Tosich Construction Pty Ltd (in liq) v Tosich

"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." The facts are discussed in some detail in the judgment below, reported as Tosich Construction Pty Ltd (in liq) v Tosich (1997) 23 ACSR 466. It is therefore unnecessary to do more here than give a bare outline. On 23 September 1993, a date at which the company was insolvent, it purchased bank cheques totalling $273,990.32, which were used to settle a purchase of residential property under a contract entered into by the respondent, a daughter of a director of the company. She had provided no consideration for the application of company funds in this way, but the company was at the time indebted to the director in a much larger sum, payable on demand. The trial judge held, after a full discussion of conflicting material, that "the appropriate finding on the evidence is that the payment, on 23 September 1993, of $273,990.32 was intended, and operated, as a payment by the company at the direction of Mr Tosich [the director] in reduction of Mr Tosich's net indebtedness to the company" (sic - his Honour meant, of course, "in reduction of the company's net indebtedness to Mr Tosich"). Although it was conceded that the company was insolvent at the time, it is not at all clear on the evidence that this fact was then apparent to those who were its directing minds. It had been in business, the judge found, for many years as a successful participant in the construction industry, enjoying "a very satisfactory relationship with its bankers", who had allowed an overdraft limit of two million dollars to be exceeded by almost half a million dollars. The figures produced later by the liquidator, the company having been ordered to be wound up in insolvency on 7 October 1994, showed a sharp decline in its average monthly income after 30 June 1993, that is only three months before the relevant transaction. It was not put at the hearing below that a reasonable person in the company's circumstances would have known of its insolvency as at 23 September 1993, and would on that account and in those circumstances have refrained from making the payment. In fact, the trial judge noted (at 474): "Another question which was not explored, but which could conceivably, in a case such as this, give rise to other relevant matters is the relationship between insolvency, or perhaps the view of its solvency or otherwise which a reasonable person would have taken in the company's circumstances at the time, and what a reasonable person might be expected to have done. ... [T]hese matters .. do not arise on the case which the applicant sought to make or on the evidence ... ."

