Rafeletos v Great Wall Resources Pty Limited

REASONS FOR JUDGMENT 1 There are presently two proceedings before the Court. Both seek the same relief in relation to a mortgage granted by Great Wall Resources Pty Ltd (the Company) to Mr George Rafeletos, which was registered as number AF363494 (the Mortgage). The Mortgage is expressed to secure the amount of any judgment and interest in proceeding NSD 1988 of 2007 (the Principal Proceeding). Mr Rafeletos was the plaintiff in the Principal Proceeding and the Company was a defendant. The Principal Proceeding is complete, apart from an interlocutory application dated 24 August 2011, which was filed on 2 September 2011. 2 In NSD 1342 of 2011 (the Second Proceeding), an originating process was first filed in the Supreme Court of New South Wales on 3 May 2011 and the proceeding was subsequently transferred to the Federal Court. In both the interlocutory application and the Second Proceeding, orders are sought that the Mortgage either be declared voidable or be set aside. The two separate proceedings indicate the different bases upon which orders setting aside the Mortgage are sought. In the originating process in the Second Proceeding, the moving party is the liquidator of the Company. In the interlocutory application in the Principal Proceeding, the moving party is the Company itself. In order to explain the circumstances in which the applications are made, it is necessary to say something about the history of the Principal Proceeding. 3 In the Principal Proceeding, Mr Rafeletos claimed relief in respect of an agreement made by him in March 2002 with the Company. The substance of the agreement was that in return for providing $200,000 towards the purchase by the Company of a property in Yallah Road, Yallah (the Yallah Property), Mr Rafeletos would become a 20 per cent shareholder of the Company and would be appointed as a director of the Company. While it was common ground that an agreement had been made, there was a dispute as to the terms of the agreement. 4 Mr Rafeletos claimed that the agreement had been repudiated. The Company, on the other hand, contended that Mr Rafeletos had resiled from the agreement and that it was, therefore, no longer operative. On 19 June 2009, after several days' hearing, in August, October, November 2008 and April 2009, I published my provisional conclusions. In light of the findings that I had made, I concluded that Mr Rafeletos was entitled to damages for the repudiation of the agreement made with the Company in March 2002. My conclusion was that the Company had repudiated the agreement with Mr Rafeletos, such that it was open to him to terminate the agreement and sue for damages for its breach. Because some of the conclusions that I reached may not have been fully addressed by the parties, I treated the findings as provisional. 5 I indicated my provisional view that the damages to which Mr Rafeletos was entitled should be determined by reference to the value that 20 per cent of the issued capital of the Company would have had at the date of judgment if the only activity in which the Company had engaged after the date of the agreement had been the acquisition, development and sale of lots in the Yallah Property. Steps were therefore put in place to assess the damages. Orders were given for the filing of points of claim and for discovery by the Company. The proceeding was listed for further hearing on 17 November 2009. 6 When the matter was called on for hearing that day, Mr Capocchiano, a former director of the Company, appeared in person. In the absence of objection from counsel for Mr Rafeletos, Mr Capocchiano was given leave to appear for the Company. He asked that the proceeding be adjourned and made assertions about having paid substantial sums of money by way of legal fees, without being given proper advice. I urged both Mr Capocchiano and his wife, who also addressed the Court, to seek legal advice if they wished to defend the proceeding further. I indicated that I was not disposed to adjourn the hearing in the absence of any explanation as to why a number of orders of the Court had been ignored by the Company up to that stage. In reasons that I gave on 17 November 2009, I observed that a singular lack of cooperation, on the part of the Company, had resulted in the proceeding continuing well beyond the time that had been intended. In the absence of any adequate explanation as to why the Company had ignored the Court's orders, I proceeded with the further hearing of the assessment of damages, after Mr and Mrs Capocchiano walked out of the courtroom. 7 In relation to the question of damages, Mr Rafeletos relied on the evidence of Mr Darryl Hughes, an accountant, and Mr Harry Stefanou, a licensed valuer and licensed real estate agent. The evidence before me indicated that Mr Hughes, in reliance upon valuations from Mr Stefanou, determined that the Company would have made a net profit in the sum of $11,495,264. 20 per cent of that figure amounted to $2,299,053 and interest on that amount, from 19 June 2009 to 17 November 2009, amounted to $85,033. After adding in the balance of a loan, borrowed by Mr Rafeletos, for which he continued to have a personal liability, I assessed the total damages as $2,557,076. I ordered that the Company pay that sum to Mr Rafeletos and that judgment be entered accordingly. I also ordered the Company to pay the costs of Mr Rafeletos of the proceeding. However, I ordered that both of those orders be stayed, up to and including 11 December 2009. I indicated that I considered that it was appropriate to stay the orders in order to give the Company the opportunity, if it was so inclined, to apply for leave to reopen its case in relation to the question of the assessment of damages. 