Re Solfire Pty Ltd [1997] QSC 167 (12 September 1997)

It is the case for the respondents that as directors they had advanced money to the company over the years and that company records demonstrated that their Loan Account stood at the sum of $58,100.46 in the 1994/95 financial year.

The day after the Magistrates Court action commenced on 17 April 1996, the company executed in favour of the respondents a Bill of Sale in which it acknowledged its indebtedness to them in the sum recorded in the taxation returns for the 1994/1995 year. The Bill of Sale secures to the respondents that sum and any other sums which might become owing to them from time to time.

The trial in the Magistrates Court was adjourned on 19 April 1996 to 5 August 1996. The hearing continued on for a few days and the respondents resolved to not further defend the action.

On 8 August 1996, before the company withdrew from the Magistrates Courts proceedings, the respondents resolved to record their agreement to assume the liability of the company for certain of its debts and to accept payment from the company in full satisfaction of the loans they had made to it, a lesser sum than the company in fact owed them. It was also agreed that the company would transfer certain of its assets of relatively minor value to them.

Pursuant to this agreement/resolution, the respondents arranged to have $181,945.81 of the company's funds transferred to the Trust Account of their solicitors on 9 August 1996.

On 9 August 1996 the plaintiffs in the Magistrates Court action entered judgment by default against the company for the sums of $8,998.68 and $38,139.99.

On 9 August 1996, the company paid out of its funds into the Trust Account of the solicitors for the respondents the sum of $181,945.81.

On 12 August 1996 the sum of $20,000 was paid out of those moneys held in their solicitor's trust account - I infer upon their instructions - to Midasville Pty. Ltd. a company of which the respondents were the sole shareholders and directors.

On 18 September 1996, the respondents executed a deed (described as "Memorandum of Agreement") which recited that the company was indebted to them "in the total sum of $127,924.17" as shown in the company Balance Sheet for the year ended 30 June 1996; that the loans were in fact secured by the Bill of Sale to which I have referred; that the respondents agreed to pay out and indemnify the company in respect of certain of its creditors and that the company was desirous of satisfying and obtaining a release of the Bill of Sale.

"The said moneys payable by the Directors (i.e. respondents) to the said creditors is agreed to be and shall for all relevant purposes be deemed to form part of the moneys advanced by them to Solfire secured by the Bill of Sale and by this agreement. The parties agree that the said sum outlined in the Schedule shall be deemed to have been advanced by the Directors to Solfire notwithstanding that the payments to creditors are due on or before the date stated in Clause 2 hereof (i.e. 1 December 1997)."

"In consideration of the said payments and indemnity and in satisfaction of the moneys loaned by the Directors to Solfire, Solfire will forthwith pay to the Directors jointly the sum of $190,666.14 in full and final satisfaction of its duty and obligation under the Bill of Sale dated 18 April 1996 and the Directors hereby accept that sum in full and final satisfaction and in release of the said Bill of Sale notwithstanding that after payment of the said creditors outlined in the Schedule they shall not have received the full amount owing to them by way of loans to Solfire as at the end of June 1996 or subsequently."

Under Clause 8 of the Agreement the sum to be paid by the company to the respondents was specified to be made up as follows:

Plant, Stock, Equipment as per 1996 Balance Sheet $8,220.33

Business Name of "Biggest Little Curtain Store" $500.00

Under Clause 9 of the Agreement the company transferred all its right, title and interest to the stock, plant and equipment, fixtures and fittings owned by it together with its registered Business Name to the respondents jointly.

On 18 September 1996, the respondents also formally released and discharged the Bill of Sale given on 18 April 1996 and agreed to pay legal costs incidental to it and acknowledged that they had received from the company the sum of $190,666.14 "in full and final satisfaction, release and discharge of the said Bill of Sale". Presumably this acknowledgment referred to their receipt of company moneys on 9 August 1996.

On 19 September 1996, $140,000 of the moneys held in the Trust Account of the solicitors for the respondents was paid to Midasville Pty. Ltd. - which in effect took over the curtain manufacturing business previously conducted by the company.

It appears that the respondents have purported to perform their obligations under the Deed they executed on 18 September 1996. They appear to have paid all or most of the company's creditors specified in the deed - with the exception of the two companies which obtained judgment against it in the Magistrates Court action. It is the respondent's contention that the judgment was unjustly obtained and it is clear on the material that as directors of the company they resolved that it would not meet that judgment.

In any event, upon execution of the Memorandum of Satisfaction release and discharge of the Bill of Sale six weeks after it had transferred $181,945.81 of its funds to the respondents the company filed its own application to be put into liquidation. One of the respondents swore an affidavit that the company was then insolvent. The clear inference to be drawn is that it was insolvent having transferred to them the moneys which had been paid into their solicitor's Trust Account and it seems on the material unlikely that short of the respondents making further advances to the company it would have had the financial capacity to pay the money it owed them as well as the money it owned to various other trade creditors including the two companies which were judgment creditors for the sum of $47,138.67.

