Nilant v Plexipack Packaging Services Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No. NG 3245 of 1996 BETWEEN: TOSICH CONSTRUCTION PTY LIMITED (IN LIQUIDATION) (A.C.N. 000 706 769) First Applicant HUGH JENNER WILY Second Applicant AND: MELANIE TOSICH Respondent CORAM: Lehane J PLACE: Sydney DATE: 15 April 1997 REASONS FOR JUDGMENT LEHANE J: Nature of proceedings: issues The second applicant, Mr Wily, is the liquidator of the first applicant, Tosich Construction Pty Limited (the Company). On 7 October 1994 the Court ordered that the Company be wound up in insolvency. On 23 September 1993 funds of the Company amounting to $273,990.32 were used to buy bank cheques which were applied in paying the amount due on settlement of a contract by the respondent, Ms Melanie Tosich, for the purchase of a house at 34 Merton Avenue, Rozelle. Ms Tosich is the daughter of Mr Robert Slobodan Tosich (Mr Tosich) who was a director of the Company. It is common ground that at the time when the payment was made the Company was insolvent. It is common ground also that the application of the Company's funds constituted a benefit to Ms Tosich for which she provided no consideration. It is common ground, finally, that the application of the Company's funds was made within two years of the "relation‑back day" as that term is defined by s 9 of the Corporations Law (the Law). In those circumstances, the applicants say that what occurred was an uncommercial transaction of the Company (s 588FB of the Law) and an insolvent transaction of the Company (s 588FC) which is voidable under s 588FE; on that footing, the applicants seek various orders of a kind which the Court is empowered to make under s 588FF. In essence, the applicants say that the correct characterisation of what happened is simply that the Company's money was applied to buy a property for Ms Tosich, a daughter of a director of the Company, i.e. in substance by way of gift (that characterisation is disputed, and I shall consider the relevant circumstances later). It may be said immediately that if the characterisation for which the applicants contend is correct, the case is a relatively simple one: having regard to the criteria applicable under s 588FB, the transaction was one into which it might be expected that a reasonable person in the Company's circumstances would not have entered, and thus an uncommercial transaction; because the Company was insolvent, it must follow that the transaction was an insolvent transaction, the test in para (a) of s 588FC being met; accordingly, the transaction would be voidable under s 588FE even if Ms Tosich were not (as she is) a "related entity" as defined in s 9 of the Law (see subss 588FE (3) and (4)); because on the applicants' hypothesis Ms Tosich was a party to the transaction she would have a defence under s 588FG only if she could establish the cumulative requirements of subs 588FG(2), and the requirement of para (c) of that subsection (that "the person has provided valuable consideration under the transaction or has changed his, her or its position in relation to the transaction") particularly would cause Ms Tosich formidable difficulties. The substantial issue in the case is, thus, whether the applicants are right in submitting that the transaction which they seek to impugn is a simple application of the Company's money, without consideration, for the benefit of Ms Tosich. Ms Tosich submits that that is an inaccurate description of the transaction. She says that the payment made on settlement of her purchase was by way of gift to her from her father; at the time the gift was made the Company owed her father a greater sum than the $273,990.32 paid on settlement and the gift was made by her father directing the Company to make the payment in partial satisfaction of its debt to him. Alternatively, Ms Tosich says that the Company advanced the $273,990.32 either to her father or to Ms Tosich herself (the probability that there was a loan to Ms Tosich was not pursued) and that that advance was fully repaid by her father on or about 18 April 1994. The applicants argue that even if one of the characterisations for which Ms Tosich contends is correct the various steps should nevertheless be considered together as a single transaction, and as an uncommercial and an insolvent transaction. Unless that argument succeeds, the outcome of the case depends upon the correct characterisation of the transaction and that in turn depends upon disputed questions of fact; and it is convenient to deal with those questions before considering the "multiple step transaction" argument. Facts (i) Dealings between the Company, Mr Tosich and the Bank The Company had for many years been a successful participant in the construction industry. It enjoyed a very satisfactory relationship with its bankers, National Australia Bank Limited (the Bank). The evidence indicates, however, that during the course of 1993 substantial changes occurred: a particularly significant change seems to have been that rather than carry on business merely as a builder, which previously it had done, the Company undertook contracts under which it was to design as well as construct; that may, in turn, have resulted in part from a lack of availability of construction work of the kind with which the Company was familiar and in which it had been successful. At all events, the Company's financial position deteriorated sharply. According to figures compiled by the liquidator, the Company's average monthly income declined sharply after 30 June 1993 and its working capital requirements were financed increasingly by means of an overdraft. It had, in 1993, an overdraft limit with the Bank of $2,000,000. As at 1 July 1993 the balance of the account stood at $842,951; by 22 September 1993 it had risen to $2,449,050.

