Muller & McIntosh (as joint and several liquidators of Arafura Equities P/L (in liq)) v Academic Systems P/L

SUPREME COURT OF QUEENSLAND

CITATION: Muller & McIntosh (as joint and several liquidators of Arafura Equities P/L (in liq)) v Academic Systems P/L [2007] QCA 218

PARTIES: GINETTE MULLER and LACHLAN MCINTOSH as joint and several liquidators of ARAFURA EQUITIES PTY LTD (in liquidation) ACN 083 542 929 (applicant/appellant) v ACADEMIC SYSTEMS PTY LTD ACN 060 989 442 (respondent)

FILE NO/S: Appeal No 3994 of 2007 / DC No 2666 of 2006

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: District Court at Brisbane

DELIVERED ON: 13 July 2007

DELIVERED AT: Brisbane

HEARING DATE: 13 June 2007

JUDGES: Williams JA, White and Atkinson JJ / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDER: Allow the appeal and set aside the judgment of the District CourtDeclare that a payment of $83,000 to the respondent on or about 29 August 2005 is an insolvent transaction within the meaning of s 588FC Corporations Act 2001 **(Cth)**Declare that the payment of $83,000 is an unfair preference pursuant to s 588FA of the Act Declare that the payment of $83,000 is voidable pursuant to s 588FE of the Act The respondent pay to the appellant the sum of $83,000 pursuant to s 588FF of the ActThe respondent pay interest on the sum of $83,000 pursuant to s 47 Supreme Court Act 1995 (Qld) from the commencement of the winding up until the date of this judgment The respondent pay the appellant's costs of and incidental to the proceedings in the District Court and of this appeal to be assessed

CATCHWORDS: CORPORATIONS – WINDING-UP – CONDUCT AND INCIDENTS OF WINDING UP – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – PROTECTED TRANSACTIONS – NO REASON TO SUSPECT INABILITY TO PAY DEBTS – where respondent had funds invested with Arafura – where respondent's solicitors issued a statutory demand for the amount said to be owing – where respondent entered deed of release with Arafura for an amount less than the full amount owing – where appellants sought a declaration that the payment was voidable as an insolvent transaction under the Corporations Act 2001 (Cth) – where the respondent raised a defence under s 588FG(2) claiming that they did not suspect and that a reasonable person would not have suspected that Arafura was insolvent at the time of the payment – whether the respondent had discharged the onus with respect to establishing the relevant defence / Corporations Act 2001 (Cth), s 459E, s 459F, s 459G, s 459Q, s 588FA, s 588FC, s 588FE, s 588FF, s 588FG / D'Aloia (as liquidator of Damark RV Investments Pty Ltd (in liq)) and Another v Federal Commissioner of Taxation (2003) 203 ALR 609, applied / Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, applied / Sims v Celcast Pty Ltd (1998) 71 SASR 142, applied

COUNSEL: I R Perkins for the appellant / F G D Forde for the respondent

SOLICITORS: Holman Webb Lawyers for the appellant / McMahons National Lawyers for the respondent

WILLIAMS JA: Ginette Muller and Lachlan McIntosh, the joint and several liquidators of Arafura Equities Pty Ltd ("Arafura"), appeal against the dismissal by a District Court judge of their application made under s 588FA, s 588FC, s 588FE and s 588FF of the Corporations Act 2001 (Cth) ("the Act") seeking against the respondent, Academic Systems Pty Ltd, a declaration that a payment of $83,000 to the respondent on or about 29 August 2005 was voidable as an insolvent transaction conferring an unfair preference on the respondent and an order that the respondent pay to the applicants the sum of $83,000 with interest.

