SKOULOUDIS v PLANET ENTERPRIZES

LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT ED 5978/01 FILE NUMBER(S) : LOWER COURT Windeyer J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

40324/02 ED 5978/01 HANDLEY JA GILES JA HODGSON JA

17 February 2003 SKOULOUDIS GROUP PTY LIMITED (IN LIQ) & ANOR v PLANET ENTERPRIZES PTY LIMITED

COMPANIES - winding up - uncommercial transaction before winding up - Corporations Act s 588 FB

The company and its liquidator sued for the avoidance of the sale of a business of the company to a company nominated by the wife of the controlling director. The vendor company was insolvent. The contract of sale was not reduced to writing and was proved by the evidence of the director and his wife. However it was carried into effect and the wife's company took possession of the business and ran it.

The consideration for the sale was the assumption by the purchaser of the liabilities of the business including the employee entitlements. The trial Judge held that the liquidator had not proved that the transaction was uncommercial and dismissed the proceedings.

On appeal: HELD: There was no acceptable evidence of the value of the business, and there was no acceptable evidence of the value of the consideration for its sale. The obligations taken over by the purchaser and those it had paid had not been ascertained. The liquidator had therefore failed to prove that the transaction was uncommercial for the purposes of s 588 FB (1) of the Corporations Act and the appeal would be dismissed.

(2) Appellants to pay the respondent's costs on an ordinary basis up to 5 September and its costs as a submitting respondent thereafter. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

40324/02 ED 5978/01 HANDLEY JA GILES JA HODGSON JA

17 February 2003 SKOULOUDIS GROUP PTY LIMITED (IN LIQ) & ANOR v PLANET ENTERPRIZES PTY LIMITED

Judgment 1 HANDLEY JA: This is an appeal as of right by a company in liquidation and its liquidator from the decision of Windeyer J of 28 March 2002 dismissing their summons of 14 December 2001 which had sought a declaration that the transfer of the "O Kosmos" newspaper business to Planet Enterprizes Pty Limited, the respondent to this appeal, was an insolvent transaction within s 588FC of the Corporations Act because it was an uncommercial transaction within s 588FB(1). 2 It was common ground before Windeyer J and this Court that the vendor company was insolvent at the date of the transaction and the sole issue was whether the transaction was uncommercial for the purposes of s 588FB(1). The Judge held that the liquidator had not discharged the onus of proof. 3 When the appeal was opened by Mr Newlinds for the appellant (who had not appeared below) the Court asked whether the appeal lay as of right because it did not appear that it involved an amount of $100,000 or more as required by s 101(2)(r) of the Supreme Court Act. Mr Newlinds endeavoured to demonstrate that the appeal lay as of right and, in the end, the Court heard him fully on all issues in the appeal and called on Mr Thomas for the respondent. I have, nevertheless, reached the firm conclusion that the appeal was incompetent without leave. 4 Windeyer J found that the sale took place during July 2001, at a date not further identified, and rejected the plaintiff's arguments that it occurred in October that year. The Judge's finding cannot be disturbed. 5 It was an informal transaction, not directly evidenced in writing, and its terms had to be proved by the oral evidence of Mr and Mrs Skouloudis, both of whom, of course, were interested parties. 6 The company, which it seems was the trustee of a trading trust, acquired the business of publishing the Greek language newspaper "O Kosmos" under a contract dated 3 December 1998 for the sum of $300,000, subject to adjustments for outgoings and employee entitlements. The amount of these was never established. Possession passed to the purchaser on 3 December 1998 on payment of $100,000, with further payments due on 3 June and 3 December the following year. The purchase price was apportioned between $290,000 for goodwill and $10,000 for plant and equipment. 7 The vendor's accounts annexed to the contract showed sales of $681,076 in the year 30 June 1998 but an operating loss of $11,405. There were no accounts of the purchaser in evidence for the period since 3 December 1998 but there were accounts, including a balance sheet and profit and loss account for the Skouloudis Family Trust, for the year ended 30 June 1999. The profit and loss account showed sales of $385,968, hire income of $735,164 and expenses, resulting in a profit of $25,027. The balance sheet showed net assets of $20 and current liabilities of $1,825,000. The relationship of the trust to the purchase of the newspaper business was not explored. 8 The expenses in the profit and loss account included $151,235 for printing costs but the figure for goodwill in the balance sheet was only $106,000 and there was no reference to any write down from the purchase price for goodwill of $290,000, paid a little over six months before, if this trust had been the beneficial purchaser of the newspaper business. There were also no debts in the balance sheet for the final instalment of the purchase price for the newspaper business of $100,000 due on 3 December 1999. 9 The figure for trade creditors of $12,316.80 does not suggest that the trust was carrying on a newspaper business. 10 The case was conducted on the basis that the company was the trustee of a trading trust and, as at 1 July 2001, had creditors in connection with both the newspaper business and other creditors who were also creditors of the trust. There was no evidence of the extent of these other creditors or the assets available for their payment or the value of any rights of indemnity available to the trustee and the liquidator. 11 The Judge found that the company acting through Mr Skouloudis agreed to sell the newspaper business to a company nominated by Mrs Skouloudis in consideration of the purchaser taking over the liabilities of the newspaper business, together with any accounts accrued due to staff for holiday pay and long service leave, and any such entitlements. These findings were not challenged. 12 Mr Skouloudis gave evidence that the staff entitlements were later assessed by him with the staff at $25,000 to $35,000 and all of the staff had been paid, except one. 13 Mrs Skouloudis nominated the respondent as the company which would purchase the business and it became common ground that it was the purchaser. 14 The direct evidence, such as it was, about the state of the business at the time of the transfer, was that of the liquidator. He said that up until July 2001, printing charges for the newspaper were slightly under $20,000 per month, sales of the newspaper averaged slightly under $15,000 per month and he estimated the advertising revenue at between $2,500 and $4,000 per month. He then said: "Based on the above information, and from the inquiries and investigations conducted by me, I believe that the business of the 'O Kosmos' newspaper was a valuable asset of the First Defendant".

