R & N Holdings Pty Ltd v Cooper

DECISION : Appeals against rejection of proofs of debt dismissed

CATCHWORDS : CORPORATIONS - winding up - appeal against liquidator's rejection of proof of debt - no evidence to warrant proof of debt - no question of principle

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 232, 233, 259A,1321

CASES CITED : Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 Westpac Banking Corporation v Totterdell (1997) 25 ACSR 769

PARTIES : R & N Holdings Pty Limited and Raquel Angelica Quinones - Plaintiffs Mark Fraser Cooper - Defendant

COUNSEL : Mr G B Carolan - Plaintiffs Mr D R Stack - Defendant

SOLICITORS : Kelvin Solari - Plaintiffs NOT Lawyers - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3019/07 R & N HOLDINGS PTY LIMITED & ANOR v MARK FRASER COOPER

1 The plaintiffs are R & N Holdings Pty Limited ("R & N") and Mrs Quinones. The defendant is Mr Cooper, liquidator of Kelloheal Pty Ltd ("Kelloleal") which became subject to creditors voluntary winding up in November 2004 in consequence of earlier voluntary administration. 2 Each of R & N and Mrs Quinones sought to prove in the winding up of Kelloheal. Their respective proofs of debt were rejected by the liquidator. Each now appeals under s 1321 of the Corporations Act 2001 (Cth) against the rejection of the proof of debt. 3 The court's function under s 1321 to "confirm, reverse or modify" the liquidator's decision. The section does not distinguish between different types of decisions. It is available as a means of reviewing the exercise of a liquidator's discretion or a decision on a matter of business judgment. In cases of that kind, the court's main concern is to see whether the liquidator acted unreasonably or in bad faith. But in cases such as the present, where the decision under challenge is a decision with respect to the admission of proof of debt, the court takes a different approach. That approach was described by Brennan J and Dawson J in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 340-341 as follows: "The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo: Re Bird's Stores Pty Ltd (1931) 37 Arg LR 94; Re Kentwood Constructions Ltd [1960] 1 WLR 646; [1960] 2 All ER 655; Re Trepca Mines Ltd [1960] 1 WLR 1273; [1960] 3 All ER 304. In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation." 4 The appellant claiming to be aggrieved by the liquidator's decision to refuse to admit proof of debt has the onus of proving that the debt should properly be admitted to proof; and the appeal is by way of hearing de novo; Westpac Banking Corporation v Totterdell (1997) 25 ACSR 769. 5 It is necessary to deal separately with R & N and Mrs Quinones and their respective appeals but in approaching them separately I note that they together lodged a single proof of debt in the sum of $471,311 in which the debt was described as "See annexure A". The annexure A consisted of 59 pages, largely related to winding up proceedings initiated by R & N and Mrs Quinones against Kelloheal in 2004 under ss 232 and 233 of the Corporations Act, that is, the provision dealing with oppressive and like conduct. Among the documents is a deed of 26 March 2004 by which the proceedings were settled. 6 Although the combined proof of debt is framed in that way, argument before me proceeded on the clear footing that Mrs Quinones' alleged debt is a debt in the sum of $200,000 arising from a loan of that sum that she says she made to Kelloheal, while R & N's alleged debt is likewise a debt for a loan said to have been made to Kelloheal, in that case in the sum of $160,000. 7 The case Mrs Quinones advances is that she lent $200,000 to Kelloheal in order to assist Mr Hernandez, one of its two shareholders, "pay off" Mr Maund, the other shareholder, who, according to what Mr Hernandez told Mrs Quinones, was inhibiting the conduct and expansion of the business of Kelloheal. Mrs Quinones gave evidence of a conversation involving Mr Hernandez, her husband and herself in December 1999 or January 2000 in which Mr Hernandez said words to the following effect: "John Maund is stopping the business. He won't let us finish installation of the plant and product because I have to buy him out of the property at Goulburn. I neede $200,000 to pay him off. Will you borrow money from the bank on the security of your house to raise the funds to buy out John Maund so we can continue with the project?" 