Essentially s 588FA of the Act provides that a transaction is an unfair preference if it results in the creditor receiving from the company more than the creditor would receive in respect of the debt if the transaction was set aside and the creditor were to prove for the debt in a winding up of the company. A transaction which confers an unfair preference becomes by operation of s 588FC an insolvent transaction if it was entered into at a time when the company was insolvent. Section 588FE(2) then provides that such a transaction is voidable if it was entered into during the six months ending on the relation-back day which is defined as meaning the day on which the winding up began. Where the court is satisfied that a transaction is voidable, s 588FF(1) provides that it may make an order directing repayment of an amount equal to the sum paid in the transaction in question. Then, importantly for present purposes, s 588FG(2) provides:

"(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if … it is proved that:

the person became a party to the transaction in good faith; and

at the time when the person became such a party:

the person had no reasonable grounds for suspecting that the company was insolvent at that time …; and

a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

the person has provided valuable consideration under the transaction …"

The principal business activity of Arafura was conducting an unregistered management investment scheme. Between 13 May 2004 and 10 March 2005 the respondent invested with Arafura a total of $80,000 pursuant to an agreement by which it provided loan fund capital for investment by Arafura in the foreign exchange market, short term money market and futures market. Pursuant to the agreement interest was to accrue on the moneys lent at an agreed rate of 60 per cent per annum compounding monthly. Between May 2004 and May 2005 interest totalling $21,745.51 was credited to the respondent's account, and from those interest payments $17,500 was withdrawn. That meant that at the end of May 2005 the respondent's credit balance was $84,245.51. Thereafter in June and July 2005 interest totalling $8,659.34 was credited to the account leaving as at July 2005 a credit balance of $92,904.85.

The terms of the loan agreement were such that a depositor was entitled to withdraw moneys provided up to 10 working days was allowed for that transaction to be completed.

Spiros Pandelakis at all material times was a director of the respondent and its controlling mind. He described himself in his principal affidavit as a management consultant and the learned judge at first instance made the following findings with respect to his background:

"Mr Pandelakis is an experienced business man and investor. He has been a lecturer in Mathematics and IT in 6 Australian Universities. He has a degree in science, majoring in computer science. He has a level 3 certificate in mortgage lending, and lectures in mortgage lending. He has professional affiliations as a New South Wales teacher, and has done some teaching in the past."

He had a home page on the web, and a printout of it was tendered during his cross-examination. In it he asserted an affiliation with the National Institute of Accountants and claimed to have a Diploma in Accounting (though in oral evidence he said he was only studying for that diploma). He also claimed a "deep understanding of business in Australia". On that home page he also asserted involvement with "non-bank mortgage finance" and asserted he had "marketed home loans and commercial loans throughout NSW and Qld". He stated he "gave advice prospects of obtaining finance for both small and large projects."

At all material times Richard Harris was employed by Arafura as Portfolio Manager. He and Pandelakis had had dealings prior to May 2004 and it was as a result of that connection that the respondent came to make the investment in question. Many of the dealings between the respondent and Arafura were conducted on a personal level between Harris and Pandelakis. In the material Pandelakis speaks of the trust he placed in Harris. Brett Best is the principal director of Arafura.

It is not in dispute between the parties that the respondent received $83,000 from Arafura on either 29 or 30 August 2005. By resolution of Arafura on 21 October 2005 the present appellants were appointed Joint and Several Voluntary Administrators of the company, and then at a meeting of creditors held on 13 February 2006 it was resolved that Arafura be placed in liquidation and the appellants were appointed Joint and Several Liquidators.

It has not been in dispute in these proceedings that Arafura was insolvent at the time the payment of $83,000 was made, and it is also not in dispute that that payment was made within six months of the relation-back day. It followed, as was recorded by the learned judge at first instance, that the payment of $83,000 was a voidable transaction pursuant to s 588FE of the Act. The only issue in the proceedings in the District Court was whether the respondent discharged the onus of proof with respect to the matters establishing a defence specified in s 588FG(2).

Because of that it is important to consider the circumstances in which the payment of $83,000 came to be made.

