Tang v Roths Holdings Australia Pty Ltd, in the matter of AXL Financial Pty Limited

BACKGROUND 4 On 10 January 2018, Ms Renee Maguire entered into an agreement described as a Home Ownership Participation Agreement with AXL (Agreement). The Agreement stated that AXL would provide 20% of the purchase price of a property to be acquired by Ms Maguire and in return it would take a registered second mortgage over the property. 5 On 2 February 2018, Ms Maguire purchased a property located at Unit 4, 301 Princess Highway, Albion Park Rail, New South Wales (Property) for the sum of $520,000. AXL provided a loan in the sum of $104,000 to Ms Maguire to enable her to complete the purchase of the Property and took a second registered mortgage over the Property to secure the loan (Second Mortgage). 6 On 1 July 2019, a transfer of AXL's interest in the Second Mortgage to Roths Holdings and Mr Roths was executed and subsequently registered (Transfer of Mortgage). It was stated in the Transfer of Mortgage that the "transferor acknowledges receipt of the consideration of $100,000". 7 On 7 November 2022, the plaintiffs commenced proceedings against Roths Holdings and the Trustee by filing an originating process. 8 On the same day, the plaintiffs filed an interlocutory process seeking orders that Roths Holdings and Mr Roths provide the plaintiffs with a discharge of the Second Mortgage and that Ms Maguire pay the sum of $139,000 into Court (Discharge Application). Ms Maguire was named as the third respondent to the interlocutory process and provided an affidavit in support of the Discharge Application. The Discharge Application was advanced on an interlocutory basis in order to facilitate the refinancing of Ms Maguire's home loan with Origin Mortgage Management Services in relation to the Property. 9 On 15 November 2022, Farrell J made orders generally to the effect of the orders sought in the Discharge Application. Her Honour did not deliver formal reasons but the transcript of the hearing of the Discharge Application makes clear that her Honour was satisfied that the valuation evidence relied on by the plaintiffs supported a value of $695,000 for the Property and the 20% investor allocation secured by the Second Mortgage was thus $139,000. 10 In accordance with the orders of Farrell J, the Second Mortgage was discharged and $139,000 was paid into Court by Ms Maguire. 11 On 3 February 2023, I made orders that the matter proceed by way of pleadings. The plaintiffs were ordered to file and serve a statement of claim by 17 February 2023 and the defendants were ordered to file and serve a defence by 17 March 2023. 12 On 15 February 2023, the plaintiffs filed a statement of claim. 13 On 16 February 2023, the plaintiffs served the statement of claim on the defendants. 14 Neither of the defendants has filed and served a defence in accordance with the orders made on 3 February 2023. 15 On 28 March 2023, the Trustee filed a submitting notice, save as to costs. 16 On 3 April 2023, the plaintiffs filed the Default Judgment Application. The plaintiffs seek orders to the following effect in the Default Judgment Application: (a) the Transfer of Mortgage be declared void ab initio, pursuant to s 588FF(1)(h) of the Act; (b) in the alternative, the Transfer of Mortgage be declared as unenforceable, pursuant to s 588FF(1)(j) of the Act; and (c) the amount of $139,000 that was paid into Court be paid to the plaintiffs, together with interest accrued. 17 On 6 April 2023, I made orders in relation to listing the Default Judgment Application for a hearing and the service of the Default Judgment Application and supporting affidavits on the defendants.

