Good Faith Defences
191 In the event that the alleged transfer of convertible bonds from Bellpac to Shan Pei were found to be voidable under s 588FE of the Corporations Act, the Court would be empowered to make an order under s 588FF. Ken Hung and Austcorp place reliance on s 588FG of the Corporations Act in arguing that such an order ought not be made.
192 Section 588FG(1) provides that the Court may not make an order under s 588FF that materially prejudices a right or interest of a person other than a party to the transaction, if certain matters are proved. Thus, the Court may not make such an order if the person whose right or interest is prejudiced received no benefit because of the transaction. Alternatively, the Court is not to make such an order if it is proved that, in relation to each benefit that the person received because of the transaction, the person received the benefit in good faith and, at the time when the benefit was received, the person had no reasonable grounds for suspecting that the company whose transaction was voidable was insolvent, as that term is defined in s 588FC, and a reasonable person would have had no reasonable grounds for suspecting that the company was insolvent.
193 It is clear enough that Ken Hung will be materially prejudiced if orders are made declaring the arrangements involving Bellpac, Shan Pei and Alfred Wong to be void. He has accepted a reduction in the amount owing to him by Austcorp. He may be also exposed to a claim for a breach of contract under the Austcorp Assignment.
194 There can be no suggestion that Ken Hung received a benefit because of the Impugned Transactions involving Bellpac, Shan Pei and Alfred Wong. There is no suggestion that any of those parties contemplated a transfer of convertible bonds to Ken Hung. It is clear that Alfred Wong contemplated a transfer of some of the convertible bonds to his personal creditors, one of which was Austcorp. Nevertheless, even if there was a single tripartite transaction, as I have found, Austcorp was not a party to that transaction. Accordingly, I also do not consider that it could be said that Austcorp received a benefit because of the transaction.
195 It may be that, but for the Impugned Transactions involving Shan Pei, Alfred Wong would not have been in a position to strike the bargain that he made with Austcorp, whereby he would assign $2,000,000 of convertible bonds to Austcorp as consideration for a release of his obligations under the Indemnity Deed. Further, if Austcorp had not acquired the convertible bonds, it could not have assigned them to Ken Hung. Nevertheless, I do not consider that either Austcorp or Ken Hung received a benefit because of the Impugned Transactions involving Bellpac, Shan Pei and Alfred Wong, howsoever characterised.
196 However, the Liquidators and Bellpac contend that the entire series of transactions by which the convertible bonds were allegedly assigned from Bellpac to Shan Pei, from Shan Pei to Alfred Wong, from Alfred Wong to Austcorp, and from Austcorp to Ken Hung, is capable of constituting a transaction within the meaning of s 588FB of the Corporations Act. They say that each of the several purported dealings with the convertible bonds is part of that transaction, which, by reason of the arguments I have already set out, is voidable under s 588FE, and because of which, they say, Austcorp and/or Ken Hung obtained a benefit.
197 The Liquidators and Bellpac assert, although the facts underlying the assertion are not described in the submission, that Austcorp was a joint venturer with, and a secured creditor of, Bellpac, ranking behind LM Investment. Austcorp had securities owing for indebtedness of about $5,000,000 as at August 2008. Austcorp knew of the prior securities, by reason of registration of its inferior securities. The Liquidators and Bellpac point to Alfred Wong's deposition that he told LM Investment that Austcorp was to be paid by the use of the convertible bonds and that, before settlement and the issue of the convertible bonds, he told LM Investment that he had for some time told the recipients of the convertible bonds that they would be secured by second mortgages over land of Gujarat. The Liquidators and Bellpac say that the only parties who could be told that were Compromise Creditors and Austcorp, they being the subsequent ranking creditors not being paid cash by Gujarat. That submission is difficult to follow. If, however, it is correct, then it appears that it would be possible to conclude that Austcorp was told that convertible bonds would be issued to Bellpac and that it would be paid its debt by Bellpac through the use of the convertible bonds.
198 The concept of transaction is very broad. Thus, a series of steps over a period, involving several parties, can constitute a transaction. A transaction includes an arrangement giving rise to an estoppel under which one party may not resile from a position. Further, a transaction may be unilateral in character (see Australian Kitchen Industries Pty Ltd v Albarran (2004) 51 ACSR 604 at [24]). A number of separate dealings may together be regarded as constituting one transaction. Nevertheless, in every case, it is vital that, however the transaction is constituted, it must be able to be characterised as a transaction of the company (see Kalls Enterprises Pty Ltd v Baloglow (2006) 58 ACSR 63 at [27]).
199 If the Impugned Transactions took effect, then Austcorp in fact received convertible bonds issued to Bellpac, and may even have been told, as the Liquidators and Bellpac suggest, that it would receive those bonds prior to their issue. However, it did not receive those convertible bonds from Bellpac, but from Alfred Wong, who was known to be a director of Bellpac. It received the convertible bonds in payment of Alfred Wong's personal debt to Austcorp, not in satisfaction of Bellpac's debt. Ken Hung's taking of an interest in the convertible bonds had nothing to do with the dealings of Bellpac and Alfred Wong with Shan Pei.