On 20 August 1993 Mr Tosich borrowed from the Bank $1,200,000. The borrowing was secured by a mortgage of the house, at Strathfield, in which Mr Tosich and his family lived and a guarantee given by the Company. Its stated purpose was to enable Mr Tosich to fund an associated company, Staratos Nominees Pty Limited (Staratos), so that it could undertake a joint venture involving the acquisition and development of a parcel of industrial land. That joint venture did not proceed and its detail, as it was proposed, is of no present importance. What is important is the use which Mr Tosich made of the money which he borrowed from the Bank: he lent it to the Company and it was applied in reduction of the overdraft, i.e., in effect as further working capital. Thus, approximately one month before funds were drawn on the Company's bank account to pay for Ms Tosich's house, Mr Tosich had borrowed from the Bank, and lent to the Company, $1.2 million. In the following months, and particularly in the early months of 1994, the Company's financial position and its relationship with the Bank deteriorated. The Bank took the view that it had been misled as to the use made of the money it had lent to Mr Tosich and by the absence of disclosure of the application of funds in completing the purchase of the house. It is unnecessary to describe in detail the course of negotiations between the Company, its auditors (Coopers & Lybrand) and the Bank. Their outcome was a "restructuring", in April 1994, which included a bills acceptance and discount facility of $1,800,000 granted by the Bank to Mr Tosich: the proceeds of that facility were to be applied (and were in fact applied) in repaying Mr Tosich's loan from the Bank of $1,200,000 and by way of deposit to the Company's account with the Bank of the balance of $600,000. The deposit of $600,000 was credited to Mr Tosich's account with Staratos and to the account of Staratos with the Company. It may be noted also that as part of the restructuring the Company executed a mortgage debenture in favour of the Bank under which, several months later, the Bank appointed receivers and managers of the property of the Company, an appointment shortly followed by the winding‑up order and Mr Wily's appointment as liquidator. (ii) The purchase Ms Tosich gave evidence that shortly before she turned 21, on 30 May 1993, her mother said to her that she wished to buy Ms Tosich a house for her 21st birthday. Ms Tosich had, she says, further conversations with both her parents to the same general effect. She inspected a number of houses including, on 10 July 1993, 34 Merton Avenue, Rozelle which was to be auctioned on 24 July 1993. She liked that house; she arranged for her parents to inspect it, which they did with Ms Tosich on 17 July. Though they did not tell Ms Tosich of their intention to do so, her parents attended the auction and bid successfully on her behalf; Ms Tosich was summoned from a wedding she was attending to sign the contract, which she did; her parents provided the deposit. Mr Tosich gave evidence to similar effect. Some aspects of Ms Tosich's evidence seem to me somewhat odd. For example, she maintained that though she had spent several weekends inspecting numerous properties, "loved" the house at Rozelle and "really wanted" it, she neither went to the auction herself nor arranged for her parents to do so, but was surprised to discover that they had. Additionally, Ms Tosich adamantly maintained that she has never, at any time, asked her father where the money from the house came from: that is perhaps somewhat surprising, given the commencement of these proceedings and the nature of her defence. But I do not think that either of those matters has, in the end, any particular significance. The house was bought, Ms Tosich signed the contract as purchaser and (though counsel elicited from her the information that she arranged for correspondence to her from the Bank to be sent to her parents' home rather than to Rozelle) her evidence that for some years she lived in the house at Rozelle was unchallenged. The source of the money for the purchase is known and is uncontested: the question (on which those aspects of Ms Tosich's evidence throw no light) is, what was the transaction in which the Company's money was spent? Similarly, it was suggested to Ms Tosich, in cross‑examination, that she had sought from the Bank, and been refused, a loan for the purpose of buying a house; the suggestion was based on statements in some internal documents of the Bank (which are in evidence, but do not relate directly to an application by Ms Tosich for finance) and on evidence given by Mr Tosich in a public examination, to the effect that he had suggested that Ms Tosich approach the Bank for finance for the purchase of a house. Ms Tosich denied that she had made such an application. The applicants led no evidence to contradict that denial and I think it must be accepted. In any event, even if Ms Tosich had previously and unsuccessfully applied for finance, it is not easy to see that that fact would be of any particular assistance, in the context of the other evidence, in characterising the payment made by the Company on the completion of her purchase. (iii) Treatment of transaction in Company's books There is no difficulty about the treatment of the $1.2 million borrowed by Mr Tosich from the Bank and paid to the Company: the books of the Company recorded it as a "term loan" to the Company from Mr Tosich. There is no reason to doubt that on 23 September 1993 the Company owed Mr Tosich $1.2 million. The evidence of Mr Tosich and of Mr