Those companies had served a statutory demand on the company on 13 August 1996. The company sought unsuccessfully to set that demand aside. Upon its failure to get the statutory demand set aside, it filed an application to be wound up returnable on 28 October 1996. Provisional liquidators were appointed on the application of the two judgment creditors on 28 October 1996.

On 19 December 1996 the company was wound up by order of the Supreme Court.

Under s.263 of the Corporations Law the company was required to lodge within 45 days of the granting of the Bill of Sale a notice in the prescribed form giving particulars of it - vide s.263(4)(c) of the Corporations Law.

Under s.266(1)(ba) when an order is made or resolution passed for the winding up of a company:

"a registrable charge on property of the company is void as a security on that property as against the liquidator ... unless

(c) a notice in respect of the charge was lodged as required by s.263 within the specified period of 45 days or;

(c)(ii) at least six months before the critical day".

Under s.266(8) "critical day" is defined to mean inter alia the day when the winding up began. In this case that day was 18 September 1996 - vide s. 513B(c) of the Corporations Law.

Under s.266(4) a Court has jurisdiction to extend the period for lodgment of notice on the grounds therein specified.

On the facts of the present case, the company did not give notice of the charge as required; neither did it seek any extension of time within which to give such a notice.

Although non-compliance by the company with the notice requirements of s.263 was canvassed at some length, as presently advised it seems to me that the respondents do not seek to enforce the Bill of Sale against the Liquidator. They rely upon it as giving them a right to retain the moneys they received from the company on 9 August 1996 as against the Liquidator. On their case the Bill of Sale was discharged before the Liquidator was appointed. They rely upon the deed of 18 September 1996 and the Memorandum of Satisfaction, Release and Discharge of the Bill of Sale executed on the same day as characterising the earlier payment as a satisfaction of their charge which at the latest preceded by one day the company's application to be wound up.

The applicant in effect contends that s.266(1)(ba) has effect to render the Bill of Sale which was discharged on 18 September 1996 (or for that matter on 9 August 1996) void - i.e. of no effect as against the Liquidator even prior to its discharge albeit that under s.262(2) it may have been valid as between the parties to it. In my view s.266(1) on the facts of this case does have the effect that as against the liquidator the charge is void as a security.

The second point taken by the applicant is that pursuant to s.267 of the Corporations Law the respondents were "relevant persons" because they were directors of the company at all material times and s.267(1) provides -

(a) a company creates a charge on property of the company in favour of a person who is ... a relevant person in relation to the charge; and

(b) within six months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced;

the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and shall be deemed always to have been, void".

The problem with this contention in my view is the categorisation of the Deed and execution of the Memorandum of Satisfaction, Release and Discharge on 18 September 1996 as steps taken by the respondents to enforce the Bill of Sale.

In my view for the reasons stated briefly by Dowsett J. upon an interlocutory application heard on 15 May 1997, albeit that the respondents were the directors of the company at the time these arrangements were made, and indeed perhaps the "governing mind" of the company, it cannot be said that in making the resolutions which they did as company directors and in executing the Deed with the company and executing the release and discharge of the Bill of Sale in consideration of their receipt of moneys from the company on 9 August 1996 they can be said to have "taken a step" to enforce the charge.

I do not suggest for one moment that as officers of the company obliged as such to not be involved in the deliberate preferential payment of creditors, their conduct in adopting the stratagem designed to defeat the judgment creditors of the company of which they were directors, is not reviewable by the Liquidator.

It is my view however that if the company voluntarily discharged its financial obligations under a valid Bill of Sale without any formal demand being made by the grantees of the Bill of Sale - and there is no suggestion on the material that any formal demand was made on the company - it seems to me impossible to assert that the respondents in the circumstances took a step to enforce the Bill of Sale. In particular I take the view that the resolution of the respondents as directors of the company on 8 August 1996 to pay the moneys owed to them by the company from the company's bank account in discharge of its obligations to them as grantees of the Bill of Sale and the steps which they took as officers of the company to permit this to be achieved, cannot be categorised as "a step taken in enforcement of the charge" under s. 267 of the Corporations Law.

Indeed when one looks at the Deed executed by the respondents and the company on 18 September 1996, on its face the arrangement made between the respondents and the company - whatever the consequences of such an arrangement may be under the Corporations Law - were contemplated as having the effect inter alia of a voluntary discharge of the company's indebtedness to the respondents in respect of moneys advanced by them to it over the years prior to September 1996.

The sum of $181,945.81 which was paid from company funds into the Trust Account of the solicitor for the respondents on 8 August 1996 was in my view held by that solicitor as trustee for the respondents. The payment therefore was effected nearly six weeks before each of the Memorandum of Agreement and the Discharge were executed on 18 September 1996.

In my view it is clear on the material that this whole stratagem was adopted to defeat the company's judgment creditors in the Magistrates Court action to which I have referred. This emerges clearly from the express terms of the Deed of 18 September 1996.