200 The transactions involving Austcorp and Ken Hung in November 2009 were entirely separate and distinct from the transactions involving Shan Pei and Alfred Wong in August 2008. Ken Hung and Austcorp say that it could not possibly have been contemplated, at the time of the Impugned Transactions involving Shan Pei, that the convertible bonds would subsequently be assigned to Ken Hung in November 2009 as a result of Austcorp's deteriorating financial position. Ken Hung's evidence is that he was unaware of Bellpac's existence until May 2010. Further, they say, the internal transaction involving Austcorp, one of its directors, namely Ken Hung, and Austcorp Group could not conceivably be characterised as a transaction of Bellpac.
201 I consider that it is not possible to characterise the transactions involving Austcorp and Ken Hung as part of a single transaction involving the transfer of convertible bonds by Bellpac to Shan Pei and the transfer by Shan Pei to Alfred Wong. Accordingly, I do not consider that the chain of assignments of the convertible bonds can be said to have constituted a single transaction from which Ken Hung derived a benefit, as the Liquidators and Bellpac contend.
202 Alternatively, Ken Hung and Austcorp say that, to the extent that Ken Hung received any benefit because of a transaction of Bellpac, he received the benefit in good faith and that at the time he received the benefit, namely 17 November 2009, he had no reasonable grounds for suspecting that Bellpac was insolvent or that it would become insolvent. They say that a reasonable person in Ken Hung's circumstances would have had no grounds for so suspecting and, accordingly, that Ken Hung can rely on the alternative defence afforded by s 588FG.
203 Ken Hung and Austcorp rely on a number of matters in support of that aspect of their defence, some of which I have already mentioned. For instance, the transactions to which Ken Hung agreed were suggested by his son, Edgar Hung, and Ken Hung placed complete reliance on what Edgar Hung told him, in circumstances where Edgar Hung was a very experienced, knowledgeable and responsible senior executive of Austcorp and Austcorp Group. Ken Hung and Austcorp contend that Ken Hung gave good consideration for the transfer of the convertible bonds, in that the debt owed to him by Austcorp was reduced by $2,000,000. Further, Ken Hung bound himself to transfer the convertible bonds to Austcorp Group, in consideration for which he would be treated as a creditor of Austcorp Group for the amount of $2,000,000. Ken Hung considered, as I have said, that it was incumbent upon him to assist Austcorp Group to satisfy its deed of company arrangement. He believed at all times that Austcorp was the owner of the convertible bonds, and he says that, had he been aware of any claim by Bellpac over the convertible bonds, it is unlikely that he would have accepted and proceeded with the proposal that was put to him. He said that at no time in the course of his dealings in relation to the convertible bonds was he aware of any claim or potential claim relating to the convertible bonds by Bellpac.
204 Ken Hung and Austcorp say that, in those circumstances, Ken Hung acted in good faith in agreeing to the proposal put to him by Edgar Hung. They say that he could not have had any reasonable grounds for suspecting that Bellpac was insolvent, given that he was not even aware of Bellpac's existence until about six months after he agreed to the proposal. They claim that there is no reason for Edgar Hung to have made any enquiries at all in relation to Bellpac's solvency, given that there was no suggestion that Bellpac maintained any legal or beneficial interest in the convertible bonds. They say that, so far as Ken Hung and Edgar Hung were concerned, Bellpac had nothing to do with the transactions pursuant to which Austcorp and Ken Hung took title.
205 Edgar Hung says that, at all times during his dealings with Alfred Wong on behalf of Austcorp in relation to the convertible bonds, he believed that Alfred Wong, and not Bellpac, was the beneficial owner of the convertible bonds. He says that nothing came to his knowledge, and nothing was said to him by Alfred Wong during the course of their discussions, that caused him any doubt in that belief. He also says that he did not have any concerns that Bellpac's solvency might be such as would potentially have an adverse impact upon the effectiveness of Austcorp's acquisition of the convertible bonds. Edgar Hung says that he considered Bellpac to be in a sound financial position. He believed that Bellpac was receiving financial support from LM Investment. He says that the first time he became aware that Bellpac had financial difficulties was in about mid-2009, following the appointment of receivers and managers.
206 Ken Hung conducted his negotiations in relation to the convertible bonds through Edgar Hung. Edgar Hung made no inquiry as to why Bellpac was the registered holder of the convertible bonds or as to whether Alfred Wong had any documentation to show that he could deal with the convertible bonds as his own. Edgar Hung said that, although he understood that his father, Ken Hung, would be taking a transfer of bonds from Alfred Wong, he did not turn his mind to the question of whether Alfred Wong would be the transferor. Edgar Hung said that he thought that Alfred Wong was the owner of the convertible bonds, but did not turn his mind to the question of whether there ought to be something recording a transfer of the bonds from Bellpac to Shan Pei and then from Shan Pei to Alfred Wong.
207 Edgar Hung said that he never doubted things that Alfred Wong said to him. He did not make any inquiry as to what Shan Pei was. Nor did he make any inquiry as to whether Shan Pei had any entitlement to receive money or property from Bellpac. Edgar Hung said that he trusted Alfred Wong's word.