R J Wyand‑Brooks, who was until the Company was wound up its accountant and financial controller, was that Mr Tosich directed Mr Wyand‑Brooks to arrange for the provision of the bank cheques to complete the purchase of the house and that, at about the time he did so, directed also that the amount paid for the house be debited to Mr Tosich's loan account. That evidence was challenged (though it was maintained in cross‑examination) by reference to what was said to be its improbability in the light of the way in which the payment was actually treated in the books. There is no doubt on the evidence that Mr Wyand‑Brooks had the authority to cause the payment to be recorded as, he said, Mr Tosich had directed. There is no doubt that it was not then recorded in that way, and I shall return to the entries that were actually made. Mr Wyand‑Brooks suggested that there might have been a practical difficulty in making entries to give effect to the direction, but in the end he was unable to give an explanation of what difficulties there might have been. His evidence was, in part, as follows: THE WITNESS: I don't believe in the first instance I allocated the cheque requisition in as much as I had not set up an account in the system to be able to allocate it to, so I believe - and I don't know, I believe it would have been of the order of - to Ms Pocock [a bookkeeper/accountant who assisted Mr Wyand‑Brooks] to input it anywhere for her purposes of her bank rec and sort it out later. MR DURSTON: Right. So what, she would have chosen to put wherever she chose to put it? - It could well have been. I honestly cannot remember, but it could well have been. The account codes haven't been set up. . . . Is that that difficult to set up? - I had a problem in my mind as to how to show it in as much as I wanted the numbers to be netted off, but I had to keep a tag on reconciling the loan amount with a separate bank statement. . . . But the physical setting up of the account, was there anything that prevented that code number, that four digit number, being set up on 23 September? - No. . . . And so that account could have been set up at that time and allocated to that on that day and the description could have been altered when you had sorted out that issue, which you have just described? That could have happened or could have been done? It was physically able to be done? - If I knew which section of the accounts I wanted to put the account in. Well, what is the difficulty? Did Mr Tosich already have a loan account at that date? - No. There was no loan account for Mr Tosich at that date? - Only an account for the company owing to Mr Tosich, which is the problem I referred to. There was only one account owing to - moneys already owing to Mr Tosich? - Yes. Then why could you not have just taken it off that on the day? - I can't remember why not.

What actually happened was that the $273,990.32 was debited to an account of an associated body, Lenska Pty Limited (Lenska), in the Company's books. That, Mr Wyand‑Brooks said, was a mistake. A second series of mistakes then occurred when Mr Wyand‑Brooks caused a number of further entries to be made as at 31 December 1993. Mistakenly believing that the debit had been not to Lenska but to Staratos, he caused a sum of $323,990.32 (intended to include the money paid for the house) to be credited to the account of Staratos and debited (for reasons which the evidence does not enable me to understand) to trade debtors. Finally, following a review of the accounts in February, Mr Wyand‑Brooks caused a number of further adjustments to be made, including crediting trade debtors with the amount previously debited, and debiting instead an account which Mr Wyand‑Brooks described as "R S Tosich loan drawings" but which seems in the books of the Company to have been described simply as "Loan Drawings" (there is no reason to doubt that it was intended to reflect drawings by Mr Tosich); at the same time the debit of $273,990.32 was "reversed out of" Lenska. Pausing there, it may be observed that by the series of entries I have described Mr Wyand‑Brooks had corrected, or at least reversed, what he described as two errors previously made. He had not, however, effected what, on his evidence, he was instructed to effect: rather than simply debit the "term loan" account of Mr Tosich (which continued in existence) he set up, instead, a separate "loan drawings" account. That is significant, if only because, on Mr Wyand‑Brooks' evidence, Staratos became indebted to Mr Tosich as a result of the application of the additional $600,000 raised by Mr Tosich from the Bank as part of the "restructuring" in April 1994; and, following a series of transactions including disposals of properties owned by Staratos, funds of Staratos were applied to repay Mr Tosich's "loan drawings" account with the Company, the debt owed by Staratos to Mr Tosich being reduced accordingly. It is from that series of transactions that there arises the alternative view of the transaction outlined in the defence, that is that the payment of the money for the house was an advance by the Company to Mr Tosich which was repaid before the Company was wound up. That view of the matter is supported by affidavit evidence given by Mr Skinner, one of the receivers and managers appointed by the Bank. It was suggested by the applicants that I should not accept the accounts given by Mr Tosich and Mr Wyand‑Brooks and should accept, instead, the evidence of Ms Pocock (the bookkeeper/accountant) whom counsel for the applicants described as the only truly independent witness. But the evidence