payment by Mr Kalls to Mr Baloglow, with the consequence that he did not regard the payment by Mr Kalls to Mr Baloglow as part of a transaction of KE or AA. They said that the correct vital element was element (f) in the composite transaction.
91 There is force in the proposition that the allegations in the amended statement of claim had not characterised the payment as a payment by Mr Kalls. Their thrust was payment by KE to Mr Baloglow. But the judge's subparas (a) to (h) reproduced the paragraphs in the plaintiffs' written submissions in which they set out "the dealings that made up the transaction". He can not be criticised for taking up the way in which the plaintiffs put the transaction in submissions, which was indeed in terms that the payment was by Mr Kalls.
92 The judge said also that payment to Mr Baloglow by Mr Kalls and not by KE was "clear on the facts". This followed from his view that there had been an advance by KE to Mr Kalls, Mr Kalls then paying the money to Mr Baloglow.
93 In written and oral submissions made to the judge the plaintiffs had disclaimed a case that the $555,000 was lent by KE to Mr Kalls. Mr Baloglow had contended for that conclusion, indeed for the conclusion that the loan was to Mr Kalls and Mr Kaliaropoulos. He plainly enough did so in aid of his submissions to the effect that it had not been shown that the transaction was an uncommercial transaction, and no breach of fiduciary duty had been established, because it had not been shown that Mr Kalls was unable to repay and Mr Kaliaropoulos was able to repay.
94 It may have been that the judge saw too much in the description of element (c) in the composite transaction, and took it that payment by Mr Kalls to Mr Baloglow meant that the money had been lent to Mr Kalls. It does not follow. There could have been plain misappropriation by Mr Kalls, and dissection into payment by KE to Mr Kalls and by Mr Kalls to Mr Baloglow was in the circumstances rather artificial.
95 The appellants submitted that the judge's view that Mr Kalls received the $555,000 from KE and then paid it to Mr Baloglow was incorrect, and that the correct view was that there was a payment by KE to Mr Baloglow which was part of a transaction of KE or AA. As a fallback position, they submitted that even if there were payment by KE to Mr Kalls by way of loan, and then payment by Mr Kalls to Mr Baloglow, the payment to Mr Baloglow via Mr Kalls was part of a transaction of KE or AA. Mr Baloglow sought to uphold that there had been a loan from KE to Mr Kalls, as had been his contention before the judge, and submitted that it was not open to the appellants now to maintain their fallback position because it was contrary to the way their case had been put in the amended statement of claim and in the conduct of the trial.
96 The parties put submissions, more generally, on whether there was a transaction of KE or AA. What is in issue is the Transaction, and in my opinion payment by KE to Mr Kalls by way of loan and by Mr Kalls to Mr Baloglow, if that were the correct view of what occurred, is not determinative of the question whether the Transaction was a transaction of KE or AA. When the judge asked whether the payment by Mr Kalls to Mr Baloglow was part of a transaction of KE or AA, he did not ask that question. As appears later in these reasons, I do not think it correct that the $555,000 was lent by KE to Mr Kalls. That is particularly material to the Barnes v Addy claim, but need not presently be explained. In my opinion, for other reasons the question should be answered no.
97 For an order pursuant to s 588FF there must be a "transaction of the company" of a particular kind. The identification of the transaction governs whether it was an uncommercial transaction, since entry into "the transaction" (s 588FB(1)) must be considered. It may govern whether it was an insolvent transaction, for example through consideration of whether the company became insolvent because of entering into "the transaction" (s 588FC(b)(i)). And it is material to the orders which may be made under s 588FF, not only because orders about payment of money are tied to what was paid under or received because of "the transaction" (s 588FF(1)(a), (b)) but also because, for example, an agreement constituting, forming part of or relating to "the transaction" can be declared void (s 588FF(1)(b)). The limitations in s 588FG are also tied in various ways to "the transaction". The identification of the transaction is fundamental, and the transaction must be a transaction "of the company".
98 Identification of the transaction was discussed by Bryson J in Mann v Sangria Pty Ltd (2001) 38 ACSR 307, especially at [39]-[42]. It was claimed that payments for meat were voidable transactions because they were unfair preferences. His Honour pointed out that the definition of "transaction", if read literally, made payment alone a transaction, but that if that were so an unfair preference was inescapable; he said at [39] -
"Paring down the characterisation of the relevant transaction to such a narrow sliver involves ignoring the facts which make the payment comprehensible and which can be taken together with the payment to constitute a transaction, defensibly a transaction within the ordinary meaning of that word and within the defined meaning."