8 On 11 December 2009, I directed the Company to provide to Mr Rafeletos a report by Mr McGrane, an accountant retained by the Company, in response to the report of Mr Hughes. I directed that Mr Hughes and Mr McGrane consult together on the assessment of damages. I also continued the stay of orders 1 and 2 made on 17 November 2009, up to 18 December 2009. 9 On 18 December 2009, I ordered that the orders again be stayed until 5 February 2010, upon two conditions; the first was that the Company grant Mr Rafeletos a first mortgage over several parts of the Yallah Property, as security for the enforcement of any judgment or order in the proceeding, and secondly that the Company pay into the trust account of a firm of solicitors the sum of $500,000 to be held as security for the enforcement of any judgment or order in the proceeding. I also directed that the Company provide a detailed outline of its case in relation of the assessment of damages, on the assumption that leave was granted to it to reopen its case on that question. 10 The proceeding was listed again on 5 February 2010 for directions as to the further hearing of the Company's application to reopen its case. The conditions on the continuation of the stay were apparently not satisfied and, accordingly, the stay terminated according to the terms of the order made on 18 December 2009. However, on 5 February 2010, I ordered that orders 1 and 2, made on 17 November 2009, be stayed until 12 February 2010. I directed the Company to serve by 12 February 2010 an outline of its submissions and the evidence on which it intended to rely in its application for leave to reopen. I set down the application for leave to reopen for hearing on 25 February 2010. 11 On 12 February 2010, orders 1 and 2, made on 17 November 2009, were stayed until 17 February 2010. On 5 March, the stay was extended again up to and including 26 March 2010. However, that extension of the stay was made conditional upon the Company granting to Mr Rafeletos, no later than 4pm on 8 March 2010, a first mortgage in the form that I then initialled and dated. The Mortgage was in respect of part of the Yallah Property. It was expressed to secure the amount of any judgment and interest in the Principal Proceeding in favour of Mr Rafeletos. The Mortgage was, in fact, granted, and that is the mortgage that is the subject of the two applications presently before me. 12 On 26 March 2010, the stay was extended again to 30 April 2010. However, I granted Mr Rafeletos leave to have writs of enforcement issued, such writs to lie in the Registry until further order. On 30 April 2010, I directed Mr Rafeletos to serve all his evidence in relation to the reopening question no later than 10 May 2010. I also directed that the experts retained on behalf of the parties meet on or before 17 May 2010, for the purpose of preparing a joint report. The matter was stood over to 21 May 2010. 13 The stay was not extended beyond 30 April 2010. There has been no evidence, one way or the other, as to why an order for a further extension of the stay was not sought. One inference that might be drawn is that it was considered unnecessary, in the light of the Mortgage. That is, however, no more than an inference. 14 The matter came back before me on 21 May 2010 when, by consent, I ordered that the parties' experts meet and confer as to the quantum of Mr Rafeletos' damages no later than 11 June 2010. Again I ordered, by consent, that the parties' experts file a joint report as to Mr Rafeletos' damages by 2 July 2010. Unsurprisingly, that does not appear to have happened. On 6 August 2010, I again ordered that the experts confer, no later than 11 August 2010, for the purpose of preparing a further joint report. The joint report was to be filed by 18 August 2010. 15 The matter was listed for further directions on 20 August 2010. On that day, I ordered that the writ of execution addressed to the Company be forwarded to the New South Wales Sheriff, such writ to be levied up to an amount of $956,951. I also directed that the Registry release garnishee orders addressed to third parties, such orders to be up to an amount of $956,951. The proceeding was listed for further directions on 12 November 2010. On that day, I directed that the proceeding be listed for a further hearing of two days commencing on 28 February 2011. 16 However, in the meantime, the Deputy Commissioner of Taxation commenced a winding-up application against the Company. That application came before me on 7 December 2010, when I ordered that the Company be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) (the Corporations Act). Mr Rafeletos was a supporting creditor, and I ordered that his costs of the winding-up application costs be paid out of the assets of the Company. 17 On 23 February 2011, submissions were filed on behalf of the Company in support of its application to reopen. However, the application to reopen did not proceed on the day appointed. 