8 Mrs Quinones also gave evidence of Mr Hernandez having said at a later time: "I will pay all the $200,000 back to you in six to twelve months. You can keep $20,000 to pay interest until I give you the money back. I will give you 40 percent of the shares in Kelloheal as security. Once we get Maund out of the way and get some money from the bank there will be no problem paying you back. You can then transfer the shares back." 9 In February 2000, Mrs Quinones borrowed $200,000 from the Commonwealth Bank. Those funds were paid into the joint account of her husband and herself. Banking records show what happened thereafter. A cheque for $180,000 was drawn on the joint account and made payable to Mr Hernandez who endorsed it to his wife. The cheque was deposited into Mrs Hernandez's bank account. The remaining $20,000 it is said was, at Mr Hernandez's direction retained by Mrs Quinones as pre-paid interest. 10 There is, in the documentary evidence, no indication that the sum of $180,000 reached Kelloheal. Its bank statements reflect no relevant deposit; nor does its balance sheet of 30 June 2000 as prepared after the event by the liquidator show any liability for a loan of $200,000 or even $180,000. 11 Resort must therefore be had to evidence of conversations. I have already referred to the statements attributed to Mr Hernandez in Mrs Quinones' affidavit filed in these proceedings. I have also been taken to parts of an affidavit she swore in the winding up proceedings of 2004. According to that affidavit, Mr Hernandez said to Mr and Mrs Quinones: "Will you borrow money from the bank on the security of your house to raise the funds to buy out John Maund so that we can continue with the project?" 12 Mrs Quinone's 2004 affidavit also says that Mr Hernandez said: "I will pay all the $200,000 back to you in six to twelve months. Leave $20,000 to pay the interest until I give you the money back. I will give you forty percent of the shares in Kelloheal as security." 13 Mrs Quinones 2004 affidavit also states: "Jose Hernandez has not repaid to me the said sum of $200,000 or any part of it even though the twelve month maximum term of the loan has expired." 14 The following passage also appears in Mrs Quinones' 2004 affidavit: "By about January 2003 I had not been contacted by Jose Hernandez regarding repayment of the sum of $180,000, the purchase of my shareholding in Kelloheal Pty Ltd or the convening of any shareholders' meetings." 15 In another part of the 2004 affidavit Mrs Quinones referred to: "The money I loaned to Jose Hernandez ". 16 There is also a statement by Mrs Quinones in the affidavit: "I agreed to loan that money [clearly a reference to the $200,000] to Kelloheal Pty Ltd so that the project could continue." 17 I refer next to the evidence about the shareholding structure of Kelloheal. ASIC search materials in evidence suggest that Mr Maund held all one hundred shares in the capital of the company in 1999 and that, at least by early 2000, fifty shares were held by him and fifty by Mr Hernandez. By December 2000, however, it seems that fifty shares were held by Unity in One Pty Ltd (a company owned by Mr and Mrs Hernandez), forty by Mrs Quinones and ten by R & N. It is reasonable to infer that Mr Hernandez transferred his fifty shares to his family company and that Mr Maund's fifty shares were transferred as to forty to Mrs Quinones and ten to R & N. There is no suggestion that more than one hundred shares have ever been on issue. 18 The case Mrs Quinones seeks to make is that the forty shares she received in the capital of Kelloheal were held by her as security for the loan she made to Kelloheal. This implies that, if and when Kelloheal paid off the alleged loan, it would be entitled to have the shares released to it - in other words, that it had an equity to redeem in the shares. That equity would, it seems, constitute a "unit" of each relevant share within the definition of "unit" in s 9 of the Corporations Act so that the accrual of the equity to the company, Kelloheal, would entail a contravention of s 259A. Certainly any action of Kelloheal actually to take a transfer of the shares upon discharge by it of the alleged indebtedness would be prohibited by s 259A. There is also the point that the shares did not come from Kelloheal by way of issue, so that the means by which it gave the supposed security over them is obscure to say the least. 