……"
FACTS
5 The history of the operation of TQLS from February 1994 was, so far as it could be ascertained, proved and cross examined on in extraordinary detail. Bearing in mind the views that I have formed about this matter, it will not be necessary for me to advert to all that evidence in detail in this judgment. Matters will need to be dealt with in some more detail from mid 1995, leading up to the dealings which are central to the decision of this case.
6 It should be noted that the liquidator, Baloglow and Kaliaropoulos all gave evidence, including oral evidence by way of cross examination. Kalls was not called as a witness, although there is nothing in the evidence to suggest that he was unavailable. His absence leaves in mystery a number of important areas. He was in practice the sole controller of both KE and AA during the period from August 1994 to December 1995 and in effect the sole controlling mind of both companies from May 1995. He alone had knowledge of the affairs of the companies during those periods and was alone privy to what arrangements, if any, were made between the companies as to the ownership and conduct of TQLS and its assets. Furthermore, he alone was privy to what arrangements were made among KE, himself, his wife Denise Kalls ("Denise") and Kaliaropoulos concerning the payment by KE to Kalls of the $555,000, including any arrangements as to its repayment to KE.
7 Baloglow and Kaliaropoulos were both satisfactory witnesses, who appeared to me to be attempting to give to the Court accurate and frank accounts and to have good recall of the facts. The liquidator also appeared to be a generally satisfactory witness, although I found extraordinary his answers as to why he made no attempt at any time, even by way of a letter of demand, to recover the relevant sum from Denise or Kaliaropoulos.
8 Prior to 22 February 1994, KE conducted TQLS. On 22 February 1994 KE sold TQLS to AA. AA was a company of which the equal shareholders were KE and Swanhill Pty Ltd ("Swanhill"). Thereafter, the directors of AA were Kalls and Baloglow, who was the controller of Swanhill. Before the sale Kalls made misrepresentations to Baloglow concerning the financial state of TQLS. AA did not trade successfully and by July 1994 Baloglow was complaining about the misrepresentations and seeking to extricate himself and his company from AA. On 24 February 1995 KE, Kalls, Denise, Baloglow and Swanhill entered into a deed ("the February 1995 deed") under which Kalls, Denise and Kaliaropoulos were to pay Baloglow $700,000 in return for his resignation as a director and the transfer of Swanhill's shares to Kalls or as he might direct. The moneys were to be paid by a first instalment of $100,000, followed by a final instalment of $600,000 no later than 31 May 1995. There was default in payment of these moneys. No more than $88,000 was ever paid. From July/August 1994 Baloglow commenced to withdraw from active involvement in the management and affairs of AA. He had ceased to play any part by about September 1994. On 5 May 1995 Baloglow resigned as a director of AA.
9 After Baloglow's departure, it would seem that TQLS was conducted by KE with funds provided by KE. There is no evidence that the sale of TQLS by KE to AA was ever formally rescinded. Nor is there any evidence of any arrangement between AA and KE as to the assets or conduct of the business. There are appearances that AA played some part in the conduct of the business, eg, by continuing to be the employer of the workers, although it would seem that KE provided the wages. AA continued to be the owner of the business name TQLS. However, whatever arrangements there were between the companies concerning these matters are under the veil of mystery drawn by the absence of any evidence, in or out of court, from Kalls, who was the effective controller of both companies at this time, so that the arrangements were known to him alone.
10 On 14 June 1995 Baloglow commenced the Proceedings against Kalls, Denise and Kaliaropoulos for $620,000 ("the Proceedings"). On 7 July 1995 it was noted in the Proceedings by consent that the defendants, KE and AA "undertake to the Court to provide to the Plaintiff seven (7) days prior notice before the disposal of ... any interest owned by the Defendants or of any interest in the business known as" TQLS. This undertaking is important, as it is the basis of Baloglow's later demand to be present at the settlement of the sale of TQLS. On 7 September 1995 the Proceedings were settled with Kaliaropoulos by his consenting to judgment for $620,000 in full settlement of Baloglow's claim. On 27 October 1995 Baloglow obtained judgment in the Proceedings against Kalls for some $640,000. Judgment was not obtained against Denise in the Proceedings and they continued pending against her.
11 During the second half of 1995 negotiations were commenced in the name of KE alone for the sale of TQLS to Decision Technology Pty Limited ("the purchaser"). At first, Baloglow protested at the negotiations in KE's name for the sale of what he said was AA's property, but these protests were not persisted in. The first agreement that KE and the purchaser reached was not completed, but was terminated on 25 October 1995. But there were subsequently negotiations which led to a second agreement for sale between them for $700,000 on 2 November 1995.