After referring to the attempts by the respondent to obtain repayment of its investment from June 2005 to August 2005, the detail of which I will return to subsequently, the judge considered the submissions of counsel for each party. It was noted that counsel for the respondent submitted that there was a difference between financial stress (a cash flow problem) and insolvency. That led to the submission on behalf of the respondent that Arafura was experiencing a temporary cash flow problem during that period rather than insolvency. That then led to the critical paragraph in the reasons at first instance:

"I find that at the time of the payment of $83,000, Mr Pandelakis was concerned that Arafura did not want to repay his principal in full and he was worried about interest on his investment and losing better investment opportunities. At that time he did not believe Arafura was insolvent. In reaching this decision, I have taken into account the sequence of events and correspondence and the relationship between Mr Pandelakis and Mr Harris. I have also taken into account the letter from McMahons dated 15 March 2006, and the affidavit in the Supreme Court proceedings.

I find that Mr Pandelakis acted in good faith, and he had no reasonable grounds for suspecting that Arafura was insolvent at the relevant time.

I find that a reasonable person in Mr Pandelakis'S circumstances would have had no such grounds for so suspecting."

The critical question raised on the appeal is whether or not the conclusion reached at first instance was open given the events which occurred between June and August 2005. It is now necessary to turn to those circumstances.

The learned trial judge made a finding that "Mr Pandelakis demanded payment of his investment on 5 June 2005" and a little later referred to the facsimile letter from the respondent to Arafura of 8 June 2005. I have been unable to find in the material any reference to a demand made on 5 June, and it would appear that the first request for repayment was contained in the facsimile letter of 8 June. The evidence of Pandelakis was that in the weeks prior to that date he had been reading about other investment funds and had reached a decision that the respondent should invest in another fund which advertised a higher yield. In consequence of that he said that he decided to withdraw $60,000 from the respondent's investment with Arafura. Relevantly the letter was in the following terms:

"Just a short note to let you know that I would like to withdraw $60,000 from my Arafura account. Please post the cheque to Academic Systems Pty Ltd…. Please leave the balance in the account with no monthly withdrawal."

Having sent off that facsimile letter he received on 9 June two letters from Arafura dated 7 June; each of those letters was a pro forma letter addressed to "Dear Investor". In the first letter it was said that "trading in the foreign exchange markets over the past three months has been extremely tough" and in consequence "all interest payments need to be compounded for May…. Therefore, all manual monthly interest payments will be postponed until the 30th June order…". The letter also contained the statement: "Rest assured your capital investment has not sustained any losses…". The second, longer letter again referred to the fact that March and April "were two very tough months for all Traders, and as a result Arafura did not make a profit during these months…". The letter then went on to inform investors that Arafura was "now making a small change to its payment options". Amongst those changes was the following: "The change to the new quarterly option means that we will need any withdrawal orders by 25th March, 25th June, 25th September, and 25th December for payment by around 15th of the following month."

In his affidavit, after referring to sending the letter of 8 June, and receiving the two letters dated 7 June, Pandelakis said he "then decided to withdraw my whole investment and I informed Harris of this. I cannot recall if I informed him of this by telephone or facsimile." No date is alleged with respect to that demand. The affidavit goes on to refer to conversations between Harris and Pandelakis concerning the length of notice which had to be given in order for that withdrawal to be made. Pandelakis said he could not recall the length of time Harris referred to but he recalled something being said that withdrawals could only be made at the middle of the month or at the end of the month. His affidavit went on:

"As a result of the confusion surrounding how much notice I had to give and when it had to be given and when the money would be released, I became frustrated in my attempts to comply with the notice requirements. As time was passing and it was late July 2005 and I had still not received my money and the reason I was given by Harris was that I had not given proper notice.

In frustration, I instructed my solicitors … to recover my investment. Upon receiving their advice, I instructed them to proceed by way of issuing a statutory demand which they did on 5 August 2005."

