Sheldrake & Anor v Paltoglou [2006] QCA 52

Judgment (57 paragraphs)

[1]

[1] de JERSEY CJ: The appellants are the liquidators of a company, Going Bananas Restaurant (Qld) Pty Ltd. Until 24 March 2003, when the company was placed under administration, it operated a restaurant at Port Douglas. The respondent was the registered proprietor of the restaurant premises. Until March 2003, Mr and Mrs Casaretto, the shareholders in the company, and latterly Mr Casaretto alone, were the lessees of the premises from the respondent.

[2]

[2] A substantial debt accrued on account of unpaid rental, in respect of which negotiations between the parties took place over an extended period. They came to nothing. Eventually, on about 27 or 28 February 2003, the respondent was made aware of a contract under which the company was to sell the restaurant business for the sum of $185,000. That marked the respondent's first awareness that the restaurant business was owned by a company, rather than by Mr Casaretto.

[3]

[3] The respondent entered into an arrangement with the company, under which she granted it a lease backdated to 1 March 2002 (from when the arrears of rental owed by Mr Casaretto remained unpaid); also, she consented on 17 March 2003 to an assignment of that lease to the purchaser of the restaurant business under the company's contract; and her agreement to do that facilitated completion of the sale of the restaurant business, which occurred on 7 March 2003.

[4]

[4] From the proceeds of sale of the business, the company paid the respondent three sums on 7 March 2003: $52,986.18 and $6,116.90, in each case for unpaid rental, and $7,882.60 in respect of legal fees. The appellants unsuccessfully sought, from the learned primary Judge, orders under s 588FF of the Corporations Act 2001 (Cth) for the repayment of those amounts.

[5]

[5] On 3 March 2003, Mr Casaretto wrote to the respondent informing her that he would receive $145,000 from the proceeds of sale ($40,000 of the price of $185,000 represented "vendor finance"), from which he would disburse $50,000 to the ANZ Bank as secured creditor, $53,000 to the respondent, and the balance (on those figures $42,000) "to pay off my outstanding trade accounts". In fact a total of $66,985.68 was owing to the respondent, which left only $28,015 for trade creditors. The company also owed $303,269.91 to the Australian Taxation Office and $100,163.29 to trade creditors, though the respondent was unaware of that. The company was at all relevant times insolvent.

[6]

[6] The learned Judge found that so much of the payment to the respondent as reflected the debt owing by the company as from 1 March 2002, amounted to an unfair preference under s 588FA. It is clear the respondent thereby received more than she would have received in a winding up.

[7]

[7] Section 588FA(1) relevantly provides:

[8]

"(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

[9]

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;..."

[10]

[8] The respondent now contends that s 588FA(1)(a) was not applicable, because the company and the respondent (qua creditor of the company) were not parties, in that "the debt was owed by Mr Casaretto and not the company". Under the arrangement reached in March 2003, by which the respondent agreed to grant a lease in favour of the company and consent to the assignment to the purchaser, that lease was backdated a year, with the company thereby assuming the obligation to discharge the arrears of rental for which Mr Casaretto personally had been liable. Those arrears constituted, therefore, a debt owed by the company to the respondent.

[11]

[9] The respondent also submitted that these circumstances nevertheless gave rise to no unfair preference, because of the balancing element of benefit to the company, through the respondent's facilitating completion of the sale of the business (cf. Re Discovery Books Pty Ltd (1972) 20 FLR 470, 478). That case concerned the materially different s 122 Bankruptcy Act 1966 (Cth). In terms of s 588FA of this legislation, it sufficed, for there to be an unfair preference, that in respect of the unsecured debt, the respondent received more than she would receive were she left to prove in the winding up, and that was plainly the position here.

[12]

[10] The learned Judge also held that payment of those parts of the payments which reflected debts predating 1 March 2002 amounted to an "uncommercial transaction". Some of the amount paid for legal fees also related to a period prior to that date. A transaction may be uncommercial under s 588FB whether or not a creditor of the company is a party. Under that provision, in determining whether a transaction is uncommercial, the only question is whether a reasonable person would not have entered into it in light of any benefit to the company, any detriment to the company, and other specified matters.

[13]

"(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:

[14]

(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.

[15]

(2) A transaction may be an uncommercial transaction of a company because of subsection (1):

[16]

(a) whether or not a creditor of the company is a party to the transaction;..."