19 It is for Mrs Quinones to prove the loan transaction she alleges as the source of the debt she seeks to prove in the winding up of Kelloheal. She has not discharged the onus of proof. She has not shown that the moneys she paid reached Kelloheal. She has not produced any evidence that a debt for the loan was recorded in the books of Kelloheal. The arrangements regarding security for payment she asserts appear to involve contrivance and possible illegality and may therefore be regarded as unlikely to have been put in place. 20 The evidence is consistent, at all points, with an alternative transaction under which Mrs Quinones lent money to Mr Hernandez, Mr Hernandez used the money to buy shares in Kelloheal from Mr Maund and, having done so, transferred some of those shares to Mrs Quinones as security for the repayment that he was himself obliged to make to Mrs Quinones. Alternatively (and this is a version that derives support from a letter written by Mr Hernandez to the liquidator), Mrs Quinones paid the money to Mr Hernandez as purchase moneys for shares in Kelloheal - probably with Mr Maund as the seller of the shares. 21 I should add that, in cross-examination, Mrs Quinones began by being adamant that she had lent money to Kelloheal. Later when taken to the passages in her 2004 affidavit and several reference to lending to Mr Hernandez, she resorted to answers to the effect, "He is the director of the company, therefore, he is the company" - in other words, attempts to recast or reinterpret her earlier sworn statements to make them support the proposition that the company was the borrower. 22 There is also the point that in the 2004 winding up proceedings reliance was placed by Mrs Quinones and R & N solely on the ss 232 and 233 grounds of oppression and like conduct, with no attempt being made by those plaintiffs as creditors to assert creditor rights or insolvency. Neither served a statutory demand for the alleged debt. 23 I simply cannot make the factual findings essential to the success of the challenge to the liquidator's decision that Mrs Quinones seeks to make. 24 Mrs Quinones' appeal against the liquidator's rejection against her proof of debt will be dismissed. 25 I turn now to R & N's appeal. Mr Stack, who appeared for the liquidator, emphasised that R & N has chosen not to put any new material before the court, with the result that its challenge to rejection of it proof of debt falls to be decided wholly and solely by reference to the materials that were before the liquidator. 26 The first document to be mentioned is an affidavit of 12 February 2004 sworn by Mr Capparelli, the principal of R & N, for the purpose of the 2004 proceedings in which both Mrs Quinones and R & N sought winding up of Kelloheal on the oppression ground. Mr Capparelli there gave evidence of a conversation in which Mr Hernandez said to him, referring to the Kelloheal business: "If you want to invest, you can have a ten percent interest for $160,000." 27 The affidavit also refers to circumstances in which money was paid by means of cheques drawn in favour of Mr Hernandez which cheques, together with some cash, were given to a person described as "Mr Hernandez's accountant" who, in turn, gave Mr Capparelli a certificate for ten shares in Kelloheal and a certificate for certain shares in another company. Mr Hernandez's letter to the liquidator says that the moneys were for the purchase of shares. As in Mrs Quinones' case, there is evidence of the receipt of the moneys by Mr Hernandez but no evidence of any corresponding receipt by Kelloheal. 28 In short, there is simply no evidence that R & N lent money to Kelloheal so as to justify the proof of debt it has lodged. Its challenge also fails. 29 The originating process is dismissed.

[Counsel addressed on costs] 30 Mr Stack seeks, on behalf of the defendant liquidator, an order that the plaintiffs pay the defendant's costs and an order that those costs be assessed on the indemnity basis. Mr Carolan, on behalf of the plaintiffs, does not seek to resist a costs order but submits that there is no basis for assessment on the indemnity basis. 31 The judgment I have given makes it clear that there was simply no evidence to support the claim of either plaintiff. Each appeal against the rejection of the proof of debt was, on the facts, quite groundless and should not have been brought. This is an appropriate case for the award of indemnity costs. 32 I order that the plaintiffs pay the defendant's costs of the proceedings, such costs to be assessed on the indemnity basis. 33 I order that the liquidator's costs be part of the costs and expenses of the winding up of Kelloheal Pty Limited.

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