That passage is a somewhat inaccurate summary of what occurred. In fact on 21 July 2005 the respondent's solicitors wrote to Arafura relevantly saying:

"Spiros Pandelakis – Dispute with Arafura Equities Pty Ltd

…

We are instructed by our client as follows:

Our client presently maintains an investment account with you…;

As of 15 July 2005, our client had the total sum of $92,904.85 invested with the account…;

In June and July 2005, our client requested several times to withdraw the sum of $60,000.00 from the account;

However, despite several demands made, you failed, refused or otherwise neglected to allow our client to withdraw any funds from the account; and

Our client has suffered a significant financial detriment in not being able to access his account and utilize his money for his own use.

Accordingly, we are instructed by our client to demand that the sum of $92,904.85 be withdrawn from the account (plus further interest), and paid to our client by no later than 4 pm on Monday, 1 August 2005, failing which our client intends to immediately institute court proceedings against you without any further notice to you…."

The learned judge at first instance then made the following findings based on the evidence and cross-examination of Mr Pandelakis:

"By 1 or 2 August, Mr Pandelakis knew Arafura did not want to pay the full amount. He denied that he was concerned that Arafura could not pay it; rather, 'I was pretty sure by this stage we had expectations to settle for a lower amount.' (T 32 L 28). He was prepared to settle for less because he was concerned that he would not get the full amount 'without great difficulty.' (T 32 L 39)."

It should also be recorded that during cross-examination Pandelakis conceded that in early discussion with his solicitors various options for recovering the moneys were discussed; he couldn't remember the detail of the legal options. Answers given in cross-examination were to the effect that Arafura "never told me they couldn't pay it" but "it looked like we might have to settle for a lower amount." As the moneys were not paid in consequence of the letter of demand of 21 July, and the other conversations referred to by Pandelakis, the respondent instructed its solicitors to proceed by way of issuing a statutory demand. That statutory demand was served under cover of a letter from the respondent's solicitors dated 5 August 2005. The statutory demand alleged Arafura owed the sum of $92,904.85. The supporting affidavit was sworn by Pandelakis and it deposed to the fact that Arafura was indebted to the respondent in the sum of $92,904.85 being the balance of an investment. The affidavit also deposed to the fact that Arafura had failed to pay that sum which remained due and payable.

The response from Arafura was a letter from its solicitor dated 9 August 2005. Relevantly that letter stated:

"We are instructed that subject to the execution of a suitable deed of release by your client a draft is enclosed for your consideration, our client will agree to pay your client the sum of $83,000.00.

As discussed, we propose that upon presentation of a duly executed deed of release by your client our client will hand over a cheque payable to your client in the above amount."

When shown that letter under cross-examination Pandelakis said he thought there was "another one before this, I'm not sure, that was offering $75,000 or $80,000." Then he referred to the fact that there were "a few telephone conversations at the time. I had calls from Richard Harris and Brett Best or his secretary … . Secretarial wife. I'm not sure. A lady from Arafura rang me and was trying to negotiate some sort of a deal. I can't remember the details…".

The formal response to the letter of 9 August was from the respondent's solicitors dated 15 August. Relevantly it said:

"With respect, we disagree with most of the contents of your draft Deed of Release and Undertaking. We enclose a fresh Deed of Release and Undertaking for your attention. We are instructed by our client to confirm with you that subject to the terms of the enclosed Deed, both parties agree to settle this matter on the basis that your client pay the settlement sum of $83,000.00 to our client as full and final settlement.

However, please note that if our client does not receive the settlement sum of $83,000.00 from your client within the prescribed period under the provisions of the Corporations Act 2001 (Cth), then our client will rely upon the Statutory Demand that it issued to your client on 5 August 2005 to institute winding up proceedings against your client without further notice to you."

The evidence is then a little vague other than it is clear that the $83,000 was paid by Arafura to the respondent on or about 29 August 2005.

There is one further factual matter which must be addressed. The Australian Securities & Investments Commission brought proceedings against Arafura, and Pandelakis swore an affidavit on 3 November 2005 which was filed and relied on in those proceedings. In that affidavit Pandelakis referred to a number of dealings he had with Arafura on behalf of the respondent culminating in the issuing of the statutory demand on 5 August 2005. The affidavit then went on:

"A short time later I received a call from Harris advising that Arafura was unable to pay me the total amount due but would be able to make a payment of $84,000.00 now and the balance would be paid later."