RELEVANT RULES AND PRINCIPLES 18 Rule 5.22 of the FCR provides that a party is in default if the party fails to: (a) do an act required to be done, or to do an act in the time required, by these Rules; or (b) comply with an order of the Court; or (c) attend a hearing in the proceeding; or (d) prosecute or defend the proceeding with due diligence. 19 Rule 5.23(2) of the FCR relevantly provides: (2) If a respondent is in default, an applicant may apply to the Court for: (a) an order that a step in the proceeding be taken within a specified time; or (b) if the claim against the respondent is for a debt or liquidated damages - an order giving judgment against the respondent for: (i) the debt or liquidated damages; and (ii) if appropriate, interest and costs in a sum fixed by the Court or to be taxed; or (c) if the proceeding was started by an originating application supported by a statement of claim or an alternative accompanying document referred to in rule 8.05, or if the Court has ordered that the proceeding continue on pleadings - an order giving judgment against the respondent for the relief claimed in the statement of claim to which the Court is satisfied that the applicant is entitled; or (d) an order giving judgment against the respondent for damages to be assessed, or any other order; or (e) an order mentioned in paragraph (b), (c) or (d) to take effect if the respondent does not take a step ordered by the Court in the proceeding in the time specified in the order. Note 1: The Court may make any order that the Court considers appropriate in the interests of justice - see rule 1.32. Note 2: An order or judgment under this Division may be set aside or varied. 20 Rule 5.23(2)(c) provides that the Court must be satisfied that the applicant for default judgment is entitled to the relief sought in the statement of claim. The principles governing the application of this rule were summarised by Yates J in Chamberlain Group, Inc v Giant Alarm System Co, Ltd (No 2) [2019] FCA 1606 as follows, and whose summary I respectfully adopt: 13 The power to give judgment against a defaulting party is undoubtedly discretionary. The discretion must be exercised cautiously. Where the defaulting party is a respondent to a pleaded claim, the giving of judgment for final relief on the application will deliver complete success to the applicant without investigation of the merits of the pleaded claim: ACOHS Pty Ltd v Ucorp Pty Ltd [2009] FCA 577 at [27]. There is no requirement that the act or acts of default be intentional or amount to contumelious conduct. There is no requirement that the act or acts of default result in inordinate or inexcusable delay. That said, such features, if present, will be relevant to the exercise of the Court's discretion. So too will conduct that persuades the Court that the defaulting party is manifesting an inability or unwillingness to cooperate with the Court and the other party or parties to the proceeding. 14 Rule 5.23(2)(c) requires the Court to be satisfied that the applicant is entitled to the relief claimed in the statement of claim. This requirement has been interpreted as meaning that the Court must be satisfied that "on the face of the statement of claim" the applicant is entitled to the relief that is claimed. It is not a requirement that the applicant prove its claim by way of evidence. Put another way, the facts alleged in the statement of claim are taken to have been admitted: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2007] FCAFC 146; 161 FCR 513 at [42]. If, on inspection of the statement of claim, the Court is satisfied that the applicant would be entitled to the relief sought then this requirement of r 5.23(2)(c) will be met: CNIP Pty Ltd v Chan & Naylor Norwest Pty Ltd (No 2) [2011] FCA 1170 at [18] - [19]; Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 at [23]. The Court may permit further evidence to be adduced, but not evidence that would alter the pleaded case: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2006] FCA 1427; 236 ALR 665 at [45], [48] - [50]; United Broadcasting International Pty Ltd v Turkplus Pty Ltd (No 2) [2010] FCA 1413 at [42] - [44]; Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352; 195 FCR 1 at [62] - [63]. 21 As explained by Derrington J in Project Noah Holdings Pty Ltd (in liq) v Jacka [2022] FCA 778 at [17], on an application for default judgment: The Court is entitled to give judgment against a defaulting party as is appropriate given the claims advanced in the statement of claim or other document supporting the originating application. It is also entitled to, and often does, consider additional material which might support the existence of the claims or the exercise of the court's discretion whether to accede to the application for judgment.

SERVICE OF THE DEFAULT JUDGMENT APPLICATION 22 The affidavit evidence relied upon by the plaintiffs establishes that the statement of claim was filed on 15 February 2023 and served on each defendant on 16 February 2023. As explained at [14] above, neither defendant filed a defence by 17 March 2023, as required by Order 3 of the orders made in these proceedings on 3 February 2023, or at all. 23 The plaintiffs served the Default Judgment Application and supporting affidavits on (a) the Trustee on 11 and 12 April 2023, (b) two directors of Roths Holdings, Ms Izabela Kwoka and Ms Nadine Marando, on 12 April 2023, and (c) the registered office of Roths Holdings on 13 April 2023. 24 For these reasons, as supported by the filed affidavit material, I am satisfied that the defendants have been properly served and have been given appropriate notice of the Default Judgment Application. 25 It is also readily apparent that the defendants have failed to comply with an order of the Court.