18 In the meantime, the liquidator, who had been appointed on 7 December 2010, commenced the Second Proceeding in the Supreme Court. The affidavit filed in support of that proceeding suggested that the basis of the claim to have the Mortgage set aside was that it had been granted within six months prior to the relation-back day. That assumption now seems to have been a misconception, in that the liquidator now accepts that the Mortgage was not granted within 6 months prior to the relation-back day. However, the relief claimed in the originating process of the Second Proceeding is for declarations under s 588FE and s 588FF of the Corporations Act. .The originating process is not limited as to the basis upon which the Mortgage was voidable. 19 On 27 July 2011, the matter came before me for directions again, when I ordered the Company to file and serve, no later than 19 August 2011, any interlocutory application that it wished to make in the proceeding. The intention was that any application in relation to the orders conferring the grant of a mortgage would be the subject of such an application. The application was made returnable for directions before the Registrar on 2 September 2011. For reasons that are not explained, no interlocutory application was filed in accordance with the direction. However, on 2 September 2011, an interlocutory application dated 24 August 2011 was filed in Court before the Registrar. 20 On 16 March 2012, I ordered the Company to file and serve its evidence in support of its application for leave to reopen its case in relation to the question of assessment of damages. That evidence was to be filed no later than 13 April 2012. I also directed that the evidence in support of the Second Proceeding also be filed by 13 April 2012. Directions were given for Mr Rafeletos to file and serve his evidence in reply no later than 11 May 2012. 21 There appears to have been some further discussion between the parties, which an order by consent that order 1 made on 17 November 2011 be varied, so as to replace the amount of the judgment of $2,557,076 with the amount of $1,450,000. That appears to represent a compromise in relation to the question of the Company having leave to reopen in relation to the question of assessment of damages. That order was made on 10 August 2012. The net effect is that there is now a judgment in favour of Mr Rafeletos in the sum of $1,450,000. 22 It is common ground that, as at 8 March 2010, and as at 5 March 2010, the Company was unable to pay its debts as and when they fell due, and was thus insolvent. By his application under the Corporations Act in the Second Proceeding, the liquidator claims a declaration that the transaction whereby the Mortgage was granted by the Company to Mr Rafeletos is voidable pursuant to s 588FE of the Corporations Act, an order setting aside the Mortgage, and an order releasing and discharging the Yallah Property from the Mortgage. By the interlocutory application in the Principal Proceeding, dated 24 August 2011, and filed on 2 September 2011, the Company claims an order that order 2 made on 5 March 2010 be set aside, an order that the Mortgage be set aside and discharged, and an order releasing and discharging the Yallah Property from the Mortgage. Order 2 of 5 March 2010 was an order that the extension of the stay to 26 March 2010 was conditional upon the Company granting the Mortgage to Mr Rafeletos. It has not been suggested on behalf of Mr Rafeletos that the Court does not have power or jurisdiction to make the orders sought by the Company. 23 The Company asserts that the purpose of the order of 5 March 2010 was to ensure the protection of the rights of Mr Rafeletos as against the Company and to ensure that the assets of the Company, consisting of the Yallah Property, were protected and preserved. The Company asserts that, at the time of the making of the order no consideration was given to the existence, and position, of other creditors of the Company. Indeed, one would not expect that such consideration would have been given, in the absence of any concerns being raised as to the solvency of the Company. 24 The Company asserts that the purpose of the order of 5 March 2010 was limited to protecting the position of Mr Rafeletos and was not intended to protect or improve his position as against other creditors of the Company. The Company now says that there have been material changes in the circumstances relevant to the way in which the orders of 5 March 2010 operated, in that the stay lapsed on 30 April 2010 and the Company was ordered to be wound up in insolvency on 7 December 2010. The Company asserts that the effect of those events is that the orders of 5 March 2010 had an unforeseen effect on third parties, in that they have prejudiced the position of unsecured creditors, to the benefit of Mr Rafeletos, who would otherwise have been in the position of an unsecured creditor. Further, the Company says a material change in circumstances has occurred and that that material change in circumstances is ground for varying an interlocutory order. 25 An interlocutory order can be revisited at anytime where the justice of the matter demands it, particularly in the light of the requirement to apply the overarching purpose specified in s 37M of the Federal Court of Australia Act 1976 (Cth). The Company says that, even if the order had been a final order, the unforeseen and unintended effect upon third parties, namely, unsecured creditors, would require that the order be revisited and set aside, either pursuant to the slip rule or the inherent jurisdiction of the Court applying s 37M. 26 I am not persuaded that that is a basis for interfering with what occurred in March 2010. Setting aside the orders that were made would be of no utility, without interfering with the Mortgage. The orders that I made on 5 March 2010 were as follows : that the order made on 17 November 2009, directing judgment for Mr Rafeletos, be stayed up to and including 26 March 2010; and that that stay be conditional upon the Company granting to Mr Rafeletos, by 4pm on 8 March 2010, a first mortgage in the form dated and initialled. 