Skouloudis Group Pty Limited v Planet Enterprizes Pty Limited

• 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5978/01 SKOULOUDIS GROUP PTY LIMITED (IN LIQUIDATION) & ANOR v PLANET ENTERPRIZES PTY LIMITED JUDGMENT Issues 1 An order for the winding up of Skouloudis Group Pty Limited (the company) was made on 9 November 2001. Mr Lord, the second plaintiff, was appointed liquidator of the company. Some time after 30 June 2001 the company sold one of its assets, namely the newspaper O Kosmos. At the time of sale, the company was insolvent. The question is whether the sale was an insolvent transaction within the meaning of s588FB of the Corporations Act 2001 (the Act). If it was then the sale was a voidable transaction under s588FE thereby enabling the court to make orders pursuant to s588FF(1). Facts 2 The court is required to determine this action on the basis of evidence far from complete. This seems to have been brought about because the action was commenced before the liquidator had assembled relevant information, even allowing for the fact that he obtained little assistance from Mr Skouloudis, the sole director of the company. No report as to affairs has been delivered to the liquidator and relevant documents have not been delivered to him. Thus, although it is clear the company was insolvent from 30 June 2001 there are no details of its financial position at that date, nor for that matter, at the date of winding up. Perhaps more significant, there are no details of the assets and liabilities of the newspaper business, the subject of the transaction sought to be set aside at any relevant date, nor of its profit and loss accounts since it was acquired by the company in December 1998. Mr Skouloudis is the sole director and shareholder of the company. The company purchased the O Kosmos newspaper from K Publications Pty Limited in December 1998 for $300,000. Whether thereafter the business was profitable or unprofitable, it is not possible to determine on the evidence before the court. It is probably more likely than not that it was unprofitable because the company does not appear to have owned any assets beneficially, other than the newspaper business. It did conduct other activities but apparently as trustee for some trading trust. 3 Mr Skouloudis said that in June 2001 he was considering transferring from Sydney to Queensland to conduct his other business interests which were situated in Brisbane. He was therefore proposing to dispose of the newspaper business which he was finding somewhat trying to operate. There is conflicting evidence about whether the company held any assets, other than the newspaper beneficially at that time, but for the purposes of this action it is does not really matter. What is clear is that there were considerable numbers of unpaid debts of the newspaper business including printing costs, rent, staff entitlements and there were other debts of the company including moneys owing to St George Bank and to a firm of solicitors. It is also clear the company could not pay these debts as they fell due. This was not disputed and it was accepted by counsel for the defendant that the company was insolvent from the end of June 2001 until the date the winding up order was made. That concession was correctly made. 4 Mr Skouloudis discussed with his wife the sale of the newspaper. Under the terms of the agreement under which the business was acquired the company was prohibited from selling it to a Mr. Theodore Skalkos, or any person or entity associated with him, for a period of three years which ended on 3 December 2001. There were other potential purchasers apparently willing to pay $50,000 for the business plus the taking over of what were described as staff entitlements which were probably entitlements to holiday pay and long service leave. Mrs Skouloudis said that she thought the business was worth more than that and that she would be interested in acquiring it. The purchase price was the taking over of the liabilities of the newspaper business, together with any amounts accrued due to staff for holiday pay and long service leave and any such entitlements. Mr Skouloudis said that these amounted to about $60,000 plus the staff entitlements. It was agreed the sale and purchase would proceed. The plaintiff called no evidence about this at all. There was evidence from Mrs Skouloudis which I accept as to discharge of some liabilities including printing debts, staff debts and rent. No debtors or creditors ledger of the newspaper business was produced and no other accounts were produced for that business. 5 Mr Skouloudis told his wife that she would need a company to enable her to conduct the business. Some time in July she met with Mr Paul Theodore, who controlled a company, Planet Enterprizes Pty Limited (Planet). He was prepared to sell the company for $600 and it was arranged that his accountant, Mr Premetis would look after the details necessary to bring this about. The intention was that Mrs Skouloudis would become sole director and shareholder in that company. So far as Mrs Skouloudis was concerned, she considered that thereafter Planet owned the newspaper business and she owned Planet. She told the staff that she had purchased it; on 2 August 2001 she signed an agreement on behalf of Planet with Arncliffe Apex Printers relating to the printing of the newspaper. In fact the necessary forms and documents required to put Mrs Skouloudis in control of Planet were not completed until October 2001 Mr Lord said that Mr Skouloudis told him the transfer took place in October but Skouloudis denied he said that. The registration of business name of O Kosmos which had previously been held by the company had expired and it was necessary to re-register the business under that name as a new enterprise conducted by Planet. This was achieved on 19 October 2001, the registration details showing that the business commenced on 30 June 2001. This may explain the contested evidence as to the date of the sale. I find it took place in July. Until registration there was no separate bank account for the newspaper business. According to Mr & Mrs Skouloudis the arrangement was that the bank accounts controlled by the company for the newspaper business could continue to be used for the business under its new ownership of either Mrs Skouloudis or Planet and it was agreed that the necessary adjustments would be made in the future. According to Mrs Skouloudis the winding up order prevented this happening and that is probably correct, although there is nothing to suggest that it would have happened shortly after the winding up order was made, had it not been made. 6 After she obtained control, Mrs Skouloudis made some payments to discharge debts of the newspaper business. For instance, the business had been locked out of its rented premises; she paid the arrears of rent and negotiated a new lease on a short-term basis but at a substantially reduced rent per month. She also made payments in respect of past printing costs and seems to have been able, with the assistance of her husband, to come to an agreement with the staff as to their entitlements and to pay out most