Peter Pan Management Pty Ltd (in liq) v Capital Finance Corporation

5. The essence of PPM's complaint, broadly stated, is that Capital procured certain required security for PPM at a cost to Capital of $3,693,000 and provided it to PPM at a cost of $4,561,000 thereby taking an undisclosed profit or fee of $868,000 to which it was not entitled.

9. The claims arise out of a fund-raising arrangement, by way of a type of managed investment scheme, for the production of a new musical play of the story of "Peter Pan". The concept of the production was developed by a theatrical producer, Kerry James Jewel ("Jewel"), commencing in 1993. During 1995, Jewell had discussions with Malcolm Brian Olivestone ("Olivestone"), the managing director of Pacvest Securities Ltd ("Pacvest"), on the subject of the fund-raising arrangement.

12. Capital was and is a commercial financier and had been for some years involved in the financing of film and theatrical productions. Park was the sole director of Capital. Capital (Park) and Pacvest (Olivestone) had been associated in the financing of a number of theatrical productions prior to "Peter Pan". Discussions between Olivestone and Park in relation to "Peter Pan" took place in about December 1995. Olivestone told Park that he expected Pacvest would be appointed manager with the responsibility of raising finance for prospective investors in the production. In late 1995 Olivestone told Jewel that Capital might be an appropriate financier to be involved in the funding arrangement. In December 1995, Olivestone produced a draft proposal which listed Capital as the financier which was to have "the exclusive right to fund investors into the project" and to "receive a remuneration derived from such funding exercise". D&D Tolhurst Ltd ("Tolhurst") were listed as proposed underwriters. A copy of the draft proposal was provided to Capital.

15. On 2 January 1996 Jewel caused to be incorporated a company called Peter Pan The Production Pty Ltd ("PPP"). Jewel and his wife were the directors. On 23 January 1996 Pacvest and PPP signed a non-binding Memorandum of Understanding outlining the proposed funding arrangement, a copy of which was provided to Capital. The Memorandum stated that Capital would "provide funding to approved applications for investment under the prospectus, upon terms which are reasonably commercial".

18. The initial funding to PPP for the production was provided by Mr and Mrs Jewel and by St George Bank which took a registered debenture over the assets of PPP on 3 May 1996. As part of the arrangement to raise funds for the production, PPM was incorporated on 1 May 1996. The directors of PPM were Jewel, Kimbal John Andrews and Olivestone of Pacvest. Pacvest became a party to an "Approved Deed for Theatrical Ventures" dated 14 March 1996 ("the Approved Deed"), the other party being Peter Moore Williams ("Williams"). The Approved Deed set up a "fund" and general machinery under which Pacvest as "the Manager" could issue prescribed interests to investors (referred to as "Participants") who contributed to the fund. Williams was appointed as the Participants' Representative to act on their behalf and as trustee of the fund and the fund was to be used for the purpose of expenditure for a theatrical production. The Approved Deed contemplated the execution of further agreements and the issue of a Prospectus.

21. The Prospectus was issued on 6 May 1996 by Pacvest (the Manager and Sponsoring Broker). Participants were offered "prescribed interests ... of a speculative nature". A taxation opinion indicated that contributions should be tax deductible. The subscription sought was 15,562 units of $1,000 each, resulting in a maximum subscription of $15,562,000. A minimum subscription of $4,500,000 was underwritten by Tolhurst. The Participants were to take a licence of the Production (Peter Pan) for a period of 13 months ("the Term") for an "up-front licence fee" of $3,500,000 payable to PPP to enable repayment of the interim funding or bridging finance for the Production. The Prospectus stated that the Participants would run the Production for 13 months and pay the running costs thereof by way of an "up-front contribution" of $12,062,000. The maximum subscription amount thus was to cover the total of these two "up-front" payments. "The Delegate" to be appointed to handle the day-to -day management of the Production on behalf of the Participants was PPM. If insufficient funds were raised to cover the running costs, PPM was to pay any shortfall in the running costs out of income from the Production.

24. The Prospectus stated that the Participants would receive a "guaranteed payment of income equivalent to the total amount contributed by each Participant" and that this payment would be made on or before 31 December 2001 and would be secured by "the Security" and that if PPM was unable to provide or procure "the Security" all contributions received from Participants would be returned. The Prospectus went on to state that Participants would also be entitled to specified shares of defined profits.

27. The Prospectus contemplated three agreements: the Approved Deed, the Licence Agreement, and a Management Delegation Agreement under which the Participants were to sub-contract to PPM their day-to-day management responsibilities. The Prospectus said that, as part of the Management Delegation Agreement, PPM guaranteed to the Participants, the Representative and the Manager that box office receipts would exceed budgeted total running expenses at any time and that average attendances would be not less than 96% of capacity of the various venues and that, if this guarantee was breached, PPM would pay to the Participants on or before 31 December 2002 an amount equal to their contributions and that "[t]he Delegate [PPM] would provide Security in respect of this obligation". It would seem that this obligation, and the Security for it, was the mechanism adopted for providing to the Participants the "guaranteed payment of income" referred to in the Prospectus.

30. "Security" was defined by the Prospectus as "an insurance contract with a reputable insurer approved by the Manager or a bank backed instrument from a bank ... or where Participants are borrowing funds from a financier any security approved by the Representative and the financier and which may be issued by a corporation and financial institution".

33. The Prospectus contained a broad budget breakdown for the running costs of $12,062,000 over 13 months, covering three planned venues for that period, starting with Perth (7 weeks) and then Melbourne (18 weeks) and Sydney (26 weeks). Senior counsel for the plaintiffs drew attention to the fact that the budget was flawed because although it covered costs of and incidental to the Prospectus of $1,815,000 in addition to the production costs, no provision at all was made in the budget for the cost of procuring "the Security".

36. A Management Delegation Agreement dated 28 June 1996 ("MDA") was entered into between Pacvest, Williams, PPM and PPP in order to implement what was foreshadowed by the Prospectus. The Representative (Williams) engaged the Delegate (PPM) as his sub-contractor for the Term and to provide the services set out in the MDA and, in particular, to manage the Production for the Term. Clause 3 of the MDA provided that the Participants would pay $3,500,000 (the Licence Expenses) to PPP and would pay $12,062,000 (the Non-Licence costs), or such lesser sum as was raised, to PPM. Clause 3.3 provided that, subject to the other provisions of the Agreement, PPM would spend the funds so received "on the Production in accordance with the Budget".

39. PPM was obliged to use its best endeavours to maintain and advance the interests of the Participants and not undertake other work (cl. 6). By cl. 11, PPM guaranteed to the other parties that total Box Office Receipts for the Production at any given time during the Term would exceed the Budgeted Total Running Costs at that time, that total Running Costs would not exceed Budgeted Total Running Costs and that the average attendance at the Production during the Term would be not less than 96% of capacity of the various venues (cl. 11.4). In the case of a breach of cl. 11.4, PPM agreed to pay to the Participants on or before 31 December 2002 the amounts of their Contributions and to provide Security in respect of this obligation (cl. 19.3).

43. In the event, Participants or investors subscribed a little in excess of $7,000,000 - less than half of the maximum subscription. Park, by his witness statement, gave evidence as to the obtaining of the "Security" for those investors, which evidence I accept as summarised below.

46. Prior to 9 August 1996, Olivestone informed Park that PPM had endeavoured to obtain but had been unsuccessful in obtaining security to ensure the guaranteed return to the Participants of an amount equivalent to their investment. Olivestone asked Park whether Capital would undertake the task of procuring the necessary security to ensure a guaranteed return of investor funds as provided in the Prospectus. On behalf of Capital Park agreed to provide this service.

49. During July and early August 1996, until the first settlement on 9 August 1996, Park had a number of conversations with Olivestone about Capital obtaining the necessary security for investors in the Peter Pan production. These conversations centred on the total fee or price which PPM was to pay Capital for the securities and not any profit which Capital would derive from the security transactions.

52. During the course of these discussions a disagreement arose as to the "deposit rate" which would be used to calculate the total cost to PPM for the provision of the securities. The total sum deposited with a bank or financial institution for a term bond had to earn sufficient interest to bring it up to the necessary redemption sum by 31 December 2002 (ie it had to equal the capital sum invested by the Participants in the production). The higher the interest rate, the lower the sum required to be deposited to achieve the guaranteed return by the redemption date. Conversely the lower the interest rate, the larger would be the sum required to be deposited to achieve the amount of the guaranteed return.

55. Negotiations took place between Olivestone and Park concerning a percentage rate which would be used to discount the five-year swap rate. The resulting rate was to be used to calculate the total amount which PPM was required to place on deposit as the purchase price for security by way of term bonds. Park pressed for the total fee or cost of the securities to PPM to be calculated on the five-year swap rate less 0.75%. Olivestone sought that the interest rate be calculated on the five year swap rate less 0.5%, which would result in a higher interest rate, which in turn meant that a lesser sum would have to be paid to Capital for its provision of the term bonds. Eventually they agreed on the 0.5% discount sought by Olivestone, which resulted in the total amounts payable by PPM for the securities being $3,663,670.62 for the first term bond in respect of a settlement on 9 August 1996 and $897,955.50 for a second term bond in respect of a settlement on 20 August 1996.

58. Because the five year swap rate was a rate which fluctuated daily, the amounts due to be paid by PPM to Capital for the provision of the term bond securities had to be calculated on the actual dates of the settlements. The five year swap rates are published each weekday in the `Australian Financial Review'. On the day of the first settlement on 9 August 1996 Capital obtained the five-year swap rate and deducted from it the agreed percentage of 0.5%. This gave a yield of 7.38%. The necessary redemption figure was then taken into account, being the `Future Value' of the first term bond security. This figure was then discounted back from the maturity date being 31 December 2002 to the date of the settlement (a period of 6.39726 years) by the factor of 7.38% to arrive at the `Present Value' of the security which was calculated initially at $3,105,318.88, and then at $3,663,670.62 to take into account an increase in the `Future Value' figure (from $4,900,000 to $5,805,000) which was necessary to accommodate a number of additional investors. A similar exercise was undertaken for the 20 August 1996 settlement, this time based upon a slightly lower five year swap rate which gave a yield of 7.14% based on a period of 6.367123 years. In this case an error occurred in the original calculation which showed a `Present Value' of $872,955.50. The error was rectified and the final agreed figure was $897,955.50. Capital arranged in each case for draft letters of engagement evidencing the security contracts between PPM and Capital to be drawn up which reflected the different amounts to be paid by PPM to Capital calculated for the day of each settlement. These were transposed onto the PPM letterhead in each case and signed on behalf of PPM in readiness for each settlement.

61. The security was provided by Capital in return for the payment of a total fee of $3,663,670.62 in respect of the security provided at the 9 August 1996 settlement and a total fee of $897,955.50 in respect of the 20 August 1996 settlement. Both sums were paid direct to Capital by PPM, and in return, Capital provided the term bonds as security.

64. On 9 August 1996 PPM provided a letter to Capital which included the following statement:

`We therefore request Capital Finance Corporation (Australasia) Limited arrange for the issue of such security. We promise to pay the amount of $3,663,670.62 for the abovementioned security and confirm that this amount is inclusive of all of your fees and expenses (if any).'

68. A similar letter was provided by PPM to Capital dated 20 August 1996 for the provision of the second term bond.

71. Park had no discussions with Olivestone or anyone else from PPM about the extent of any remuneration which Capital would derive from these security transactions. During the course of the discussions between Park and Olivestone leading up to 9 August 1996, Olivestone asked Park a number of times about the details of the arrangements between Capital and its bank, Oversea-Chinese Banking Corporation ("OCBC"), for the provision of the term bonds. Park told Olivestone that these transactions were confidential matters between Capital and its bank and that PPM was not entitled to this information.

75. The funds which were obtained from Participants or investors under the Prospectus were provided directly by the investors or, if an investor so wished, wholly or partly from money borrowed by the investor from Capital at 12.85% per annum interest. Capital in turn obtained its funds for this purpose by borrowing from OCBC at an agreed rate of interest. Capital also had an agreement with OCBC for the assignment to OCBC of loans to investors whereby OCBC agreed to purchase at face value loans to "approved investors" and to pay Capital an agreed periodic management fee to continue to administer them. Capital retained an outside company to check all investors against OCBC's credit criteria. In the result the Participants fell into three categories from Capital's point of view. There were the investors who provided their own funds, there were the approved investors who were financed by Capital but whose loans were purchased by OCBC and there were the remaining investors who were financed by and continued to be indebted to Capital.

78. OCBC thus provided three financial facilities to or for Capital:

(i) a "loan portfolio facility";

(ii) a "security facility" (by the issue of the term bonds relevant to the investors covered by the loan portfolio facility); and

(iii) term bonds for cash investors.

84. The "loan portfolio facility" involved an assignment of the bulk of the loans to investors by Capital to OCBC. OCBC accepted about 80 percent of the Peter Pan investors, leaving Capital to keep the risk for the balance. As I have said, OCBC agreed to pay a management fee to Capital in return for Capital continuing to administer the assigned loans. Capital also issued its own letters of credit to secure repayment in respect of the investors whose loans were not assigned to OCBC. In reality these letters of credit were simply pieces of paper representing the fact that the investors would necessarily be "repaid" by Capital discharging the loan debts due by them to it.

87. The "security facility" was the issue of term bonds by OCBC as requested by Capital pursuant to its agreement with the PPM.

90. In order to assist Capital's cash flow, Capital sought from OCBC, in this transaction, an advance payment on the management fees payable to it, which would otherwise have been paid progressively over the period of the loan. The mechanism adopted by OCBC to make this advanced payment was to increase the "deposit rate" on the monies provided by Capital for the term bonds. This made the term bonds cheaper for Capital to procure and thereby increased the margin between Capital's cost of procurement from OCBC and Capital's price received from the PPM for procuring the bonds. In return, Capital agreed to accept an increase in the OCBC base rate on the loans which resulted in a lesser margin for Capital for its ongoing management fees. All this was agreed between Park of Capital and one Lawrence of OCBC. Evidence from Lawrence confirmed Park's evidence concerning these arrangements and the detailed calculations involved in them.

93. Park testified in detail concerning the relevant calculations made by OCBC and I accept that the only consequence of these arrangements was that there was an internal commercial adjustment effected between OCBC and Capital with the result (as stated above) that Capital's ongoing management fees were reduced by an increase in the OCBC base rate, in return for which Capital obtained in advance management fee income representing part of the future income which it would have derived in any event. Olivestone was unaware of these arrangements.

97. Capital paid OCBC a total of $3,693,024 for the two term bonds. That sum was in effect drawn by Capital out of the total payments made by PPM to Capital for the provision of those term bonds, namely $4,561,626.

100. Olivestone was called to give evidence for the defendants. I found him to be a credible witness and I accept his evidence. Olivestone said that on behalf of PPM he had asked Capital to obtain the necessary securities because PPM "had been unable to obtain securities in the form of insurance cover to ensure a guaranteed return of the investors' funds as provided for in the Peter Pan prospectus". He had enquired of brokers both here and in London and of a number of banks. Olivestone said that his enquiries confirmed that the rate offered by Capital was as good as he could get in the market. Olivestone testified and I accept that PPM agreed to pay the fee "demanded" by Capital for the securities and made no agreement with Capital concerning the price at which Capital would itself purchase the securities. Olivestone confirmed that he had on occasions asked Park for details of Capital's purchase of the securities but that Park had refused, on the ground of commercial confidentiality, to reveal any details of the transactions between Capital and OCBC. Furthermore, Olivestone said that he assumed that Capital's remuneration for providing the securities included "a profit component", although he was surprised when he found out how much - however his concern was just with the bottom line. Olivestone confirmed Park's evidence that he had negotiated with Park concerning a discount from the five-year spot rate and that they had agreed on 0.50%. He also knew that Capital's costs and expenses were included in its price for the term bonds.

103. There was a substantial body of evidence which established the precise details of the money flows which occurred at the settlements on 9 and 20 August 1996. It is unnecessary to set out the details or the amounts involved. However, certain of the essential features of what occurred, a little simplified, must be mentioned. The payments and receipts which were organised on those dates were connected and interdependent. PPM had no funds of its own and its ability to purchase the term bonds from Capital and to repay (to the St George Bank) PPP's bridging finance for pre-production costs depended on the receipt of the investors' funds. The investors' funds had to be paid over by the Representative to PPM but he required from PPM in exchange for those funds the security constituted by the term bonds. The Representative held money from the cash investors but depended for the bulk of his funds upon the receipt from Capital of the moneys advanced to the investors by Capital. In turn, Capital's source of moneys for the loans to investors was partly the moneys paid to it by OCBC for the assigned loans and partly a proportion of the payments from PPM for the term bonds. In addition, Capital's source of funds for the purchase of the term bonds from OCBC was also the payments by PPM for provision of those term bonds - which brings one back to PPM which depended upon the receipt of the investors' funds to obtain the term bonds and repay PPP's bridging finance.

106. When "Peter Pan" opened in Perth on 21 July 1996, PPP had debts of over $3 million including over $2 million owed to the St George Bank for bridging finance. The show closed in Perth in the last week of August 1996. The show was scheduled to commence in Melbourne in September 1996 but failed to do so due to lack of funds.

111. The liquidator caused examinations to be conducted of persons, including Park and Olivestone, pursuant to the Corporations Law. Some of the answers which Park and Olivesone gave in those examinations no doubt caused the liquidator to give serious consideration to bringing this proceeding. In addition, the manner in which Park conducted himself in his examination and the gaps in the information which he provided no doubt strengthened the justification for a proceeding such as this in the minds of the liquidator and his advisers. A number of matters requiring explanation were raised in those examinations which were only answered fully by the time witness statements and supplementary witness statements had been tendered and, in some instances, cross-examination completed. Park was not a witness whose demeanor engendered immediate acceptance of his evidence and he was often difficult or evasive but, in the end, I consider that he did provide a credible account of the relevant transactions which was corroborated in material respects by Olivestone and Lawrence. Olivestone, too, had not given a clear account of the relevant facts in his examination under the Corporations Law but, as I have said, I found his evidence at trial to be credible.

114. I now turn to consider the plaintiffs' submissions.

118. The plaintiffs submitted that Capital had been retained by PPM as its agent to arrange for the term bonds. I do not accept that submission. I am satisfied on the evidence to the contrary. PPM and Capital agreed on the price which PPM would pay Capital to arrange for or procure the bonds. Capital in its own right then reached a negotiated price with OCBC to issue the term bonds. An agreement was made between OCBC and Capital as principals. As the defendants submitted, PPM had not authorized Capital to create legal relations between PPM and OCBC or any other party. I conclude that Capital was not appointed by PPM as an agent. In the absence of agency, a series of submissions by the plaintiffs concerning breach of fiduciary duty and constructive trust and claims for equitable compensation all fall by the wayside, as the plaintiffs conceded.

122. There is no good reason necessitating such a term to be implied into the agreements between PPM and Capital. The evidence, including the letters of 9 and 20 August 1996, shows that a price was fixed and agreed for provision of the securities. The question of remuneration does not arise. Both sides based arguments upon the words in the letters "we...confirm that this amount is inclusive of all your fees and expenses (if any)". To my mind, these words were intended to negative any obligation of PPM to pay to Capital any fees and expenses in addition to the agreed price. The words do not show that the arrangement was one where the price was comprised of the cost of the securities, the fee for obtaining them and any associated expenses; they simply confirm that this is the "all-up" price for what Capital was providing and that there were to be no other charges. It is therefore unnecessary to decide whether Capital's "profit" was reasonable, but I will say that in my view it was strongly arguable that the evidence did not establish that Capital's margin was unreasonable when looking at the overall transaction.

126. It was common ground that PPM was insolvent at the time of the first settlement on 9 August 1996 and thereafter. The plaintiffs submitted that the transactions between PPM and Capital involving the term bonds were "insolvent transactions" within the meaning of s.588FC of the Law because they were "uncommercial transactions" within s.588FB of the Law.

129. Section 588FB(1) of the Law relevantly provided:

"(1) 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."

133. The plaintiffs submitted that a reasonable person in PPM's circumstances would not have made the agreement with Capital which it did concerning the term bonds and would not have purchased the term bonds from Capital out of the investors' funds. The plaintiffs argued that there was no benefit to PPM from the transaction because, after the repayment of PPP's bridging finance nothing more was left, after purchase of the term bonds, to cover anything contained in the budget set out in the Prospectus. Instead, there was a "detriment" to PPM "which should have received monies up to the $868,601" which might have been used to continue production of the show.

136. In my opinion, the plaintiffs' argument is misconceived. There was no evidence that the security which PPM was obliged to provide to guarantee the repayment of the investors' funds was available at any price less than that paid by PPM to Capital. On the contrary, Olivestone looked for but was unable to find security at a cheaper price. No better price was available - as the plaintiffs conceded. It is true that Capital obtained the term bonds from OCBC at a lower "price" but I am satisfied that that was because of the arrangements which Capital had negotiated with OCBC, which have been described above. There was no basis to contend that OCBC's price to Capital for the term bonds was available to PPM or to anyone else. There was no "detriment" to PPM, as argued, because had the term bonds not been purchased from Capital, the investors' funds would not been available at all. PPM's financial position would have been no better and no worse. However, without the investors' funds, PPP would have been unable to repay the St George Bank to the extent which it did and whatever chance there was to raise finance from other sources to continue the show would have been eliminated. I note that Jewel's evidence shows that an attempt was in fact made by him in mid-September 1996 to obtain further funding and a meeting with interested persons was held but the attempt failed.

139. In Demondrille Nominees Pty Ltd v Shirlaw,[2] the Full Federal Court said:

"Part 5.7B, headed "recovering property or compensation for the benefit of creditors of insolvent company" and comprised of ss 588D-588Z, was inserted in the Law by Act No 210 of 1992 with effect from 23 June 1993. Division 2 (ss 588FA-588FJ) in that Part is headed "Voidable transactions". Sections 588FB and 588FC within that Part assume particular importance in the present case. .... ... it is essential to bear in mind the context in which ss 588FB and 588FC appear. It will be recalled that they appear in a Division headed "Voidable transactions". Voidable transactions are the subject of subs 588FE(1) of the Law which provides that where a company is being wound up, a transaction of the company that was entered into after 23 June 1993 may be voidable because of any one or more of the succeeding subsections of s 588FE.... ...These provisions are clearly the current attempt by the legislature to balance the interests of the unsecured creditors of a company being wound up and those who would otherwise ... be the beneficiaries of pre-winding up transactions entered into by the company; cf para 1034 of the explanatory memorandum which accompanied the Corporate Law Reform Bill 1992. Uncommercial transaction .... Demondrille had, at Cornelis's expense, obtained "a bargain of such magnitude that it could not be explained by normal commercial practice". Using those words, the explanatory memorandum stated that it was transactions of such a kind at which s 588FB was aimed (explanatory memorandum, para 1044). On the facts found by the trial judge, the conclusion was inevitable that the transaction embodied in the agreement was an uncommercial transaction. Although we think that this conclusion is required by the plain terms of s 588FC, support for it is also to be found elsewhere. Section 109H of the Law is as follows: 109H In the interpretation of a provision of this Law, a construction that would promote the purpose or objects underlying the Law (whether that purpose or object is expressly stated in the Law or not) is to be preferred to a construction that would not promote that purpose or object_._ The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up (see explanatory memorandum, para 1014). To construe the expression "uncommercial transaction" to catch the Agreement in the way in which we have done promotes the purpose or objects of the provisions to which we have referred."