of Ms Pocock is really of very little assistance on the issues I have to decide. She had no recollection of the drawing or allocation of the funds used for the purchase of the house; she said that the allocation of payments, other than routine payments, was a matter for Mr Wyand‑Brooks. Mr Wyand‑Brooks, however, gave evidence that allocations were (in cases of doubt) dealt with by Ms Pocock and would often be incorrect, but that as a practical matter this was of no concern because mistakes would be identified and corrected either in the course of monthly reviews of the accounts or in the course of making year end adjustments. Mr Wyand‑Brooks' account of the initial allocation of the drawing for the house was somewhat equivocal. He agreed with the suggestion that "the person that was responsible for doing the allocation" was himself; but there is also a suggestion, in his evidence, that the initial allocation to Lenska was made by Ms Pocock (Lenska being a company which provided services to the Company and to which certain relatively large cheques were regularly debited, including cheques for wages and group tax). No reason having been suggested why the sum might intentionally (on Mr Wyand‑Brooks' part) have been debited to Lenska, however, and none being apparent, I am inclined to think that Mr Wyand‑Brooks' evidence is perhaps the more likely; but, a deliberate allocation by Mr Wyand‑Brooks being improbable, the making of that allocation in error by Mr Wyand‑Brooks seems hardly more probable. The second series of entries, conceded by Mr Wyand‑Brooks to be, like the allocation to Lenska, a "glaring error", is not easy to understand at all but would be particularly surprising (given that the allocation to Lenska remained untouched) if Mr Wyand‑Brooks had made the allocation to Lenska or known about it. It may well be true that not much care was given, as Mr Wyand‑Brooks suggests, to allocations between monthly reviews of the accounts or even, in some cases, before the end of the financial year. Nevertheless the "glaring errors", particularly the second series of entries made as at 31 December 1993, are puzzling. But the fact that they are puzzling does not, I think, give any particular assistance to the applicants. It does not, in my view, either point to a conclusion that the payment for the house was by way of direct gift to Ms Tosich or to a negative conclusion that there is simply no evidence sufficient to enable the Court to be satisfied as to any other characterisation.

Accounting entries, after all, reflect, and may provide evidence of the nature of, the underlying transaction. The character of the underlying transaction depends, principally at least, on the intention of those who entered into it. Here the person whose intention is principally relevant is, of course, Mr Tosich. His evidence as his intention is supported by the evidence of Mr Wyand‑Brooks. It is that the amount paid was to be debited to his account with the Company. Since, at the time, Mr Tosich had recently become a substantial creditor of the Company, that intention is not inherently a surprising one. Although the books reflect, in the end, the creation of a "loan drawings" account rather than a simple debit to the term loan account, they are at least consistent with an intention that the drawing was to be on account of Mr Tosich and by way of a reduction of the Company's net indebtedness to him. The entries reflecting that state of affairs were made some time before receivership or liquidation supervened. Aspects of the "glaring errors", particularly perhaps the intervention of "trade debtors" are surprising, but an alternative explanation, that what were described as errors were rather blundering attempts to disguise the true nature of the transaction, would, in my view, be scarcely credible. Ms Pocock also gave evidence, on which some reliance was placed, that a large number of cheques was drawn each month but not sent out to their payees. Her evidence was that she was told that this was done because the Company had insufficient funds to meet the cheques. Mr Tosich, Mr Wyand‑Brooks and Mr George Hajos, the partner of Coopers & Lybrand responsible for the audit of the Company, all agreed that cheques were drawn and retained but not for the reason given by Ms Pocock: a common reason was that conditions entitling the payee to payment had not been met. Despite the concession that the Company was insolvent on 23 September 1993 (a concession which, though I see no reason to doubt it correctness, neither Mr Tosich nor Mr Hajos was prepared to support in evidence) I doubt, giving the continuing support of the Bank and the funds advanced by Mr Tosich, that the Company was at that time unable to meet its ordinary business outgoings. Again, however, I very much doubt that it matters. Particularly, I do not see how the retention of cheques owing to shortage of funds (if it happened) throws any light on the nature of the transaction by which funds were used to pay for the house. In my view, the appropriate finding on the evidence is that the payment, on 23 September 1993, of $273,990.32 was intended, and operated, as a payment by the Company at the direction of Mr Tosich in reduction of Mr Tosich's net indebtedness to the Company. Was there nevertheless an uncommercial transaction of the Company? The word "transaction" is defined, in s 9 of the Law, as meaning, for the purposes of Part 5.7B, "a transaction to which the body [here, the Company] is a party" and a list of examples of such transactions is then given, including: (d) A payment made by the body ...