[17]

[12] The Judge held that the company suffered detriment - with respect to those pre 1 March 2002 amounts - in paying out debts due, not from it, but by Mr Casaretto personally, and that "a reasonable person in the company's circumstances would not have entered into the transaction given the extent of its indebtedness". The respondent submitted that the Judge should have held that a reasonable person in the company's position would have agreed to discharge all unpaid rental obligations in order to ensure the respondent's agreement to the assignment of the lease from the company to the purchaser of the business. Notwithstanding this feature, in view of the magnitude of the company's debts, and the prejudice this transaction would cause to unsecured creditors, the finding that this was an uncommercial transaction was open.

[18]

"A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and;

[19]

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or..."

[20]

[14] Section 588FE provides for the avoiding of transactions. At the relevant time, it provided:

[21]

"(1) Where a company is being wound up, a transaction of the company that was entered into on or after 23 June 1993 may be voidable because of any one or more of the following subsections.

(2) The transaction is voidable if:

(a) it is an insolvent transaction of the company; and

[22]

(b) it was entered into, or an act was done for the purpose of giving effect to it:

(i) during the 6 months ending on the relation-back day; or

(ii) after that day but on or before the day when the winding up began.

(3) The transaction is voidable if:

(a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and

(b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day."

[23]

[15] Repayment orders are authorized by s 588FF. At the relevant time, its terms were:

[24]

"(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

[25]

(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;..."

[26]

[16] At the time of these payments, the company was insolvent. Accordingly, the transaction fell to be characterized as an "insolvent transaction" under s 588FC because the payment of the amount of the unpaid rental and legal fees accrued prior to 1 March 2002 was an "uncommercial transaction", and the payment of the amount of the unpaid rental accrued thereafter amounted to an "unfair preference". The whole transaction was therefore voidable (s 588FE), and jurisdiction arose to order repayment to the company of the requisite amounts (s 588FF).

[27]

[17] The Judge held that the appellants had nevertheless not established an entitlement to repayment, because, in terms of s 588FG, the respondent had demonstrated she became a party to the transaction in good faith; she had no reasonable ground for suspecting the company was then insolvent; a reasonable person in her circumstances would not have had ground for such a suspicion; and she provided valuable consideration for the payments made.

[28]

[18] The terms of s 588FG(2), at the relevant time, were:

[29]

"(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

[30]

(a) the person became a party to the transaction in good faith; and

[31]

(b) at the time when the person became such a party:

[32]

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction."

[33]

[19] The appellants challenged Her Honour's particular conclusions that at the time of the transaction, the respondent did not have, and a reasonable person in her circumstances would not have had, reasonable ground for suspecting the company was insolvent.

[34]

[20] The Judge held that from when the rent first remained unpaid, that is, from before 2002, the respondent and Mr Casaretto were in a state of "ongoing and meaningful (if drawn out) negotiations". Various proposals were raised but came to nothing. As I have said, the respondent first became aware of the existence of the company when provided with a copy of the contract of sale of the restaurant business. The Judge noted that the respondent ascertained then that Mr and Mrs Casaretto were the only shareholders and Mr Casaretto was the sole director. Searches showed a fixed and floating charge in favour of the ANZ Bank and a fixed charge in favour of Esanda.

[35]

[21] Her Honour's critical findings follow (emphasis added):

[36]

"There is no evidence to suggest that Ms Paltoglou had any reason to believe that the company owed amounts of any substance to trade creditors. In fact in a handwritten facsimile forwarded to Ms Paltoglou by Mr Casaretto on 3 March 2003 explaining the situation regarding the sale of the restaurant, Mr Casaretto refers to using the balance of the proceeds of sale to 'pay off my outstanding trade accounts'. From her own experience in the restaurant industry, Ms Paltoglou believed that the amount owing to trade creditors would not have been substantial as the usual practice of suppliers is to demand cash on delivery if monthly accounts are not paid on time."

"Ms Paltoglou knew that Mr Casaretto personally was not in a position to pay his debts as and when they fell due prior to the sale of the restaurant, and it would have been reasonable for her to assume (once she was aware of its existence) that the company was in a similar position. However, it was not unreasonable for Ms Paltoglou to believe that upon the sale of the restaurant, all (or at least, all significant) debts of the company would be satisfied. Had the transaction been made in circumstances other than the sale of the restaurant as a going concern, then there could well have been grounds for a suspicion that the company was, or would become insolvent. In the circumstances that Ms Paltoglou was aware of whereby she had no knowledge of other substantial creditors and those she knew of she believed would be satisfied from the proceeds of sale, she had no reason to believe that by entering into the transaction she, or the company, was acting to the detriment of other creditors."