When that affidavit was put to him initially in cross-examination he answered "there does seem to be some inaccuracies" in it. One he pointed to was: "that they made a payment of $84,000 and the balance would be paid later. We actually settled for a fixed sum." Then he answered: "Well, they may have made that offer prior to the settlement but the eventual outcome was that we settled for a fixed sum". When pressed further about the affidavit Pandelakis responded: "I have a problem comprehending long written documents. I don't read very much." That answer is hardly credible, particularly given that on his website he alleges that one of his "personal skills" is "Excellent written and verbal communication skills". Towards the end of cross-examination counsel again referred to the paragraph quoted above from the affidavit. Then Pandelakis asserted that in "the latest affidavit I made with ASIC, this clause was crossed out." But, though the onus was on the respondent, no such document was produced to the court. When then specifically asked whether the paragraph was incorrect he replied: "Well, he may have said that but that wasn't what eventuated. He may have said that he would pay the balance later but that's not what eventuated." Shortly after that he again said "I can't remember the conversation so I don't know exactly what he said. I can't recall exactly what he said at this stage."

The trial judge dealt with that issue as follows:

"In his affidavit sworn 3 November 2005 in Supreme Court proceedings concerning the Australian Securities and Industries [sic] Commission, Mr Pandelakis deposed to his concerns about Arafura's ability to repay his investment and his decision to engage solicitors on or about 15 July 2005 as a consequence of his concerns…. He deposed to the following: 'Arafura was unable to pay me the total amount due but would be able to make a payment of $84,000 now and the balance would be paid later'…. At the hearing of this application, he said that this was inaccurate, and he had asked for it to be amended in affidavits subsequent to the Supreme Court proceedings. He said that the statement in his affidavit deposing to 'an amount in excess of $20,000 still remaining owing' was also inaccurate."

Later, in the passage quoted earlier from the reasons, there was also a reference made to the "affidavit in the Supreme Court proceedings".

It is not clear from what the trial judge said whether or not any positive finding was made with respect to the statement made in the affidavit; was that statement made to Pandelakis or not. It remains a statement in an affidavit on the Supreme Court file which was used in Supreme Court proceedings. In my view the passages quoted above from the cross-examination of Pandelakis do not amount to a positive denial of what is said in the affidavit. Rather he seems to be saying that what is contained therein may have been said but that was not what "eventuated". In the circumstances it is appropriate for this Court to act on the basis that in the course of contact between the respondent and Arafura shortly after the statutory demand was delivered a statement along the lines of that alleged in the affidavit was in fact made.

It is true, as found by the learned judge at first instance, that up until May 2005 all interest payments had been made by Arafura on time.

Subject to what has been said about the matter contained in the affidavit of Pandelakis, at first instance findings were made in accordance with what has been set out above with respect to the dealings between the respondent and Arafura from 8 June 2005 to 29 August 2005.

The learned judge at first instance referred to the definition of "suspicion" propounded by Kitto J in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 and also to the other considerations relevant to a defence based on s 588FG(2)(b) considered in Sims v Celcast Pty Ltd (1998) 71 SASR 142 and D'Aloia v Federal Commissioner of Taxation (2003) 203 ALR 609. It is not necessary in the circumstances to quote extensively from those judgments.

The ultimate facts which are determinative of the matter are inferences drawn from the primary facts set out above. This Court is in as good a position as the judge at first instance to draw inferences from those facts.

When one applies the reasoning in the cases cited to the facts of this case there is, in my view, only one conclusion open, namely, that a reasonable person in the circumstances confronting the respondent had grounds for suspecting that Arafura was insolvent at the time the payment of $83,000 was made. Indeed I would go further and say that the respondent must have suspected that Arafura was insolvent at that time. In other words the respondent has not on the evidence discharged the onus on it of establishing the defence under s 588FG(2).