The case which the appellants did seek to make at the hearing was summarized by the learned judge in the following passage: "But the case before me was put on the basis either that I should not accept what the respondent claims to have been the effect of the transaction as between the company and Mr Tosich or, alternatively, that I should look at the transaction as a whole, including the gift to Ms Tosich, and treat it as a 'hiving off' of the company's assets to a member of a director's family. The applicants' case fails in its first aspect, as I have held, on [the] facts. It fails in its second aspect because, looked at from the company's point of view, the transaction involved not a 'hiving off' but the reduction of a net indebtedness." At the hearing of the appeal it was accepted that the first basis on which the appellants' case had been put had failed on a view of the facts which was open to his Honour, and could not now be challenged. It is true that there were conflicting entries to be found in the books of the company. But the accounting entries can only be evidence; they cannot of themselves affect the true nature of the transaction they were merely intended to record: see Temples Wholesale Flower Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93 at 100 et seq, and the cases there referred to. Here, the judge, who heard the witnesses, accepted the account of the underlying transaction given by Mr Tosich. The alternative basis on which the case was put below was not seriously pressed before us. The repayment of a debt payable on demand, at any rate in the absence of very special circumstances which were not alleged in relation to this matter, could not be considered a "hiving off" of assets. At the hearing of the appeal, some attempt was made on behalf of the appellants to widen the issues. Counsel suggested the directors would have known that the payment would be likely to jeopardise the company's position with its bank. A reasonable person, it was said, in the company's circumstances, would have had the same knowledge, and would not have entered into the transaction. Had this line of argument been pursued at the hearing, it is likely the information to which directors had access and the relationship of the company with its bank, as well as the details of banking transactions over a significant period, would have been fully explored. The point was not raised, and there was no such full exploration. In those circumstances, what was said in the joint judgment of Gibbs CJ, Wilson, Brennan and Dawson JJ in Coulton v Holcombe (1986) 162 CLR 1 at 7-8 must be determinative. Their Honours said: "It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish. The powers of an appellate court with respect to amendment are ordinarily to be exercised within the general framework of the issues so determined and not otherwise. In a case where, had the issue been raised in the court below, evidence could have been given which by any possibility could have prevented the point from succeeding, this Court has firmly maintained the principle that the point cannot be taken afterwards: see Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418, at p. 438; Bloemen v. The Commonwealth (1975) 49 A.L.J.R. 219." Their Honours added a reference (at 8) to the statement of the Court in University of Wollongong v Metwally [No 2] (1985) 59 ALJR 481 at 483: "It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so." In dealing with the issues which were raised before him, the trial Judge said (at 473-474): "If in this case the court were to regard all the relevant steps that were taken on 23 September 1993 as one transaction, it would not follow, because the last of the steps was a gift to Ms Tosich, that the transaction was an uncommercial transaction. The question to be asked is whether the transaction was one which a reasonable person in the company's circumstances would not have entered into, having regard to the matters specified. It is not possible to answer that question simply by reference to the benefit which Ms Tosich received and for which she gave no consideration. The matter must be looked at from the point of view of the company. It suffered, no doubt, a detriment by reason of the reduction in its working capital; it obtained a benefit to the extent that its net indebtedness to Mr Tosich was reduced. It is not easy to see why a reasonable person in the company's circumstances would have regarded the fact that Mr Tosich was to apply the proceeds of the reduction of his debt in making a gift to his daughter as particularly relevant to the question whether the company should enter into the transaction." We find ourselves in agreement with this way of looking at the matter. We should add that, in the expression "it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction", it is difficult to see what meaning is added by the words "it may be expected that". These words can hardly qualify the reference to what a reasonable person would have done, so as to introduce a statutory norm that assumes a reasonable person doing something other than what a reasonable person would do. We think senior counsel for the appellants was probably correct when he suggested the draftsman's intention was simply to emphasize the objective nature of the inquiry, not into what the particular company might have done, but into whether a reasonable person would not have entered into the transaction. Little assistance is to be obtained from the use of expressions such as "could reasonably be expected" in the quite different contexts with which courts were concerned in cases such as Crown Bedding Co Ltd v Inland Revenue Commissioners [1946] 1 All ER 452; Arnold v Queensland (1987) 73 ALR 607 at 628; and Estee Lauder Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 314 at 324-325. What the Court must do is consider each of the matters to which reference is made in s 588FB(1) and, having regard to them, reach a conclusion as to whether a reasonable person in the company's circumstances would not have entered into the transaction. The company's circumstances must include the state of its knowledge, that is, of the knowledge of those who were relevantly its directing mind. Only if the Court can conclude that a reasonable person in the company's circumstances would not have entered into the transaction does the section make that transaction uncommercial. Where, having considered the matters listed in s 588FB(1), the Court concludes that one of those matters does not apply to the facts of the particular case, a finding to that effect does not mean that the Court has not fulfilled its obligation of "having regard to" the matter; on the contrary, in such a case, the Court will have had regard to it in the only way possible. In the present case, the appellant claimed that the trial Judge erred when he referred to the company as having obtained a benefit. It was submitted that "there was no benefit to the company in the partial repayment of the loan to Mr Tosich on 23 September 1997". We do not think his Honour erred. The obtaining of a discharge of a legal obligation must in general be regarded as a benefit, although the value of the benefit may be affected by the circumstances. The appellants also submitted that his Honour erred by failing to have regard to the benefit received by the respondent, to which he was required to have regard by the terms of paragraph (c) of s 588FB(1). This submission is simply incorrect; what the respondent received was adverted to in the judgment more than once. It would be correct to say that his Honour regarded the respondent's benefit, in the circumstances of a case involving the repayment by the company of a debt owed by it and payable on demand, as having very little weight. As to this, we agree with him. For these reasons, the appeal must be dismissed with costs. I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Court

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Cases Cited (5)