of those amounts due for holiday pay and the like. She has borrowed considerable sums from relatives, amounting to at least $30,000 which she has put into the business and used either to keep it going or to pay business creditors at the time she took it over. She has sold motor vehicles which belonged to her and put the proceeds of sale, amounting to at least $27,000 into the business. Whether all of this has been used for the purpose of paying running costs of the business after 1 July 2001, or whether part has been used to discharge existing liabilities as at that date is not made clear. As I have said there is no proper evidence of this. 7 There is evidence that Mr Skalkos, who is the proprietor of a business Media Press Pty Limited, which was a creditor of the company in the sum of approximately $28,000, some of which has been paid by Mrs Skouloudis, is prepared to buy the newspaper business. The evidence is that if the plaintiffs are successful in setting aside the sale of the business then he would be prepared to pay $100,000 for it and take over the employee liabilities. As the evidence is those liabilities have been discharged, it is not clear whether or not he would pay more than $100,000, but he does say that he might be prepared to pay more. The liquidator, Mr Lord, gave some evidence as to value. In an affidavit, sworn 14 December 2001 he said that a reconciliation of the company's account with Media Press Pty Limited showed the printing and distribution charges for the newspaper were under $20,000 per month, that sales averaged $15,000 per month and advertising revenue was between $2,000 and $4,000 per month. It would seem to me this would show a loss rather than a profit per month, but no attention appeared to be given to that during the trial. He said that based on those figures "and from inquiries and investigations conducted by me I believe that the business of the O Kosmos newspaper was a valuable asset of the first defendant". He said that he believed it might be possible to sell the business as a going concern for in excess of $100,000. He went on to say: This is based upon the premises that it has a circulation of approximately 5000 copies, it is printed twice weekly, is one of only two Greek language newspapers published in Sydney and that the newspaper has been published in Sydney since approximately 1935 and therefore has an established readership and considerable goodwill. Any sale would of course be strongly influenced by market factors at the time. 8 No objection was taken to this evidence, but it seems to me to have been largely based upon the fact that Mr Skalkos was prepared to offer $100,000 for the newspaper business, some time around about December 2001. As there was no evidence before the court of the basis upon which the value of newspapers was worked out, it does not seem to me to be possible to place great reliance upon the opinion of the liquidator stated so baldly without any underlying facts giving support to that opinion. 9 It is also important to understand that this transaction took place in July 2001. At that time, Mr Skalkos was not a possible purchaser, even if it took place later that remained the position. The evidence is that other purchasers were prepared to pay in the vicinity of $50,000 for the business. On any basis that must have meant the goodwill rather than the taking over of the assets and liabilities of the newspaper business which would have been unknown to any prospective purchaser and which would have had to remain with the company after sale. 10 In response to a notice to produce addressed to Planet, requiring that company to produce documents recording the acquisition of the newspaper business, its operation from 1 January 2001 to 31 December 2001 and financial statements during that period and bank books and bank statements during that period, very little was produced. Most of the documents required related to the operation of the business by Planet not by the company. Nevertheless the fact remains that little was produced. It is however important to realise that these proceedings were not proceedings to set aside a transaction on the basis that it was fraudulent or that it was fictitious. The action presumes that a transaction involving the sale of the business has taken place. What it seeks to do is to set that transaction aside as an uncommercial transaction. 11 The liquidator has not called for proofs of debt. He has no idea of the assets and liabilities of the company and neither has he any idea of the assets and liabilities of the newspaper business. That at least is how I understood his evidence. It is therefore difficult to understand why he has launched into this action so quickly, albeit that, if the newspaper business was the only real asset of the company, then he might reasonably consider it desirable to get it back as quickly as possible if that could be achieved. On the other hand, it may be that he has been encouraged to precipitous action by Mr Skalkos, who has apparently funded this litigation up to an amount of $20,000 and who is clearly interested in obtaining control of this newspaper thereby giving him control of all Greek language newspapers published in Sydney. Whatever is the position really does not matter. What matters is that this claim must be decided upon the evidence available and that evidence is quite clearly insufficient. For instance, evidence was given by both Mr and Mrs Skouloudis, that other documents were held which had not been produced in accordance with the notice to produce. When that situation arises it does not seem to me to be correct to state that the court must proceed upon the basis that the documents produced were the only documents available. It might, however, be possible for the court to consider that any other documents would not necessarily assist the case of the defendant company. On the plaintiff's application the case was reopened after judgment was reserved. There was tendered a distribution agreement signed by Mr Skouloudis on behalf of "Skouloudis Group Kosmos" dated 27 July 2001. The agreement was for an initial term of three months from 1 August 2001. The plaintiff puts this forward as evidence no transfer had taken place before that date particularly as there was no explanation given for it. However, it must be considered alongside the printing agreement dated 2 August 2001. It does not purport to be an agreement executed by the plaintiff company. It may cast some doubt about the transfer date in July, but it does not establish the transfer date was October. The law 12 The transaction was an insolvent transaction under s588FC if it was an uncommercial transaction. That is because the company was insolvent at the time the transaction was entered into, even if there is some doubt about that particular date. Whatever date it was entered into the company was insolvent, but in fact I find it was entered into some time in July 2001. 13 Section 588FB(1) defines uncommercial transaction as follows: 588FB. Uncommercial Transactions (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: (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