208 Ken Hung and Austcorp further say that, even if Edgar Hung had grounds for suspecting that Bellpac might have been insolvent (which they deny), Edgar Hung was not Ken Hung's agent for all purposes. Where there is no duty for an agent to communicate knowledge to the agent's principal, the principal is not bound by any knowledge acquired by the agent if, at the time when the knowledge was acquired, the agent was not acting on behalf of the principal. Accordingly, they say, whatever knowledge Edgar Hung acquired as to Bellpac's insolvency (and they deny that there was any) was irrelevant to whether Ken Hung had knowledge of Bellpac's insolvency. They say that any knowledge that Edgar Hung had as to Bellpac's insolvency was acquired in the course of his activities as a senior executive of Austcorp, not as attorney for Ken Hung, and that Edgar Hung had no obligation to communicate that knowledge to his father.
209 In any event, Ken Hung and Austcorp say, the fact that Edgar Hung made no enquiries as to the extent of Bellpac's liabilities is a far cry from his being put on notice about potential insolvency. Edgar Hung said that, as at October 2008, he thought there were no solvency problems with Bellpac because, so far as he was aware, none of the other significant creditors of Bellpac, such as LM Investment, had taken any action against Bellpac.
210 Austcorp, independently of Ken Hung, also relies on s 588FG of the Corporations Act. Thus, Ken Hung and Austcorp say, Austcorp received no benefit from any transaction of Bellpac involving the assignment of the convertible bonds. Alternatively, they say, the executive of Austcorp who had carriage of the matter on its behalf, Edgar Hung, had no suspicions as to the possible insolvency of Bellpac, and, in the light of what Alfred Wong had told Edgar Hung about the continuing support of Bellpac by LM Investment, Austcorp had no reasonable grounds for suspecting that Bellpac was insolvent. LM Investment did not appoint the Liquidators as receivers and managers of Bellpac until 13 May 2009, more than six months later. Ken Hung and Austcorp say that Austcorp was simply a good faith assignee of the convertible bonds, which it accepted in return for the release of Alfred Wong's liability under the Indemnity Deed.
211 To the extent that a finding were made that Edgar Hung had reason to suspect Bellpac's insolvency, Austcorp's knowledge would be the same. Austcorp could not raise the argument concerning agency that was raised by Ken Hung.
212 In all of the circumstances, I consider that neither Ken Hung nor Austcorp received a benefit from the transaction whereby the convertible bonds were allegedly assigned by Bellpac. Accordingly, s 588FG would be an answer to a claim by the Liquidators and Bellpac for orders under s 588FF that the Impugned Transactions be avoided. I did not find Edgar Hung to be an impressive witness. Nevertheless, I would also be disposed to find, assuming that Ken Hung or Austcorp did in fact receive a benefit, that the benefit was received in good faith and in circumstances where there were no reasonable grounds for believing that Bellpac was insolvent.
213 The Liquidators and Bellpac invite the Court to infer that, even assuming that Shan Pei did acquire some proprietary interest in the convertible bonds, contrary to their primary contention, Shan Pei was nevertheless a knowing participant in breaches of statutory and fiduciary duty committed by Alfred Wong and Danny Au-Yeung and, accordingly, received the convertible bonds as constructive trustee for Bellpac. Shan Pei has not provided any evidence in response to the allegation of knowing participation, despite having been given the opportunity to do so and having indicated that it wished to do so.
214 Receipt from Alfred Wong, as seller, of a transfer of convertible bonds registered in the name of Bellpac, and signed by him as attorney for Bellpac, of which he was a director, would be sufficient to put the recipient of the transfer on notice of enquiry as to the circumstances in which Alfred Wong came to be beneficial owner of those convertible bonds. In the light of the evidence I have described above, the Liquidators and Bellpac contend that Ken Hung, through the knowledge of his attorney, Edgar Hung, knew of the relevant obligations, and of the misapplication of the assets of Bellpac, by reason of one or other of the following circumstances:
Edgar Hung had actual knowledge of the constructive trust and the misapplication of the trust property;
Edgar Hung deliberately shut his eyes to those things;
Edgar Hung abstained, in a calculated way, from making the enquiries that an honest and reasonable person would make about the constructive trust and the misapplication of the trust property; or
Edgar Hung knew of facts that would indicate to an honest and reasonable person the existence of a constructive trust in favour of Bellpac and the misapplication of the trust property.
215 Therefore, the Liquidators and Bellpac say, Austcorp and Ken Hung received a transfer of the convertible bonds subject to the constructive trust that had arisen in favour of Bellpac. Accordingly, they say, Ken Hung is liable to restore the convertible bonds to Bellpac. Ken Hung and Austcorp say, in response, that they received the convertible bonds as bona fide purchasers without notice of any claim by Bellpac.
216 It is by no means clear whether or not Shan Pei knowingly participated in breaches of statutory and fidicuiary duty committed by the directors of Bellpac. However, even assuming that it did, I would be disposed, in the light of what I have already set out, to find that Ken Hung and Austcorp were bona fide purchasers for value without notice of the convertible bonds, and, accordingly, that they were not bound by any constructive trust that had previously arisen in favour of Bellpac.