Tonic Pty Ltd v State of South Australia

ANALYSIS 55 On the evidence before me I do not consider Tonic to be a person who is entitled to the disclaimed property for the purposes of s 568F(1)(a) of the Act, nor do I consider Tonic to be a person in whom it is appropriate that the disclaimed property be vested for the purposes of s 568F(1)(b). 56 The Crown's submission concerning inadequacies in the evidence are warranted. I would add that the inadequacies are not limited to transactions in 2010 and 2011 but affect nearly all of the transactions upon which Tonic relies. 57 The Land was not subject to the Mortgage prior to May 2011. I find that the whole of the Land became burdened by the Mortgage because of Tonic's decision to procure a bank guarantee to secure LC&T's obligations to Macquarie on a trading account. As such, Tonic assumed the risks inherent in LC&T's trading activities. The risks transpired in or around September 2011 when Macquarie called on the guarantee. 58 The bank guarantee did not "convert" to a loan "owed by Tonic and LC&T" when Macquarie called on it. On the evidence before me, Tonic obtained the 2011 facility some months before the guarantee was called upon. The Mortgage secured Tonic's obligations under the 2011 facility and other obligations. It too, predated the calling on the guarantee. I have nonetheless found that the secured 2011 facility (already in existence) was drawn down upon after Macquarie called on the bank guarantee such that Tonic's obligation to repay its debt to BankSA owed its existence to Tonic's assumption of risk in relation to LC&T's trading losses. 59 The reason for Tonic procuring the guarantee and obtaining the 2011 facility in its own name and burdening the Land in connection with it are not explained on the evidence. Tonic does not suggest that the financial benefits and accommodations it conferred on LC&T were in the nature of a gift. However, its affidavits are silent as to the consideration given by LC&T for the benefits it derived either from any initial loan advanced in 2010 or from Tonic's procurement of the bank guarantee to secure LC&T's trading activities or from Tonic entering into the 2011 facility secured by the Mortgage. In my view, the legal arrangements between LC&T and Tonic are largely undocumented and opaque. I find that the financial affairs of the two entities were so intermingled that Mr Scaffidi could not precisely recall, at the time that he swore the first Scaffidi affidavit, important events concerning the extent of Tonic's initial contribution toward the purchase price. That is surprising given that the acquisition of the property and LC&T's trading activities would in the ordinary course have given rise to reporting obligations under laws relating to (at least) capital gains and land tax. Tonic's tax treatment of the transactions has not been disclosed to the Court. 60 I infer that Mr Scaffidi, as the sole director of Tonic, considered it to be in Tonic's best interest to advance financial benefits to LC&T including for the purpose of facilitating LC&T's ultimately unsuccessful trading activities. It may also be reasonably inferred that Mr Scaffidi considered it appropriate to grant an initial loan to LC&T that was unsecured. Even if LC&T had applied the loan money toward the purchase price of the Land, that circumstance would not confer upon Tonic an interest in LC&T's 95% holding. To the extent that Tonic asserts any such proprietary entitlement, its nature and extent has not been clearly articulated on the evidence or in oral or written submissions. As I have said, any loan advanced by Tonic to LC&T in 2010 was an unsecured loan. Assuming the loan to exist, Tonic stood as an unsecured creditor in respect of its repayment in the winding up. 61 The money drawn down on the 2011 facility (or, if it be the case, the 2012 facility) was not applied toward the purchase or improvement of the Land or toward the acquisition of LC&T's interest in it. As I have said, the fact that money was drawn down on either facility is explicable by Tonic's decision to procure a bank guarantee to secure investments by LC&T. Those investments had nothing to do with the Land. 62 As a consequence of Tonic's commercial dealings, on the date that LC&T went into liquidation, BankSA stood as a secured creditor in relation to Tonic and Tonic stood as an unsecured creditor in relation to LC&T. That was a risk allocation of Tonic's choosing. 63 The disclaimer of LC&T's interest in the Land did not affect Tonic's entitlement as a tenant in common to seek an order for the partition or sale of the whole of the Land under s 69 and s 70 of the Law of Property Act 1936 (SA) or to otherwise cooperate with the Crown in right of South Australia to effect the sale of the Land and the realisation of their respective interests in it. In that event, the sale proceeds would first have been applied to repay any obligations secured by the Mortgage and the net proceeds would then have been divisible between the Crown and Tonic in their respective shares. Why Tonic did not seek to effect the sale of the property and the discharge of the Mortgage by that means is unclear. 