99 Bryson J said at [41] -
"In the application of subs.588FA(1) I am required to take the step, applying the subsection to the facts, of deciding what is to be recognised as a transaction, or what are to be recognised as transactions. This point of characterisation, which is a turning point for disposing of the claim of unfair preferences, does not seem to me to be a point where the grounds of decision can be completely certain or fully articulated. In my view the transaction to which s 588FA(1) is to be applied if the purpose of the subsection is to be regarded and the connotation of the words "unfair preference" is to have an appropriate influence on its application is the whole series of events including, in each of the six cases, the order for supply of meat, its delivery, the contemporaneous delivery of the invoice, handing over a cheque or sending it on either at or soon after delivery, in five of the six cases a post-dated cheque for exactly the price, and when the post-date arrived, payment of the cheque."
100 In the present case, the step of deciding what was to be recognised as a transaction was taken by the plaintiffs' identification of the Transaction. At the trial the variation of elements (c) to (h), rather than all elements (a) to (h) in his [22], was put forward. The judge was called upon to decide whether the Transaction in either of these forms was a voidable transaction, not whether some other transaction was a voidable transaction.
101 For a transaction to be a transaction "of the company", at the least the company must be a party to the transaction: see the definition of "transaction". Being a party to a transaction will often be plain, but it is not a precise concept. The bank which provided finance to DT could be said to have been a party to the Transaction, in that providing finance was necessary for the Transaction to occur, but I do not think it would be a party for the purposes of Pt 5.7B. Being a party to a transaction requires a nature and extent of involvement, for which there is no simple test. Whether the involvement is sufficient may in some circumstances call for consideration.
102 In Pt 5.7B the words "of the company" add something. As well as being a transaction to which the company is party, which comes from there being a transaction, the transaction must warrant the description of a transaction of the company. Unless being a party to a transaction requires such involvement that the description applies without more, which does not seem to me a correct understanding, being a transaction to which the company is a party and being a transaction of the company are not co-extensive. In this I do not accept the appellants' submission that all that was required for there to be a transaction of a company was that the transaction be one to which the company was a party, referring to Prentice v St George Bank (2002) 20 ACLC 923 at [24]. Austin J there said that it seemed to him the limitation of a transaction to one to which the company was a party was "no different from" the limitation in ss 588FC and 588FE(2) to a transaction of a company. On the facts, however, in that case the transaction did not involve any conduct or dealing by the relevant company (see especially at [45]), and I do not think his Honour's observation can support the submission.
103 Entry into the second agreement for sale would itself be a transaction of KE within a literal reading of the definition, as would payment of money itself whether to Mr Kalls or direct to Mr Baloglow. The plaintiffs did not rely on one or other of these dealings, or any other single event, as the transaction of KE or AA, but on the Transaction with its composite of dealings. A composite transaction can be a transaction for the purposes of Pt 5.7B: re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292. But a composite transaction may include events or actors which are not dealings by the company or actors acting on behalf of the company, and the collection of dealings may not warrant the description of a transaction of the company. In the present case the composite transaction went beyond a single event, and included dealings not of KE or AA. Were KE or AA parties to the Transaction, and was it a transaction of KE or AA?
104 In re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd the composite transaction was specifically the totality of dealings initiated by the company, intended to and in fact bringing about a result albeit with the participation of a third party: see at 299-300. In Wily v Bartercard Pty Ltd (2000) 34 ACSR 186 (Austin J); Bartercard Pty Ltd v Wily (2001) 39 ACSR 94 (CA) the transaction, not really a composite transaction, was found in the company's acquiescence in an arrangement giving rise to either a contract or an estoppel. Neither case supports that being involved in or part of a composite transaction is of itself sufficient for it to be a transaction of the company. It will be a question of fact, involving an evaluative judgment again having regard to the nature and extent of involvement, whether the particular composite transaction is a transaction of the company.