In my view the whole transaction which commenced on 8 August 1996 and concluded at least as far as the company was concerned on 19 September 1996 was one designed to defeat the rights of its judgment creditors. It was conceived by the respondents as a method by which the ordinary processes of the law - however expensive they may have been in the circumstances of this case - could be circumvented so that the company having used all its available resources to pay creditors (including the respondents) other than those judgment creditors the moneys that were owing to them, could go into liquidation leaving its judgment creditors with judgments and unsatisfied statutory demands which would be worthless. In my view the whole transaction may properly be characterised as "an uncommercial transaction" within s.588FB of the Corporations Law". It is clearly distinguishable from Tosich Constructions Pty. Ltd. (In Liq.) v Tosich 23A CSR 466 at 473 per Lehane J.

It is clear in my view that the whole object of the transaction stretching from 8 August 1996 to 19 September 1996 was to give "an unfair preference" to the company's creditors (including the respondents) at the expense of its judgment creditors.

On the material it is clear that at all material times the company was insolvent - indeed it was the acceptance of this fact that led to the company applying to be wound up on that ground. To no small extent its inability to pay its debts must have then been attributable to the transfer of its funds to be held by the solicitors for the respondents on 8 August 1996. By 19 September 1996 in excess of $31,000 of those funds had been expended at the direction of the respondents.

The whole transaction in my view comes clearly within the contemplation of s.588FC of the Corporations Law and it occurred within six months of the filing of the application to wind up (on 19 September 1996). It is therefore voidable under the express terms of s.588FE(2), (3) and (5)(b) of the Corporations Law.

In my view the respondents cannot bring themselves within the protection given under s.588(FG) of the Corporations Law.

In my view on the facts of this case, the Court is empowered to make orders appropriate under s.588FF of the Corporations Law.

At the present time, it is not entirely clear on the material the extent to which the respondents have discharged their perceived obligations under the Deed of 18 September 1996 to pay creditors of the company - other than the two judgment creditors, F. Webb & Co. Pty. Ltd. and La Belle Curtains Pty. Ltd.

In my view it is appropriate to require the respondents (a) to transfer to the applicant Liquidator the plant, stock and equipment as per 1996 Balance Sheet, valued at $8,220.33 in the Deed of 18 September 1996, to which they purportedly become entitled under that deed; and (b) order that the respondents pay to the applicant Liquidator the sum of $181,945.81 which they received in cash on 9 August 1996 and to which the Deed of 18 September 1996 refers.

The respondents ought have liberty to prove in the winding up of the company as unsecured creditors for moneys which they lent to the company prior to the order made for winding up on 19 December 1996.

If the respondents did in fact discharge or pay creditors of the company pursuant to their perceived obligations under the Deed of 18 September 1996, prior to the order being made for the winding up of the company on 19 December 1996 the respondents also ought have leave to prove those sums so paid.

The applicant Liquidator in this case sought an injunction restraining the respondents from disposing of the moneys that they had received from the company. This application was opposed and for the reasons stated by Dowsett J on 15 May 1997, no injunction was granted.

While one may have some sympathy for the respondents should they have taken it upon themselves to pay out in full or in part various creditors of the company at a time when to their knowledge the company was in liquidation, it must be kept in mind that the whole scheme upon which they embarked was designed to ensure that the judgment creditors of the company in the Magistrate Courts action to which I have referred had their lawful expectations of getting some benefit from the judgments defeated.

The remedies, if any, available to the respondents should they in fact have taken it upon themselves to discharge company obligations which it was the function of the liquidator to discharge and the remedies, if any, of the Liquidator against fully paid unsecured creditors of the company and his obligations to the respondents, if any, in respect of payments they made to unsecured creditors of the company after his appointment have not really been canvassed in argument and it is inappropriate for me to embark upon a consideration of such matters.

(1) The transaction which the company entered into with the respondents between 8 August and 19 September 1996 which related to the payment of $181,945.81 of the company's funds for the benefit of the respondents on 9 August 1996 constituted an insolvent and uncommercial transaction with s.588FE of the Corporations Law and is voidable at the option of the Liquidator.

(2) Subject to the effect of s.588FG(3) of the Corporations Law on the use of part of the sum of $181,945.81 for the discharge of tax liabilities of the company the respondents have no rights prejudiced by the orders to be made herein.

(i) transfer to the applicant the plant, stock and equipment as per the 1996 company Balance Sheet valued at $8,220.33 in the Deed executed by the company and the respondents on 18 September 1996;

(ii) pay to the applicant the sum of $181,945.81 which was the amount of money paid by the company to the solicitor for the respondents in trust for them on 9 August 1996 and which was subsequently paid out of his trust account at their direction between 9 August 1996 and 9 May 1997;

(iii) have liberty to prove in the winding up of the company as unsecured creditors for moneys they lent to or paid on behalf of the company prior to the order for winding up made on 19 December 1996.