CONSIDERATION 26 It is alleged in the statement of claim that: (a) Mr Roths was a director of Roths Holdings between 13 November 2020 and 1 July 2021; (b) Mr Roths was a director of AXL from 10 September 2019 and prior to that, at all relevant times, he was a director of AXL in that he acted in the position of a director of AXL and/or the directors of AXL were accustomed to act in accordance with his instructions or wishes; and (c) as at 1 July 2019, Roths Holdings held 300 of the 500 ordinary shares issued in AXL and Mr Roths held 100 of the 210 ordinary shares issued in Roths Holdings. 27 By reason of the matters alleged at [10] of the statement of claim, as summarised at [26] above, the plaintiffs plead that as at 1 July 2019, (a) AXL was a subsidiary of Roths Holdings pursuant to s 46 of the Act, (b) AXL was a related body corporate of Roths Holdings pursuant to s 50 of the Act, and (c) both Roths Holdings and Mr Roths were related entities of AXL. 28 Further, the plaintiffs contend in the statement of claim that Roths Holdings never received the purported consideration of $100,000 stated in the Transfer of Mortgage or any other consideration or benefit. 29 The following causes of action are advanced in the statement of claim. 30 First, the plaintiffs contend that the Transfer of Mortgage was an uncommercial transaction within the meaning of s 588FB of the Act. 31 Section 588FB provides: 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 (d) any other relevant matter. (2) A transaction may be an uncommercial transaction of a company because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. 32 I am satisfied that the allegations in the statement of claim justify a finding that a reasonable person in the circumstances of AXL would not have entered into the Transfer of Mortgage. The transfer of AXL's interest in the Second Mortgage to the defendants deprived AXL of a valuable asset for no benefit and conferred on the defendants a valuable asset for no consideration. 33 Second, the plaintiffs contend that the Transfer of Mortgage was an insolvent transaction within the meaning of s 588FC of the Act. 34 Section 588FC provides: Insolvent transactions 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: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction. 35 I am satisfied that the allegations in the statement of claim justify findings that the Transfer of Mortgage was entered into by AXL or that an act was done or an omission was made for the purpose of giving effect to the Transfer of Mortgage at a time when AXL was insolvent. 36 I am satisfied that the factual allegations, set out in the statement of claim and in the affidavit of Mr Tang affirmed on 7 November 2022, are sufficient to justify a finding that AXL failed to maintain the books and records that it was required to maintain pursuant to s 286 of the Act for the period between its incorporation and winding up. By reason of s 588E(4) of the Act, a company that has failed to keep the books and records, required by s 286 of the Act, is presumed to be insolvent. I am, therefore, satisfied that by reason of its failure to keep the books and records, AXL was insolvent at all times between its incorporation and winding up. As explained by Mr Tang's affidavit evidence, the liquidators have sought access to the books and records of the money lending business carried on by AXL from Mr Roths. The liquidators, however, have only received (a) unreconciled management accounts maintained in MYOB, (b) miscellaneous records for various related entities, (c) bank statements for AXL's National Australia Bank account for the period from 5 February 2016 to 3 October 2019, and (d) bank statements for AXL's Macquarie Bank Limited account for the period from 30 June 2020 to 11 January 2021. 37 Third, the plaintiffs contend that the Transfer of Mortgage was an unreasonable director-related transaction within the meaning of s 588FDA of the Act. 38 Section 588FDA relevantly provides: Unreasonable director-related transactions (1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if: (a) the transaction is: (i) a payment made by the company; or (ii) a conveyance, transfer or other disposition by the company of property of the company; or (iii) the issue of securities by the company; or (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and (b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or (ii) a close associate of a director of the company; or (iii) a person on behalf of, or for the benefit of, a person mention in subparagraph (i) or (ii); and (c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (i) the benefits (if any) to the company of entering into the transaction; and (ii) the detriment to the company of entering into the transaction; and (iii) the respective benefits to other parties to the transaction of entering into it; and (iv) any other relevant matter. The obligation referred to in subparagraph (a)(iv) may be a contingent obligation. Note: Subparagraph (a)(iv) - This would include, for example, granting options over shares in the company. 