This, I believe, is a typographical error for "the first plaintiff". He continued: "From the inquiries and investigations that I have made and the information and interest I have received, I consider that it may be possible to sell the 'O Kosmos' newspaper business as a going concern for an amount in excess of $100,000.00." 15 There was evidence that Mr Skouloudis had received cash offers of $50,000 from other potential purchasers who were also willing to take over employee entitlements. There was also evidence that Mr Skalkos, who controlled the rival Greek newspaper, was prepared, after December 2001, to pay $100,000 for the business and take over employee entitlements, but the appellant company had contracted in the purchase agreement of 3 December 1998 that it would not sell to Skalkos for a period of three years, which would not expire until 3 December 2001. 16 Mr Skouloudis did not attempt to explore Mr Skalkos' interest in purchasing the business prior to selling it to the respondent company. His interest, if any, in purchasing the business in July 2001 was not explored during the cross-examination of Mr and Mrs Skouloudis, or during the evidence of Mr Skalkos. 17 In these circumstances Mr Skalkos' willingness to purchase the business after December at the price mentioned is of little relevance to its market value in July. Especially is this the case in the light of the evidence of Mr Skouloudis that the business was in difficulties and he was going to be selling the business to somebody at that stage. There was no suggestion that he was willing or able to carry it on until the restrictive covenant had expired. 18 The trial Judge was not impressed by the liquidator's tentative and qualified opinion of the evidence of the value of the business in July 2001, and nor am I. There was, in fact, no acceptable evidence of what the business was worth and, in particular, that it was worth more than what Mrs Skouloudis had agreed to pay. 19 A further difficulty for the appellants is that there was no evidence of the creditors and their debts that Mrs Skouloudis and her company agreed to take over and pay. The liquidator did not establish what the debts of the printing business were. In particular, proofs of debt had not been called for and collated and made the subject of evidence. 20 As at February 2002, Media Printing Pty Limited was owed $119,991, which may have been for printing "O Kosmos". But although Mr Skalkos controlled this company, the relationship of that debt to the printing and publishing of "O Kosmos" was not established. There was also no evidence of the amounts paid to pre-acquisition creditors by the respondent company and whether amounts are still owing which it had not paid at the date of trial but was still bound to pay. 21 Mr Newlinds relied on the fact that the respondent continued to use the vendor company's bank account after the business was taken over. It seems that pre-acquisition trade debts received after the business was taken over were paid into what then became the common bank account and may have been used to pay creditors for which the respondent was responsible. However, there is no evidence of this and the company's bank statements and cheque books were not in evidence. There was no evidence about the information they contained that may have been relevant on this issue. It follows, in my judgment, that there is no evidence from which the Court can make a finding as to the value of the benefits to the company of entering into the transaction for the purposes of s 588FB(1)(a) because the total purchase price is not known and was not proved. The Court is also unable to determine what the detriment to the company was within s 588FB(1)(b) because the value of the business was not established. 22 In these circumstances, I am of the view that the appeal is incompetent and should be dismissed with costs. 23 GILES JA: I agree and have nothing to add. 24 HODGSON JA: I agree, and will just add a couple of comments. Mr Newlinds, in his submissions to support the contention that the sale was at an under value, relied on the price of $300,000 paid for the business in December 1998. However, the financial statements of the business for the year ended 30 June 1998 showed a turn-over in excess of $55,000 a month. By 2001, it seems that the turn-over had come down to less than $20,000 a month, so that the price paid in December 1998 can be of very little probative value. 25 There are difficulties facing a liquidator without funds and having no cooperation from the liquidated company's directors and virtually no company records. In applications such as this, a liquidator can in those circumstances rely on Jones v Dunkel (1959) 101 CLR 298, but nevertheless must produce some evidence from which inferences can be drawn. The case presented by the liquidator in these proceedings, it seems to me, did not provide even the limited evidence needed to base the drawing of inferences. 26 Finally, it seems probable that the respondent and/or Mrs Skouloudis provided an amount of money in the order of about $60,000 in connection with the purchase. It seems to me that part of the liquidator's case to support an order setting aside the transaction under s 588FF would be to show that the liquidator was ready, willing and able to refund that money. If there had been no other deficiency in the case, apart from provision of proof of that readiness, willingness and ability, then the Court may have been prepared to make a conditional order. However, readiness, willingness and ability to provide a substantial sum of that sort, it seems to me, is an important part of a liquidator's case for such an order, and it should have been part of the material relied on by the liquidator. 27 HANDLEY JA: The order of the Court therefore will be appeal dismissed as incompetent. Appellants to pay respondent's costs.

COUNSEL ADDRESSED ON COSTS 28 HANDLEY JA: Because of the filing of the submitting appearance by the respondent on 5 September 2002 the Court will revoke its earlier order and order that the appellants pay the respondent's costs on an ordinary basis up to 5 September and its costs as a submitting respondent thereafter.

Last Modified: 02/25/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.