27 Setting aside those orders would achieve nothing and would have no utility. What the Company complains about is the act that the Company itself undertook on 8 March 2010 in granting the Mortgage. There was no compulsion involved in the grant of the Mortgage. Rather, it was a term of the stay that the Mortgage be granted. I have no evidence before me as to what motivated the Company to grant the Mortgage. One could draw the inference that those responsible for the management and decision-making of the Company considered that it was in the best interests of the Company to grant the Mortgage, in order to satisfy the condition of the stay. Be that as it may, the Mortgage was granted by the Company, when it was under the control of its directors. No complaint was made at the time on behalf of the Company that the condition of the stay was inappropriate. The Company could have ignored the condition and the stay would have been dissolved. That may well have had very adverse consequences for the Company, namely, that there would have been a judgment for the amount of $2,557,076 that had not been stayed and was enforceable. That could have given rise to the service of a statutory demand. Be that as it may, the grant of the Mortgage is what the Company now seeks to have set aside. That is to say, it seeks to have the Court interfere in a transaction that it entered into voluntarily and consensually. Putting aside the question of whether or not there was any consideration for the grant of the Mortgage, one can only assume that having taken advice, the Company was of the view that it was in its best interests to grant the Mortgage. 28 It appears to me to be misconceived to suggest that there are third parties who may be affected. The creditors would have had no standing whatsoever, at the time, to interfere and ask the Court not to impose the condition on the stay simply because the Company might grant a mortgage to their detriment. The creditors, of course, had their own remedy. They could have applied for the winding-up of the Company. That, ultimately, is what one of the unsecured creditors, the Deputy Commissioner of Taxation, did. Had there been a threat to the assets of the Company, the unsecured creditor had remedies under the Corporations Act. For example, it would have been possible to apply for the appointment of a provisional liquidator. None of the unsecured creditors did that because, I assume, none of the creditors was aware of the conduct of the Company in granting the Mortgage. 29 The significant point is that the unsecured creditors were strangers to this proceeding being conducted between Mr Rafeletos and the Company. Although the liquidator is now the mind and decision-maker of the Company, he can only stand in the shoes of the Company so far as this application is concerned. I do not consider that there is any basis established for the Court to interfere with the consensual act of the Company in granting the Mortgage to Mr Rafeletos. 30 The second basis upon which the application is put, as stated in the originating process filed in the Second Proceeding, is that the transaction consisting of the grant of the Mortgage is a voidable transaction under s 588FF of the Corporations Act. Under s 588FF(1), where on the application of a company's liquidator a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make one or more of the orders specified in s 588FF(1). Those orders include an order releasing or discharging a security given by the company under or in connection with the transaction and an order declaring an agreement constituting, forming part of, or relating to, the transactions to have been void at and after the time when the agreement was made or at and after a specified later time. Under s 9 of the Corporations Act, transaction includes a security interest granted in a company's property. Thus, the grant of the Mortgage was, clearly enough, a transaction. 31 Section 588FE provides that, if a company is being wound up, a transaction of the company may be voidable because of any one or more of s 588FE(2) to s 588FE(6). In the present application, the liquidator relies on s 588FE(3), which provides that a transaction is voidable if it is an insolvent transaction and also an uncommercial transaction of the company, and it was entered into during the two years ending on the relation-back day. The relation-back day is the day of the filing of the winding-up application by the Deputy Commissioner of Taxation, namely, 8 September 2011. Relevantly, although unfortunately for the creditors, s 588FE(2) provides that a transaction is voidable if it is an insolvent transaction and it was entered into during the six months ending on the relation-back day. There may well be good grounds for concluding that the Mortgage was an insolvent transaction. However, it was not, by a very short time, entered into within or during the six months ending on the relation-back day. 32 Under s 588FC, a transaction of a company is an insolvent transaction, relevantly, if it is an unfair preference or an uncommercial transaction. The Mortgage may well be an unfair preference by the operation of s 588FA. However, the liquidator contends that the Mortgage is an uncommercial transaction under s 588FB. Under that provision, a transaction is an uncommercial transaction if, and only if, it maybe expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to four matters, as follows: the benefits, if any, to the company of entering into the transaction, the detriment to the company of entering into the transaction, the respective benefits to other parties to the transaction of entering into it, and any other relevant matter. 