[37]

[22] In light of the finding, amply justified on the evidence, that upon becoming aware of the company in late February 2003, the respondent should reasonably have assumed that subject to the sale of the restaurant, the company, like Mr Casaretto, was insolvent, it is arguably but a short step to conclude that a reasonable person would have sought precise figures as to the "amount owing to trade creditors" and the company's other debts - especially where Mr Casaretto had for a long time withheld from the respondent that the company owned the business. The question obviously arises whether the respondent turned a blind eye, in the face of reasonable suspicion, or what should have been reasonable suspicion, as to the company's solvency.

[38]

[23] The appellants submitted that an aggregation of "essentially uncontroversial facts and circumstances" compelled the conclusion that the respondent had reasonable grounds for suspecting that the company was insolvent, or that a reasonable person in her circumstances would have had reasonable grounds for such a suspicion. On the other hand, the respondent submitted that the Judge's contrary conclusions were reasonably open. The circumspection which should attend the approach of an appellate court invited to overturn factual findings made by a trial court which has enjoyed the benefit of hearing oral evidence is well established. But in this case, the question is what inference should properly be drawn from undisputed material, including the oral evidence of the respondent, accepted by the Judge (Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531, 551; Fox v Percy [2003] HCA 22; (2003) 214 CLR 118, 127, 146, 159-160; Woods v Multi-Sport Holdings Pty Ltd [2002] HCA 9; (2002) 208 CLR 460, 495-6; Boral Besser Masonry Ltd v ACCC [2003] HCA 5; (2003) 215 CLR 374, 482).

[39]

[24] The appellants proceeded from the Judge's finding that the respondent "knew that Mr Casaretto personally was not in a position to pay his debts as and when they fell due prior to the sale of the restaurant, and it would have been reasonable for her to assume (once she was aware of its existence) that the company was in a similar position". Her Honour then reasoned, however, that with the imminent sale of the restaurant, the respondent did not have reasonable grounds for the requisite suspicion. As she expressed it: "It was not unreasonable for Ms Paltoglou to believe that upon the sale of the restaurant, all (or at least, all significant) debts of the company would be satisfied...in the circumstances that Ms Paltoglou was aware of whereby she had no knowledge of other substantial creditors and those she knew of she believed would be satisfied from the proceeds of sale...". The appellants submitted that Her Honour fell into error in that concluding finding.

[40]

[25] What the respondent might reasonably have suspected, and what a reasonable person in her position may have suspected, as to the financial position of the company, fell to be assessed against the recognition that the company was disposing of its sole income producing asset. Should the respondent reasonably have entertained at least a suspicion that the proceeds would be inadequate to discharge the company's debts, and in particular, the "outstanding trade accounts" to which Mr Casaretto referred in his communication of 3 March 2003?

[41]

[26] As to the amount of that residual liability, the Judge was influenced by the respondent's evidence as to her own experience in the restaurant industry, and the usual practice of suppliers to require cash on delivery if monthly accounts were not paid on time. But on the other hand, as the respondent knew, Mr Casaretto bore the burden of a long history of failing to pay rental and other outgoings when due. She also knew that he had failed to disclose relevant financial commitments when discussing proposed repayment arrangements. (During earlier negotiations, for example, he had failed to disclose and allow for an obligation he had assumed in favour of his estranged wife of the order of $115,000 (p 40 l 40.)

[42]

[27] There was also evidence from which one might infer the relative magnitude of the company's trading liabilities. The respondent was aware that Mr Casaretto had been actively seeking a business partner able to inject fresh capital of the order of $100,000 into the business (p 42 l 25). That permitted the inference that further capital in that amount was necessary to clear accrued liabilities to permit the company to continue trading.

[43]

[28] During cross-examination at the hearing, the respondent made a number of concessions which powerfully bore upon an assessment of the questions arising under s 588FG.

[44]

[29] They were that by at least January 2002, the respondent had come to appreciate that without the restaurant business, Mr Casaretto was "finished" (p 40 l 30); she had by then already sought security for the outstanding indebtedness from Mr Casaretto personally (p 39 l 50, p 42 l 15); by March that year, the respondent was willing to grant him an agreement to lease on condition that all arrears and outgoings were cleared (p 42 l 40); he agreed to that proposal, but was unable to make even the initial requisite payment (p 42 l 45); in late February the following year, the respondent instructed her solicitors to serve a notice to quit on Mr Casaretto (p 43 l 15); it was then that she became aware of the existence of the company which subsequently fell into liquidation; during the days leading up to the instant payments, the respondent came to an appreciation that the proceeds of sale represented her only realistic hope of recovering the arrears (p 45 l 10), and that the cash flow of the business was simply inadequate to meet ongoing liabilities (p 45 l 20); as at that time, the respondent had experienced a long history of rent defaults and other breaches, and was owed a substantial amount in that regard (p 45 l 15); defaults to that stage had driven her to overdraw upon her bank account, and compelled her personally to borrow money in order to service her own mortgage (p 45 l 45); as she conceded, when she became aware of the existence of the company, she had no reason to believe it would be in any better position financially to meet its obligations than was Mr Casaretto personally; and throughout the whole period until the respondent actually received the payments in question, she was "very apprehensive" about the prospect of being paid, whether by Mr Casaretto personally or by his company (p 48 l 5). Further, on 28 February 2003, the respondent's solicitor advised her that unless satisfactory arrangements could be made with the ANZ Bank as secured creditor, her prospects of recovery might be "bleak" (p 323).