any other matter. 14 Section 109H of the Act requires a purposive approach be taken and therefore this section should be interpreted in the light of its objectives. These objectives were set out in the Explanatory Memorandum to the Corporate Law Reform Bill 1992, paras 1034-1035, in the following terms: The provision is specifically aimed at preventing companies disposing of their assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice. 15 Further, Young J in the decision of McDonald v Hanselmann [1998] NSWSC 171 considered where 'a purchaser is a related entity in the corporate sense, or a relation by blood or law in the individual sense, then the court should look at the transaction far more closely and be less inclined to excuse a sale at an undervalue because of some commercial factor.' Discussion on facts and law 16 Accepting for the moment that it does not matter whether or not the transaction was entered into with Mrs Skouloudis or with Planet, (although one would have thought that if it were with Mrs Skouloudis she should have been a necessary party to the proceedings; and on the date at which I have found it took place, Planet could not have been a party to it) the position on the evidence is as follows:

(a) Assuming that the purchaser would comply with her obligation to discharge the business liabilities, the benefits to the company of entering into the transaction were to have those liabilities discharged. On the evidence it was not able to discharge those liabilities itself.

(b) There would only be a detriment to the company in entering into the transaction if at the date it took place it could have obtained a higher price for the business or, if it were able to continue running the business in the future, some profits would eventually be obtained as a result of it doing so.

(c) The respective benefits to vendor and purchaser can only be looked at in the light of the foregoing two comments. The only evidence as to a proper price for the business at the time the transaction took place is the evidence that other potential purchasers were around who might have paid about the same price. If a transaction to that effect had in fact been entered into, then the benefits to the company would have obtained a sum of money which might have paid out most of the creditors of the newspaper business. On the other hand, assuming that Mrs Skouloudis or Planet was able from a financial point of view to comply with the obligations to discharge the creditors then on the evidence as it stands the company would be in no worse a situation and perhaps a slightly better situation because the obligation was to pay out all creditors rather than to pay a particular price. 17 Various matters are put forward by counsel for the plaintiffs as indicia of uncommerciality. These may be summarized as follows:

(a) That there was no written agreement for transfer of business and no resolution of the directors of the company to sell the business.

(b) That there was no ascertainable purchase price.

(c) That there were no listings of creditors, liabilities to employees, plant and equipment and stock to be assigned. That there were no arrangements for a lease of the premises, or new bank accounts to be opened for indemnification of the company against creditors' claims.

(d) That there was a continued use of the bank accounts of the company and therefore and intermingling of funds.

Most of this is correct. But there are countervailing matters which require an inquiry into whether a reasonable person in the company's circumstances would not have entered into the transaction: Lewis v Cook [2000] NSWSC 191, Austin J. If the newspaper business were the only asset of the company which it held beneficially, as appears to be the position, and if the company was unable to pay the debts of that newspaper business as appears to have been the case, then the disposal of that business for a sum sufficient to pay the liabilities, which the company was unable to pay was not necessarily an unreasonable transaction. This was a one person company business being transferred to either one person or a new one person company. It was not some major transaction. It is not being suggested that it was a transaction entered into for the purpose of defeating creditors. The court can only proceed on the evidence available to it. It is likely that if more time had elapsed more evidence would have been available but that is hardly to the point. It was the plaintiff who insisted on rushing this matter on to hearing in the duty judge list against the opposition of the defendant on the basis that the hearing would take about two hours, whereas in fact it took about two days. It is for the plaintiff to establish that the transaction was uncommercial. In my view it has not done so. In those circumstances it is not necessary to consider the problems which would arise under s588FF of the Act. In the circumstances of this case it would not be appropriate for the court to make any of the orders which it is empowered to make under that section unless these could be made conditionally upon the defendant being reimbursed for the amounts paid to discharge liabilities of the company existing at the date of the transaction. None of the orders sought in the summons would provide for this. In addition it would be necessary to provide some means to ensure that if Mrs Skouloudis or Planet provided funds to the business to enable its continued operation then the claim of Mr Skouloudis or the defendant as a creditor of the business be in some way recognised. As I have said no proper argument was addressed to these matters but in view of the conclusion to which I have arrived it is not necessary to discuss this further.

Orders 18 The summons be dismissed with costs. **********

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