33 In order to satisfy s 588FB, one might expect to be able to conclude that the transaction involved the conferring of a bargain on one party of such magnitude that it could not be explained by normal commercial practice (see, for example, Demondrille Nominees Pty Limited v Shirlaw (1997) 25 ACSR 535 at 548). 34 The liquidator contends that the grant of the Mortgage was an uncommercial transaction. It says that, in granting the Mortgage, the benefit that the Company obtained was no more than a stay of several weeks to 26 March 2010, whereas the detriment was the encumbering of a significant asset, and thereby the impairment of its ability to raise funds to meet debts in circumstances where those debts were significant. There was also a real risk that the Company might have been insolvent at the time of granting the Mortgage, such that it would confer an unfair preference over other unsecured creditors. 35 The difficulty that I have with that contention is the lack of evidence as to any detriment to the Company. There is no evidence as to the nature of the creditors, whether they were pressing at the time or whether the Company had need of working capital. Indeed, the earlier evidence in the Principal Proceeding would suggest that the Company was not engaged in any business, but that it was merely embarking on the realisation of the subdivision of the Yallah Property. The precise state of the subdivision is by no means clear, and it may be that the Company was continuing to incur liabilities in the carrying out of the subdivision and development proposal. However, I simply have no evidence of those matters before me in these applications. 36 The Company in fact obtained some benefit from the satisfaction of the condition of the stay. It is perhaps a matter of speculation as to what might have happened had the stay not been granted and the Mortgage not been granted. Whether or not the stay was dissolved by the effluxion of time is not the only matter. It is possible to draw an inference that, but for the Mortgage, the judgment would have been enforced against the Company for a sum of $2,557,076. It was not until many months later that agreement was finally reached, whereby the amount of the judgment was reduced by a very significant amount, to $1,450,000. One would certainly be inclined to draw the inference that, but for the existence of the Mortgage, the Company would not have had the opportunity of negotiating with Mr Rafeletos with a view to reaching agreement as to the quantum of his damages. 37 It may be that, had the financial state of the Company been drawn to the Court's attention on 5 March 2010, an observation may have been made to the effect that the grant of a mortgage might constitute a preference. That is pure speculation. It may be that it was not intended to give to Mr Rafeletos preference over all other unsecured creditors. However, the Company must have known what its financial position was at the relevant time. Yet, for whatever reason, it chose not to inform the Court of its circumstances. 38 Those considerations are relevant to the application by the Company. They are also relevant to the application by the liquidator under the Corporations Act, in terms of whether or not the transaction could be said to be one that a reasonable person in the Company's circumstances would not have entered into. 39 It is by no means clear that, at the time, Mr Rafeletos was being given a substantial benefit. The detriment to the Company was no more than that it was agreeing not to deal with its own property. There is no evidence as to the value of the Yallah Property. For example, there is no evidence as to whether or not it was possible for the Company to raise further funds, if necessary, in order to enable the Company to carry on its business. The circumstances that the Company faced in March 2010 included that it had a judgment entered against it for a sum in excess of $2.5 million, and that it wished to challenge the assessment of damages but would not be able to do so if the stay expired. It had committed many, many defaults in complying with Court directions up to that time. 40 In all of the circumstances, I do not consider that I should conclude that a reasonable person in the Company's circumstances would not have granted the Mortgage in order to buy itself further time. It did, in fact, achieve a considerable advantage, albeit after it was wound up and the liquidator had intervened, in the sense that eventually the Company was able to reduce the judgment debt by more than a million dollars. I would draw the inference that, but for the existence of the Mortgage, it is unlikely that the Company would have been in a position to continue to negotiate or not negotiate. I am not persuaded, in all the circumstances, that the grant of the Mortgage was an uncommercial transaction within the meaning of s 588FB. 41 It follows, in my view, that both applications should be dismissed. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.