64 In my view, the evidence is inadequate to support a finding that the payment by Tonic of the sum of $348,972.04 was made for the purpose of repaying any loan balance solely referable to the earlier bank guarantee. As I have said, the secured obligations referred to on the face of the Mortgage are defined widely and are not limited to a debt that might have owed its existence to Tonic's decision to procure the bank guarantee to facilitate LC&T's trading activities. 65 Notwithstanding the deficiencies in the evidence, for the purpose of what follows, I will assume that Tonic repaid, from its own funds, the balance of any loan facility secured by the Mortgage. I will also assume, again for the purpose of what follows, that the loan facility had not previously been repaid in part and again drawn down upon for Tonic's business purposes at any time between 2011 and January 2017. I will make those assumptions notwithstanding that Tonic has not adduced any loan account statements to support any finding as to how and for what purposes either facility had been used over that significant period of time. 66 Proceeding on those assumptions, it is not correct to say that Tonic repaid the balance of the 2012 facility "for LC&T" as the hand written notation on the bank statement suggests. If Tonic repaid the facility it did so because it was indebted to BankSA on its own account and because it could not enter into other desired transactions relating to several other properties unless the balance of the loan secured by the Mortgage was repaid. None of that creates an entitlement in Tonic to the disclaimed property, nor does it make it appropriate to vest the disclaimed property to "reflect" the payment. 67 Furthermore, to the extent that Tonic seeks the orders in "recognition" of the payment of the $10,000.00 deposit and the repayment of either the 2011 facility or the 2012 facility secured by the Mortgage, the orders would appear to confer upon Tonic a windfall for two reasons. The first is that Tonic presently holds a 5% interest in the Land as tenant in common. It is to be recalled that the property was purchased for $470,000.00 and that stamp duty and other expenses totalled $494,444.84. As at 2011, Tonic's 5% interest in the Land was valued at significantly more than $10,000.00. Tonic's payment of the deposit is sufficiently reflected in its 5% holding as a tenant in common. The amount paid by Tonic to discharge the loan secured by the Mortgage falls well short of the value of the Land as at 2012. There is no evidence before me of the present day value of the Land, but it is reasonable to infer that the value of the disclaimed property exceeds the amount of $348,972.04, and considerably so. 68 It seems to me that Tonic is seeking to have the Court recognise that it has made loans or advances to LC&T or otherwise conferred financial benefits upon LC&T that were never repaid by LC&T. To a degree, that is understandable. However, in my view, the Court should not make orders that would put Tonic in a better position than any other unsecured creditor of LC&T. I do not consider it appropriate to vest LC&T's prior interest in the Land in Tonic in circumstances where all other unsecured creditors received no dividend and the liquidator received no remuneration in the winding up. That is particularly so in circumstances where the disclamation of LC&T's interest appears to be explained at least in part by the existence of the Mortgage which Tonic itself had procured for reasons that are not apparent on the evidence before me. 69 Finally, on the material before me, I cannot be satisfied that the benefits of the order sought by Tonic would not be shared with Mr Chau. It is to be recalled that Mr Chau was the sole director of LC&T and that the financial collapse of the company was, in the view of the liquidator, due to financial mismanagement, trading losses and poor record keeping. Mr Chau has not intervened to oppose the order notwithstanding that on Mr Scaffidi's evidence "Mr Chau or LC&T" has paid interest on the loan facility since 2011. It may be inferred that the interest payments over that time would be significant. Even if there was otherwise a proper basis for making the orders sought I would not do so in the absence of a firm disavowal by Tonic that the benefits flowing from the order would not be enjoyed by the former director of LC&T at the expense of the company's creditors and the liquidator. 70 If that were the only basis for refusing the relief I would have been minded to invite Tonic to make further submissions in respect of that limited issue. However, in the circumstances I have described, I am not persuaded that the orders should be made in Tonic's favour, and I maintain that view irrespective of whether the order might also have conferred a benefit on Mr Chau. 71 The application should be dismissed. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Charlesworth.

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