[45]

[30] In my view, the aggregation of those undisputed circumstances and established concessions clearly warranted the conclusion that the respondent, when receiving these payments, had reasonable ground to suspect that the paying company was unable to pay its debts as they fell due, and that a reasonable person in her position would have entertained such a suspicion (being "a positive feeling of actual apprehension or mistrust", in terms of Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266, 303).

[46]

1. that the appeal be allowed and the judgment of the District Court given on 29 July 2005 set aside;

[47]

2. that there be an order under s 588FF of the Corporations Act 2001 that the respondent pay to the appellants, as liquidators of Going Bananas Restaurant (Qld) Pty Ltd, the sum of $66,985.68;

[48]

3. that the respondent pay the appellants' costs of the proceeding in the District Court, and the appeal, to be assessed; and

[49]

4. that the amount of the appellants' entitlement to interest on the said amount of $66,985.68 be reserved for further consideration, if not agreed.

[50]

[32] McMURDO P: The relevant facts, issues and provisions of the Corporations Act 2001 (Cth) are set out in the reasons of the Chief Justice so that my reasons may be briefly stated.

[51]

[33] I agree with the Chief Justice's reasons for concluding that the payments of $52,986.18 for rental arrears, $6,116.90 for rates arrears and $7,882.60 for legal fees arising out of the March 2003 dealings between Going Bananas Restaurant (Qld) Pty Ltd ("the company") and the respondent amounted to an unfair preference to the respondent under s 588FA(1). At the time of those dealings the company was insolvent so that those transactions (whether looked at separately or as a whole) were insolvent transactions under s 588FC and therefore voidable under s 588FE(1) and (2).[1] They could be set aside by the primary court under s 588FF(1)(a) but not if the respondent came within s 588FG(2), the only contentious aspects of which (both at first instance and on appeal) were whether the respondent had, and a reasonable person in her circumstances would have had, no reasonable grounds for suspecting that the company was or would become insolvent because of its entering into those transactions (s 588FG(2)(b)). So much was correctly identified by the learned primary judge.

[52]

[34] Her Honour also considered the March 2003 dealings between the company and the respondent were uncommercial transactions insofar as they related to the payments of debts accrued prior to 1 March 2002. That finding is disputed by the respondent in the notice of contention because the transaction was in some ways for the benefit of the company. This finding was not, however, critical to the outcome either at first instance or on appeal if the respondent received an unfair preference through the transaction under s 588FA and any of the circumstances set out in s 588FC(a) or (b) were also met so that it was voidable under s 588FE(1) and (2).

[53]

[35] I agree with the Chief Justice's reasons for rejecting her Honour's conclusions on the critical issues in s 588FG(2)(b) and for concluding instead that at the time of the dealings between the company and the respondent in March 2003 the respondent had, and a reasonable person in her circumstances would have had, reasonable grounds for suspecting that the company was then insolvent. It follows that the appeal must be allowed.

[54]

[36] During the appeal hearing the respondent, who represented herself on the appeal, as she did at first instance, indicated that in the event the appeal was successful she would wish to apply for an indemnity certificate under s 15 Appeal Costs Fund Act 1973 (Qld). This Court may only grant such a certificate where the appeal succeeds on a question of law. Mr Jonsson, who appeared for the appellant, indicated that he may assist the Court in respect of such an application. In accordance with Practice Direction 1 of 2005 para 37 such submissions should be provided to the Court within seven days of judgment of the Court.

[55]

[37] I agree with the orders proposed by the Chief Justice.

[56]

[38] MUIR J: I have read and agree with the reasons of de Jersey CJ and the orders he proposes.

[57]

[1] This section has been amended so that now the relevant sections are s 588FE(1)(a) and (2).

At a glance

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Judgment (57 paragraphs)

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Cases Cited (6)