12 On 5 September 1995 Kalls' then solicitor, James Jordan, had given an irrevocable undertaking on behalf of Kalls that the balance of the proceeds of the sale should "be to the account of Theo Baloglow or as Theo Baloglow may direct." He further undertook, on behalf both of Kalls and of his firm, that they would arrange to have Baloglow or his solicitors attend on settlement of the sale to collect from the proceeds received moneys towards the debt sued for in the Proceedings. After the second agreement was entered into, Kalls instructed James Jordan to renege on this undertaking and not to inform Baloglow or his solicitors of the settlement of the second agreement. James Jordan, very properly, refused to accept these instructions and terminated his retainer by Kalls. He was replaced as Kalls' solicitor by Dowe Xenos solicitors ("Xenos"). Baloglow's solicitors were Konstan & Associates ("Konstan"). On 14 December 1995 James Jordan informed Konstan of his receipt of those instructions and his termination of his retainer. Konstan wrote to the purchaser's solicitors requiring deferment of the settlement from 15 December 1995 and conveyed to them a copy of the consent orders of 7 July 1995 as the basis of Baloglow's entitlement to be informed of the settlement. There were then further negotiations as to the manner in which the matter was to proceed, which resulted in an agreement recorded in a letter dated 18 December 1995 from Konstan to Xenos.
13 This agreement was, on 19 December 1995, embodied in a deed of release and indemnity ("the December 1995 deed"), the parties to which were Baloglow, Kalls, Kaliaropoulos, Denise, KE and AA. The deed recited the judgments against Kalls and Kaliaropoulos; the commencement of the Proceedings against Denise; and the agreement of Baloglow, Kalls, Kaliaropoulos and Denise to settle the judgment debt and the Proceedings. By its operative terms, the December 1995 deed provided that Kalls and Kaliaropoulos should pay to Baloglow upon the execution of the deed $555,000 in full and final satisfaction of the debt. By clause 2, Baloglow undertook to discontinue the Proceedings against Denise and not to undertake enforcement action to recover the balance of the judgment debt. By clause 3, Kalls, Denise, KE and AA indemnified Baloglow and Swanhill against all claims arising from the operation of TQLS or by the purchaser, although it is hard to see how there could be any such claims. It was only in this very peripheral regard that KE was a party to the December 1995 deed. By clause 4, provided payment was received by Baloglow in accordance with clause 1, Baloglow released Kalls, Kaliaropoulos and Denise from all claims arising out of the Proceedings and associated matters. The release given by Baloglow in clause 4 was merely the standard release that one would expect upon settlement of the claims embodied in the Proceedings.
14 It is important to note that, in both the letter of 18 December 1995 and clause 1 of the December 1995 deed, it was specified that it was Kalls, not KE, who was to pay the sum of $555,000 to Baloglow. In the deed that obligation was also undertaken by Kaliaropoulos.
15 Settlement of the sale of TQLS did take place on 19 December 1995. What occurred at settlement was that the purchaser's solicitors, as directed, handed to Xenos a bank cheque for $660,611.17 made out in favour of that firm. Xenos endorsed the cheque to Konstan. It was banked in Konstan's trust account. The excess over $555,000 was paid out as agreed and the $555,000 was accounted for by Konstan to Baloglow as set out in a letter of 8 January 1996.
16 As to whether any arrangements had been made between KE and Kalls, Denise and Kaliaropoulos concerning the repayment to KE of the $555,000, the evidence is exiguous. The liquidator deposed that he could not find any written record of any such transaction, or evidencing the payment out by the company of that sum. The plaintiffs did not call Kalls or Denise as a witness. Kaliaropoulos did give evidence, but the plaintiffs did not ask him any question in cross examination concerning his knowledge of any such arrangement.
17 Before the sale, AA had been wound up, but the winding up had been terminated. Kalls had been served with a bankruptcy notice. On the evidence, these facts were unknown to Baloglow. AA and KE were voluntarily wound up on 3 and 4 April 1996 respectively. Kalls was adjudged bankrupt in 1997.
18 It should be added that, to any degree it is material, it is clear on the evidence that Baloglow was not at any material time or, indeed, ever a creditor of either KE or AA.
UNCOMMERCIAL TRANSACTION CLAIM
19 The plaintiff must show in order to succeed on this claim the following:
1 That there was a "transaction".
2 That the transaction was a transaction of a company.
3 That the transaction of the company was an "uncommercial transaction" within the meaning of s 588FB(1), that is, that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the matters specified in the subsection.
4 That the transaction was entered into at a time when the company was insolvent or that the company became insolvent by reason of the transaction.
20 If these matters are established, the Court must turn to the substantive defence under CL s 588FG(2). This requires the defendant to prove that he became a party to the transaction in good faith; that he had no reasonable grounds and that a reasonable person in his circumstances would have had no grounds for suspecting that the company was insolvent or would become insolvent as a result of the transaction; and that he had provided valuable consideration under or changed his position in reliance on the transaction.
21 I shall proceed to consider these matters.
22 For the purposes of this claim, the plaintiffs sought to rely on a composite transaction as being a transaction of a company. That transaction is alleged to have been made up as follows: