Plaintiff v Defendants

2 In late December 2004, Jordanlane demanded payment pursuant to the Deed of Guarantee from Mr Landeryou.[1] Subsequently, this proceeding was issued against Mr Landeryou seeking the amount said to be due under the Deed of Guarantee. Whilst in this proceeding claims were also made against Ms Kitching and Mr Andrew Landeryou, the claim against Ms Kitching has resolved and the claim against Mr Andrew Landeryou has been determined by a default judgment.

3 At trial, Mr Landeryou's solicitors sought and obtained leave pursuant to rule 20.03 to file and serve a notice that they have ceased to act for him. Upon being satisfied that Mr Landeryou was aware that the trial was listed for hearing on 13 October 2008 and that Mr Landeryou has been aware of this fact for a number of months,[2] I proceeded to hear the trial in his absence. For the reasons given below, Jordanlane's claim against Mr Landeryou succeeds and there will be judgment against him in its favour.

4 At trial, Jordanlane called evidence from Stephen Darrell Kenmar, who witnessed two of the parties to the Deed of Settlement, Mr Solomon Lew and Mr Michael McLeod, sign the Deed of Settlement.[3] Jordanlane also called Mr Gideon Rathner, the official liquidator of IQC, the substance of whose evidence was that there was no basis for saying that IQC was insolvent.[4] Additionally, Jordanlane called the solicitor who has the carriage of the matter on its behalf, Mr Samuel Maxwell Bond, to establish the sending of a copy of the fully executed Deed of Settlement to Mr Landeryou's then solicitors on 15 September 2004.[5]

5 There was effectively no dispute about the core facts upon which Jordanlane's claim against Mr Landeryou was based. Jordanlane was largely able to prove its case out of the admissions contained in Mr Landeryou's defence and as a result of his failure to make timely responses to notices to admit.[6] The facts may be briefly stated as follows. On 25 August 2004, Ms Kitching executed the Deed of Settlement and Mr Landeryou executed the Deed of Guarantee. The Deed of Settlement relevantly provided:

"1. JL agrees to sell and KK agrees to purchase all of JL's shareholding in IQ Corporation Pty Ltd (in liquidation) (ACN 090 148 262) ("IQC"), being 28,600,000 shares ("the JL Shares"), for a purchase price of $3,000,000.00 ("the Purchase Price").

1. 2. In consideration of the promise of JL to transfer the JL Shares in accordance with clause 6 below, KK hereby agrees to pay the sum of $3,000,000.00 ("the debt") which sum is acknowledged to be immediately due and owing to Jordanlane.
2. 3. JL agrees to refrain from calling on the debt provided that KK pays the debt as follows:

(a) the sum of $2,000,000.00 on or before 4.00pm on 22 December 2004;

(b) the sum of $500,000.00 on or before 4.00pm on 1 September 2005;

(c) the sum of $500,000.00 on or before 4.00pm on 1 September 2006.

1. 4. In relation to the payments set out in clause 3 above, time shall be of the essence.
2. 5. In the event that KK fails to comply with any of the obligations set out in paragraph 3 above, the whole of the debt then outstanding ("the default sum") shall become immediately due and payable to JL together with interest on the default sum from the time of default at a rate prescribed by the Penalty Interest Rates Act.
3. 6. JL confirms that the JL Shares are presently free from any encumbrance and on execution of this deed JL shall not transfer, assign or encumber or in any other way deal with the JL Shares other than in the manner set out in this deed.
4. 7. From the date upon which the executed share transfer form is provided pursuant to clause 6 above, JL will be deemed to hold the JL Shares on trust for KK or her nominee and JL will not transfer, assign, encumber or in any other way deal with the JL Shares except at the direction of KK or her nominee.
5. 8. Without limiting the operation of clause 7 above, JL gives no warranty and makes no representation about the ability of KK or her nominee to transfer successfully the JL Shares to her or her nominee and KK or her nominee assume any risks in that regard. The payment of monies under clause 3 above is not dependent upon the successful registration of the JL Shares by KK or her nominee."

The Deed of Settlement also went on to provide for Ms Kitching to give an unregistered mortgage over a property (clause 9); for the possibility of terminating the winding up of IQC (clause 11); for the provision, in the event of default, of five clear business days being given to Ms Kitching of such default before proceedings could be commenced (clause 14); for the requirement of the procuring of Mr Lew's and Mr McLeod's execution of a counterpart of the Deed of Settlement within 30 days of 25 August 2004 (clauses 20 and 21) and for mutual releases (clause 23).[7]

6 By clause 1.1 of the Deed of Guarantee, Mr Landeryou "irrevocably and unconditionally guarantee[d] to Jordanlane the full and complete performance by [Ms] Kitching of all of her obligations under the Principal Transaction [which was defined as an agreement by Ms Kitching to purchase the shares of Jordanlane in IQC for the sum of $3 million]". The Deed of Guarantee required Mr Landeryou to personally perform all of the guaranteed obligations, and in particular pay all amounts payable by Ms Kitching if she did not fully and completely perform her obligations when due, within seven days of receiving a written notice of demand.[8]

7 On 15 September 2004, Mr McLeod and Mr Lew signed counterparts of the Deed of Settlement. Whilst written submissions filed on behalf of Mr Landeryou suggest that this fact has not been proved by admissible evidence and therefore should not be taken to have been established, Mr Kenmar gave direct evidence that he personally witnessed each of Mr Lew and Mr McLeod sign the Deed of Settlement on 15 September 2004 (that is, within the 30 day period required by clause 21 of the Deed of Settlement).[9] Ms Kitching failed to pay the sum of $2 million to Jordanlane on or by 4.00 p.m. on 22 December 2004. Ms Kitching's then solicitors received a letter of demand from Jordanlane's solicitors on about 23 December 2004. Following the demand referred to in this letter, Ms Kitching failed to pay the sum of $3 million plus interest or any other sum to Jordanlane. In late December 2004, by way of prepaid letter to his then solicitors, Mr Landeryou received the written notice of demand referred to in paragraph 15 of the statement of claim.[10] Following the demand in late December 2004, Mr Landeryou has failed to pay the sum of $3 million plus interest or any sum to Jordanlane. The property referred to in clause 9 of the Deed of Settlement was sold on 2 July 2005 and the sum of $1,135,936.04 was received by Jordanlane.

8 By the evidence it called and by the admissions made by Mr Landeryou (in his defence and as a result of the services of the notices to admit referred to above), Jordanlane has, subject to any defence raised by Mr Landeryou, established an entitlement to be paid by Mr Landeryou the amounts owing by Ms Kitching. Specifically, Jordanlane established:

(a) Ms Kitching defaulted on 22 December 2004 and $3 million plus interest thereby became payable.

(b) Clauses 20 and 21 of the Settlement Deed were complied with in that Mr Lew and Mr McLeod executed a counterpart of the Deed of Settlement within 30 days of 25 August 2004.

(c) Clause 14 of the Settlement Deed was complied with in that Jordanlane gave Ms Kitching five clear business days written notice prior to commencing proceedings.

(d) Ms Kitching did not perform the obligations described as the "Guaranteed Obligations" in clause 1.2 of the Deed of Guarantee within seven days of receiving a written notice of demand.

9 It follows that in the absence of some specific defence of Mr Landeryou's succeeding, Jordanlane would be entitled to judgment.

10 Mr Landeryou did not appear at trial. He gave no evidence and he called no evidence. Nevertheless, his defence raises an issue concerning the operation of s 468 of the Corporations Act 2001. Further, various defences are taken in paragraphs 6, 6A, 6B, 14 and 14A of his amended defence[11] which are predicated upon a construction of s 468 for which he contends. Before turning to s 468, there are two matters referred to in the defence which I should deal with specifically. First, in paragraph 14(b) of the defence,[12] it is asserted that the Deed of Settlement "was not executed by either Solomon Lew or Michael McLeod within 30 days of 25 August 2004, and so is of no force or effect by reason of its clause 21". It is then asserted in paragraph 17 of the outline of submissions of the third defendant that "in those circumstances, since the deed was ineffective, there was no primary or underlying obligation for the third defendant to guarantee, and the plaintiff's claim against him must fail". I have already found that there was evidence that the Deed of Settlement was executed as required by clauses 20 and 21 of it.[13] For the reasons given above,[14] the assertion by Mr Landeryou that the Deed of Settlement was not executed by Mr Lew or Mr McLeod as required by its terms must be rejected.

11 Secondly, in paragraph 6A(b) of the defence, it is asserted that IQC was insolvent at the time the Deed of Settlement was executed. There is no evidence in support of this proposition. Indeed, Mr Rathner's evidence, to which I have referred above,[15] was that there was no basis for saying that IQC was insolvent.[16] It follows that this assertion by Mr Landeryou must also be rejected. In any event, to the extent that this assertion is relied upon to support a contention that the consideration provided by Jordanlane to Ms Kitching was "worthless",[17] it must be remembered that the Deed of Settlement was executed as a deed.[18]

Section 468 of the Corporations Act

12 Section 468(1) of the Corporations Act, as it was in force at the time the Deed of Settlement was executed,[19] provided:

"Any disposition of property of the company, other than an exempt disposition, and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void."

13 In his defence, Mr Landeryou contended that, because IQC was in liquidation at the time the Deed of Settlement was executed, the purported sale of shares to Ms Kitching was void. Upon this contention he then asserted defences as follows. First, the consideration provided by Jordanlane to Ms Kitching was said to be worthless. Secondly, because the purported sale was void, the Deed of Settlement was entered into by Jordanlane in contravention of ss 51AA, 51AB and/or 51AC of the Trade Practices Act 1974 (Cth) or ss 12CA, 12CB and/or 12CC of the Australian Securities and Investment Commission Act 2001 (Cth) and was "a harsh and unconscionable bargain in equity" and "liable to be set aside". Thirdly, he contended that the consideration expressed for the guarantee given by him was the transfer of shares in IQC and as that consideration was void, he was, at the time he signed the Deed of Guarantee, acting under a mistake in believing that the Deed of Settlement was valid. He then contended that, at the time he signed the Deed of Guarantee, Jordanlane knew or ought to have known that the Deed of Settlement was not valid and that he was acting under a mistaken belief and therefore that Jordanlane acted unconscionably in entering into the Deed of Guarantee. All of these contentions are based upon the interpretation of s 468 for which he contends.

14 The short answer to the propositions in Mr Landeryou's defence and written submissions is that the construction of s 468 contended for by him is wrong. Whilst any transfer of shares made after the commencement of a winding up is void unless appropriately sanctioned so far as regards any effect to be given to it by the company, a contract to transfer shares is not rendered void by the section as between the parties themselves.[20] This is because the purpose of s 468(1) in relation to the transfer of shares[21] is to prevent a shareholder from evading liability as a contributory by transferring shares to some impecunious person after a winding up has commenced[22] and this purpose is sufficiently served by avoiding the transfer only so far as the company is concerned. It follows that the defences raised by Mr Landeryou in his pleadings are no answer to Jordanlane's claim against him. In any event, I note for the sake of completeness that there is no evidence that Jordanlane knew or ought to have known that the Deed of Settlement was not valid and there is no evidence that Mr Landeryou had any belief (mistaken or otherwise) as to the force and effect of it.[23]

15 For the reasons given above, there will be judgment for the plaintiff against the third defendant for the amount of $1,864,063.96[24] added to an amount calculated for interest at the rate prescribed by the Penalty Interest Rates Act in accordance with clause 5 of the Deed of Settlement on the amount of $3 million until the proceeds of the sale of the property were received by the plaintiff and on the amount of $1,864,063.96 thereafter.

16 Subsequent to the hearing of this matter, and pursuant to leave granted to them, the solicitors for Jordanlane submitted an interest calculation for use in the event that I concluded that Jordanlane was entitled to judgment. The interest calculation runs from 30 December 2004 until the date of this judgment (20 October 2008) and applies the relevant penalty interest rates on the amounts referred to in paragraph 15 above. The calculation totals $934,835.18. The calculation is correct, save for one matter. The plaintiff's calculation assumes that the sum of $3 million is outstanding until 29 September 2005. However, there is no evidence supporting this date. The only evidence as to the receipt of the sum of $1,135,936.04 is that the property which produced this amount was sold on 2 July 2005. Accordingly, I propose to calculate interest on the basis that the proceeds of sale of the property were received on 2 July 2005. On this basis, interest to 20 October 2008 totals $902,982.29. Accordingly, there will be judgment for the plaintiff against the third defendant in the sum of $2,767,046.25. I will hear the parties on the question of costs.

[1] A similar demand was made from Mr Andrew Landeryou, who had also executed a Deed of Guarantee in the same form as that executed by Mr William Landeryou.

[2] See the supplementary affidavit in support of application for leave to withdraw sworn by Stephen Vincent Curtain on 10 October 2008.

[3] Mr Kenmar's witness statement signed and dated 13 October 2008 is Exhibit "A" in this proceeding.

[4] Mr Rathner's witness statement signed and dated 13 October 2008 is Exhibit "B" in this proceeding.

[5] The witness statement of Mr Bond signed and dated 13 October 2008 is Exhibit "C" in this proceeding.

[6] Whilst at an earlier stage in this proceeding Mr Landeryou made application to be relieved from the operation of rules 35.03 and 35.05, this application was subsequently not proceeded with.

[7] References to JL in the Deed of Settlement are references to Jordanlane and references to KK are references to Ms Kitching.

[8] Clause 1.2 of the Deed of Guarantee.

[9] See also City of Melbourne v Holdenson & Nielson Fresh Foods Pty Ltd [1959] VicRp 82; [1959] VR 626 at 630.

[10] The receipt of this document was acknowledged by Mr Landeryou's then solicitors in early January 2005.

[12] Whilst it is, as I have said above, an amended defence, I will continue to refer to it as "the defence".

[16] See Exhibit "B" at paragraph 7 and T15.17 - 16.10.

[18] See generally ss 73 and 73A of the Property Law Act 1958.

[20] See In Re Onward Building Society [1891] 2 QB 463 per Lord Esher MR at p.475 and Carringbush Corporation Pty Ltd v ASIC [2008] FCA 474 per Greenwood J at paragraphs [25] and [26]. See also the reasoning underlying the judgment of Megarry J in Sullivan v Henderson [1973] 1 WLR 333 and National Acceptance Corporation Pty Ltd v Benson (1988) 12 NSWLR 213, and in particular per Kirby P at 215. Whilst it might be contended that Sullivan v Henderson can be distinguished because in that case the underlying contract was entered into prior to the winding up order being made, that fact did not form part of the basis for Megarry J's judgment. See further Koutsojiannis v Brown (1981) NZCLC 95-007 at p.98, 084.

[22] See Rudge v Bowman (1868) LR 3 QB 689.

[23] Whilst there are a number of other answers that might be given to Mr Landeryou's defences concerning the inapplicability of various of the statutory provisions upon which he relies in the Trade Practices Act and the Australian Securities and Investment Commission Act, and concerning the operation of clauses 7 and 8 of the Deed of Settlement, it is not necessary to burden these reasons with an exposition of those matters having regard to what I have already said in paragraphs 13 and 14 above.

[24] Being the amount of $3 million less the proceeds of the sale of the property in the sum of $1,135,936.04.