39 I am satisfied that the allegations set out in the statement of claim justify findings that the Transfer of Mortgage (a) was a transaction that constituted a transfer of property of AXL to a director and associate of a director of AXL, and (b) as explained above at [32], a reasonable person in the circumstances of AXL would not have entered into the Transfer of Mortgage, given the absence of any benefit to AXL and the respective benefits conferred on Roths Holdings and Mr Roths. 40 I am satisfied that the allegations in the statement of claim justify findings that the plaintiffs contend that the Transfer of Mortgage was a voidable transaction by reason of s 588FE(4) of the Act. 41 Sub-section 588FE(4) provides: (4) the transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) a related entity of the company is a party to it; and (c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day. 42 The allegations in the statement of claim justify findings that (a) AXL was insolvent at the date that the Transfer of Mortgage was entered into, (b) the defendants were parties to the Transfer of Mortgage and were related parties to AXL, and (c) the Transfer of Mortgage was entered into on 1 July 2019, being a date that fell within the 4 years ending on the relation-back day. 43 I am also satisfied that the allegations in the statement of claim justify findings that the Transfer of Mortgage was a voidable transaction by reason of s 588FE(5) of the Act. 44 Sub-section 588FE(5) provides: (5) the transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and (c) the transaction was entered into, or an act done was for the purpose of giving effect to the transaction during the 10 years ending on the relation-back day. 45 The allegations in the statement of claim and the evidence given by Mr Tang in his affidavit justify the following findings. 46 First, AXL was insolvent at the date that the Transfer of Mortgage was executed. 47 Second, AXL became a party to the transaction for purposes that included the purpose of defeating the rights of all of the creditors of AXL on the winding up of the company, given (a) AXL ceased trading on the day before the Transfer of Mortgage was executed, (b) the Transfer of Mortgage falsely stated that $100,000 consideration was received by AXL, (c) the Transfer of Mortgage was not recorded in the books and records of AXL, (d) Mr Roths was a shadow director of AXL as at the date the Transfer of Mortgage was executed, and (e) the defendants were related entities of AXL. 48 Third, the Transfer of Mortgage was entered into on 1 July 2019, being a date that fell within the 10 years ending on the relation-back day. 49 Further, I am also satisfied that the allegations in the statement of claim justify findings that the Transfer of Mortgage was a voidable transaction by reason of s 588FE(6A) of the Act. 50 Section 588FE(6A) provides: (6A) The transaction is voidable if: (a) it is an unreasonable director-related transaction of the company; and (b) it was entered into, or an act was done for the purposes of giving effect to it: (i) during the 4 years ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began. 51 The allegations in the statement of claim and the evidence given by Mr Tang in his affidavit justify findings that (a) the Transfer of Mortgage was a director-related transaction of AXL for the reasons identified at [37] to [39] above, and (b) the Transfer of Mortgage was entered into on 1 July 2019 being a date that was less than four years prior to the relation-back day. 52 By reason of the matters identified at [40] to [51] above, I am satisfied that the Transfer of Mortgage was a transaction that is voidable by reason of s 588FE and the Court should make a declaration pursuant to s 588FF(1)(h) that the Transfer of Mortgage is unenforceable. Given that conclusion, it is not necessary to make a declaration that the Transfer of Mortgage was void ab initio. In any event, a declaration to that effect would need to be accompanied by an order addressed to the Registrar of Land Titles to correct the Register: see Haslam v Money For Living (No 2) [2007] FCA 1981. The Registrar, however, is not a party to the proceedings and no such relief has been sought by the plaintiffs. 53 As the Second Mortgage has already been discharged, the only remaining substantive matter to address is the question of to whom the funds paid into Court should be paid. Given my conclusion that a declaration should be made that the Transfer of Mortgage is unenforceable, it follows that the proceeds received on the discharge of the Second Mortgage that have been paid into Court, together with accrued interest, should be paid to the plaintiffs.

DISPOSITION 54 For the foregoing reasons, a declaration is to be made that the Transfer of Mortgage is unenforceable and the funds paid into Court, together with accrued interest, are to be paid to the plaintiffs. 55 The first defendant is to pay the costs of the plaintiffs. I note that the plaintiffs only seek costs against the first defendant in light of the submitting appearance by the second defendant. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.