Whilst one could not conclude that a creditor, who becomes so frustrated with an inability to recover a debt that he serves a statutory demand and within the period provided for by that demand accepts a lesser sum in full settlement, could never discharge the onus of establishing a defence under s 588FG, it has to be said that ordinarily the inference would be open in such circumstances that the creditor had grounds for suspecting that the company was insolvent at the time payment was made.

It follows that the appeal must be allowed.

I would make the following orders:

Allow the appeal and set aside the judgment of the District Court;

Declare that a payment of $83,000 to the respondent on or about 29 August 2005 is an insolvent transaction within the meaning of s 588FC of the Corporations Act 2001 (Cth);

Declare that the payment is an unfair preference pursuant to s 588FA of the Act;

Declare that the payment is voidable pursuant to s 588FE of the Act;

Order that the respondent pay to the appellant the sum of $83,000 pursuant to s 588FF of the Act;

Order that the respondent pay interest on the sum of $83,000 pursuant to s 47 of the Supreme Court Act 1995 (Qld) from the commencement of the winding up until the date of judgment;

Order that the respondent pay the appellant's costs of and incidental to the proceedings in the District Court and of this appeal to be assessed.

WHITE J: I have read the reasons for judgment of Williams JA and agree with his Honour that in this case the court may draw inferences from the established primary facts about which there was little if any dispute save for the issue of the Supreme Court affidavit in the ASIC proceedings. I agree with his Honour’s analysis of that evidence. I agree with his Honour that not only would a reasonable person in the circumstances known and existing at the time when the $83,000 was paid by Arafura Pty Ltd have grounds for suspecting that the company was then insolvent but that the principal of the respondent company must himself have suspected that that was so. In other words, both provisions of s 288FG(2)(b) were satisfied.

I agree with the orders proposed by his Honour.

ATKINSON J: I agree with Williams JA that the appeal should be allowed and with the orders proposed by His Honour. I agree with His Honour's reasons but wish to add a few observations of my own.

The respondent instructed his solicitors to issue a statutory demand which they did on 5 August 2005. The statutory demand was issued pursuant s 459E of the Corporations Act 2001 and was accompanied by an affidavit sworn by the respondent's principal, Mr Pandelakis, swearing to the fact that Arafura Equities Pty Ltd had failed to pay the sum of $92,904.85 which was due and payable. If a debt subject to a statutory demand is not paid and the statutory demand is not set aside pursuant to s 459G of the Corporations Act, then the company is taken, pursuant to s 459F of the Corporations Act, to have failed to comply with the demand at the end of the period for compliance with it. The failure of a company to comply with a statutory demand is the basis for an application for a company to be wound up in insolvency pursuant to s 459Q of the Corporations Act.

It is trite law that a statutory demand is not merely a debt collection device.¹ It cannot and should not be used when the creditor is aware that there is a genuine dispute in respect of the debt. However, where there is no dispute as to the debt, a creditor may use the statutory demand procedure and subsequently make an application to wind up the company in insolvency if the statutory demand is not satisfied. This is particularly apt where the creditor believes that the debt has not been paid because the company is unable to pay its debts as and when they fall due, which means that it is insolvent. If the debt is not paid in response to a statutory demand which has not been set aside, then the company is deemed to be insolvent.

Accordingly, a creditor that uses a statutory demand procedure to collect a debt which is due and payable and about which there is no dispute, would have real difficulty in demonstrating that a payment made by the company in response to the statutory demand is not voidable as an insolvent transaction if the company is wound up in insolvency within the following six months.

Footnotes

1. Re QBS Pty Ltd [1967] QdR 218 at 224 per Gibbs J; Re Bond Corp Holdings Ltd (1990) 1 WAR 465; Re Badja Pty Ltd [2000] QSC 441 (99/1143); Poonon Pty Ltd v DCT [1999] NSW SC 1121 per Austin J at [21]. ↩