The appellants argued that even if I should conclude that, as between the Company and Mr Tosich, the payment on 23 September 1993 operated to reduce the Company's indebtedness to Mr Tosich (the transaction then, as between Mr Tosich and Ms Tosich, being a gift to her from him) I should nevertheless regard the various steps as constituting together a transaction of the Company. Counsel relied, for the proposition that a transaction, for the purposes of Part 5.7B, might cover a series of steps, on Nilant v Plexipack Packaging Services Pty Ltd (1996) 21 ACSR 428 (FCA, Nicholson J) and sought to distinguish the actual decision in that case (that the payments there sought to be impugned were not transactions of the company concerned) on the facts. Counsel also relied on a number of cases dealing with the word "disposition" in s 85 of the Family Law Act 1975 and its predecessor, s 120 of the Matrimonial Causes Act 1959: Cameron v Cameron (1968) 12 FLR 22; Official Trustee v Bassola (1986) 11 FamLR 557; In the marriage of Heath (1984) FLC 91-517; In the marriage of Davidson (1994) 17 FamLR 656. The proposition for which those cases were cited was, as expressed in Bassola at 560 by Murray J, that a "disposition": ... may consist of a number of steps taken in completing a transaction provided there is a causal link between the first step and the final vesting of property in the disponee.

I can see no reason to doubt that a "transaction" of a company for the purposes, for example, of s 588FB may made up of several steps, some or all of which might also be properly described individually as transactions. But it does not follow from that general proposition that the nature of the individual steps can be ignored in considering the questions which the Law, in this case s 588FB, requires to be answered.

Section 588FB(1) tells us what is, for the purposes of the Law, an uncommercial transaction: A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter.

If in this case the Court were to regard all the relevant steps that were taken on 23 September 1993 as one transaction, it would not follow, because the last of the steps was a gift to Ms Tosich, that the transaction was an uncommercial transaction. The question to be asked is whether the transaction was one which a reasonable person in the Company's circumstances would not have entered into, having regard to the matters specified. It is not possible to answer that question simply by reference to the benefit which Ms Tosich received and for which she gave no consideration. The matter must be looked at from the point of view of the Company. It suffered, no doubt, a detriment by reason of the reduction in its working capital; it obtained a benefit to the extent that its net indebtedness to Mr Tosich was reduced. It is not easy to see why a reasonable person in the Company's circumstances would have regarded the fact that Mr Tosich was to apply the proceeds of the reduction of his debt in making a gift to his daughter as particularly relevant to the question whether the Company should enter into the transaction. Other matters might have been relevant, as contemplated by para (d) of subs 588FB(1): one might have been whether in fact Mr Tosich was entitled then to require payment of the debt owing to him; but there was no suggestion that he was not. Another question which was not explored, but which could conceivably, in a case such as this, give rise to other relevant matters is the relationship between insolvency, or perhaps the view of its solvency or otherwise which a reasonable person would have taken in the company's circumstances at the time, and what a reasonable person might be expected to have done. I mention these matters, which do not arise on the case which the applicant sought to make or on the evidence, only to demonstrate why I am not prepared to hold, as counsel for the respondent invited me to, that a transaction for which value is given (including by way of the reduction of a debt) cannot be an uncommercial transaction. It is by no means impossible, I think, to conceive of circumstances in which it could be one. But the case before me was put on the basis either that I should not accept what the respondent claims to have been the effect of the transaction as between the Company and Mr Tosich or, alternatively, that I should look at the transaction as a whole, including the gift to Ms Tosich, and treat it as a "hiving off" of the Company's assets to a member of a director's family. The applicants' case fails in its first aspect, as I have held, on facts. It fails in its second aspect because, looked at from the Company's point of view, the transaction involved not a "hiving off" but the reduction of a net indebtedness. Conclusion Although the case is by no means an entirely easy one, either on the facts or as a matter of applying the relatively new provisions of Part 5.7B of the Law, for the reasons I have given the application in my view must be dismissed. The applicants should pay the respondent's costs. I certify that this and the preceding 17 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane. Associate: Dated: 15 April 1997 Heard: 26 and 27 March 1997 Place: Sydney Decision: 15 April 1997 Appearances:Mr D J Durston of counsel instructed by Ross Koffel Solicitors appeared for the applicant. Mr V R W Gray of counsel instructed by Henshaws appeared for the respondent.