143. In Lewis v Cook,[3] Austin J said, concerning the definition of "uncommercial transaction":

"Thus there is only one question remaining, namely whether the purported forgiveness of the debt falls within the definition of `uncommercial transaction' in s 588FB(1). There are only a few reported cases on s 588FB(1), and not surprisingly they adopt a purposive interpretation as directed by s 109H. In Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535, the Full Federal Court referred to the Explanatory Memorandum to the Corporate Law Reform Bill 1992 (which introduced Part 5.7B). Paragraph 1044 of the Explanatory Memorandum speaks of transactions which result in `the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice', and transactions where `the consideration is nominal or trivial or lacks `a commercial quality'. The Full Court (at 548) said that the object of the section is to prevent a depletion of the assets of a company which is being wound up by certain `transactions at an under-value' entered into within a specified time limit before the winding up. In McDonald v Hanselmann [1998] NSWSC 171; (1998) 28 ACSR 49, 53, Young J referred to the Demondrille case and the Explanatory Memorandum and concluded that the test, at any rate where there is a sale at an undervalue, is whether there was `a bargain of such magnitude that it could not be explained by normal commercial practice'. The words `it may be expected that' in s 588FB(1) do not qualify the reference to what a reasonable person would have done. The section was intended to emphasise the objective nature of the inquiry - not an inquiry into what the particular company might have done, but rather into whether a reasonable person would not have entered into the transaction. However, although the inquiry is objective, the Court must have regard to `the company's circumstances' - which include the state of knowledge of the company when it enters into the transaction. Where the transaction is entered into or authorised by the board of directors, as here, the section requires an assessment of the state of knowledge of the directors: Tosich Construction Pty Ltd (in liq) v Tosich (Federal Court of Australia (Burchett, Foster & North JJ), unreported, 22 September 1997)."

147. In the present case it has not been demonstrated that the transaction between Capital and PPM involving the term bonds resulted in Capital obtaining a bargain of such magnitude that it cannot be explained by normal commercial practice. What Capital provided to PPM for the price was neither nominal nor trivial nor lacked commercial quality. PPM did not deplete any of its assets in entering the transaction. It simply performed its role as Delegate under the relevant agreements. Of course the transaction here was of a somewhat different type to those contemplated in the passages quoted above and the criteria in the section are quite wide. [4]

150. In conclusion, I am quite unpersuaded that a reasonable person in PPM's particular circumstances would not have entered the relevant transactions with Capital and I accordingly conclude that the transactions were not uncommercial transactions within the meaning of the Law.

153. The result is that all of the live contentions of the plaintiffs have failed and there must be judgment for the defendants. I will hear the parties on the question of costs.

[1] See ss.588FB, 588FC, 588FE, 588FF of the Law.

[2] [1997] FCA 1220; (1997) 25 ACSR 535, 546-548.

[3] [2000] NSWSC 191 at [45]- [46].

[4] See too the commentary in Keay: Insolvency (3rd ed., John Libby & Co Pty Ltd), 453-455.