105 In V R Dye & Co v Peninsula Hotels Pty Ltd (1999) 3 VR 201 Ormiston JA said at 214 that the transactions between the parties must be looked at "in a manner which accords with the commercial realities". In Lifestyle Earls Court Pty Ltd (in liquidation) v Mentone Mansions Pty Ltd [2006] VSC 2 the commercial realities meant that there was one transaction being the composite of three related contracts for sale, which when the three contracts for sale were taken together were not an uncommercial transaction. There were not two transactions, each being one of the contracts for sale. In the same way, in deciding whether a composite transaction is a transaction of the company there must be a practical and realistic appraisal of the constituent dealings and the overall transaction.
106 In the present case the Transaction was a succession of events which, seen against the events prior to 2 November 1995, were directed to satisfaction of the initial liability of Mr Kalls and others to pay $700,000 to Mr Baloglow. In the end only $555,000 was paid, and it went to satisfy the liability of Mr Kalls and Mr Kaliaropoulos under the December 1995 deed, but that deed was part of the Transaction and itself brought partial satisfaction through reduction in the amount which had to be paid. It was contemplated, and by December 1995 the contemplation could be regarded as an intention on the part of both Mr Kalls and Mr Baloglow, that the money payable to Mr Baloglow would come from the sale of TQLS. It was sought by Mr Baloglow to have strict arrangements to make sure that he was paid. But paying Mr Baloglow was an objective of Mr Kalls and others, at the last of Mr Kalls and Mr Kaliaropoulos, and at no time did KE or AA undertake an obligation to pay. Save that they became indemnifiers under the December 1995 deed, their involvement was because the sale of TQLS was Mr Kalls' source of money.
107 As well as acting for Mr Kalls in his dealings with Mr Baloglow, Jordans were acting for KE on the sale of TQLS. But the correspondence concerning payment to Mr Baloglow from the sale of TQLS reflected the reality that payment from that source was directed by Mr Kalls in his own interests of satisfying the liability to Mr Baloglow. The reality included that Mr Kalls endeavoured to renege on the arrangements, and to bring about payment of the money to another of his companies; a material indication, in my view, that KE and AA were no more than a source of money for Mr Kalls and that, if he could get away with it, the sale of TQLS would not be used to satisfy the liability to Mr Baloglow. Even when KE and AA were made parties to the December 1995 deed as indemnifiers in relation to TQLS and its sale to DT, that was as part of a settlement arrived at between Mr Konstantinidis and Mr Kalls recorded in the letters of 18 December 1995, and seemingly a quid pro quo offered or agreed to by Mr Kalls in return for reduction of the liability to Mr Baloglow to $555,000. This involvement also was in Mr Kalls' own interests of satisfying the liability to Mr Baloglow.
108 In my opinion, the practical and realistic view of the Transaction is that it was a transaction of Mr Kalls, or at most of Mr Kalls and Mr Kaliaropoulos through Mr Kalls. It could be said that KE and/or AA were a party to the Transaction, but only because Mr Kalls made use of them as the source for the money he was to pay to Mr Baloglow and to provide what can be regarded as a "sweetener" in the settlement arrived at in December 1995. The Transaction included a transaction, indeed a number of transactions, of KE or AA, but the Transaction was a transaction of Mr Kalls or Mr Kalls and Mr Kaliaropoulos: I do not think that the Transaction was a transaction of KE or AA.
109 The appellants said that the Transaction had the effect of changing KE's or AA's rights, liabilities or property, referring to Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238 at [133]. Those words were used to describe the effect of conduct engaged in by the company, and to express what was necessary rather than what was sufficient. The appellants' submissions to the judge had included that, from the nature of an uncommercial transaction, a transaction of a company may well not effectuate any purpose of the company. They cited Tosich Constructions Pty Ltd (in liquidation) v Tosich (1997) 23 ACSR 466, in which Lehane J treated a series of steps ending with payment to the director's daughter as a transaction. However, his Honour regarded the transaction, from the company's point of view, as one of reducing its indebtedness to the director, not a "hiving off" of the company's assets, and I do not think the case assists the appellants. If the transaction is, for example, the single event of a payment by the company to a third party for the benefit of the director, it will be a transaction of the company. The Transaction involved much more.
110 Accordingly, although for reasons rather different from those given by the judge, in my opinion the claim under Pt 5.7B of the Law was correctly dismissed.