Welcome Homes Real Estate Pty. Limited & Ors. v. Ziade Investments Pty. Limited & Anor. [2007] NSWCA 167

Welcome Homes Real Estate Pty. Limited & Ors. v. Ziade Investments Pty. Limited & Anor. [2007] NSWCA 167 - NSWCA 2007 case summary — Zoe

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Interest on Loan 10% 9 This document was signed by Jack on behalf of Jack and Jean and on behalf of Welcome, and by Neaf on behalf of himself and on behalf of Investments. 10 Between July 1996 and November 2000, there were further advances from the appellants (apart from Ritz) to Neaf and/or Investments, in relatively small sums. 11 On 27June 2002, Ritz advanced Investments $250,000.00. 12 By 31 July 2003, Neaf had become the owner of a property 84 Dudley Street, Coogee, for the purpose of carrying out the construction of three three-bedroom residential apartments. On that day, Neaf entered into a loan agreement with Willis Bowring Mortgage Investments Limited (WBMI) in relation to a loan to Neaf of $3 million, which was guaranteed by Investments and No.1 and secured by a first mortgage over the Dudley Street property. 13 Under the agreement, the loan was due for repayment on 20 June 2004. It was a term of the guarantee that if Neaf left unpaid any amount on the date provided in the agreement, the guarantors must immediately pay that amount to WBMI without requirement of any notice (see 4 Blue 822 and 824). 14 In November 2003, Jack's son-in-law Jim Katehos was employed by Jack to go through the loan records to tidy them up. 15 On 5 December 2003, Ritz advanced $200,000.00 to No.1 although Jack's evidence was of an oral agreement to advance money to Investments; and according to this evidence, Neaf in the relevant conversation agreed that he would secure this amount as well as previous loans to Investments. 16 On 10 February 2004, WBMI addressed a letter to Neaf offering to increase the $3 million facility by $396,000.00, subject to the principal sum not exceeding 66.6% of the value of the security, according to a valuation from a qualified valuer nominated by WBMI. 17 On 17 February 2004, cheques of Ritz in favour of Willis & Bowring, Solicitors, were used to pay the February interest on two loans from WBMI, namely $22,338.75 interest in respect of the loan to Neaf in relation to the Dudley Street property, and $37,989.75 being interest on a loan to No.1 in respect of a development on a property in Alexander Street, Coogee. 18 On 27 February 2004, there was a meeting between Jack, Neaf and representatives of WBMI (referred to as Mark and Peter) in relation to the Dudley Street project, a dispute with the builder on that project (Tricon), and the Alexander Street project in respect of which there was a loan of $11.5 million approved from WBMI to No.1. Jack's notes of that meeting commence as follows: Jack came into the board room. Said hello to Peter and was introduced to Mark Hearnden.

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Thank you for your assistance and co-operation. 21 On 11 March 2004, a cheque drawn by Ritz in favour of Willis & Bowring was used to pay interest for March on the two loans, $22,338.75 being the interest on the Dudley Street loan, and $37,989.75 being the interest on the Alexander Street loan. 22 As at 12 March 2004, Investments owned three properties: 1. 12-16 Alexander Street, Coogee, the home of Neaf and his family (a different property from the Alexander Street development property owned by No.1). 2. A property in Brook Street, Coogee, on which a large new home was being constructed for Neaf and his family. 3. An investment unit in St. Thomas Street, Bronte. 23 The first two of those properties were mortgaged to the National Australia Bank (NAB). In early March 2004, Investments had instructed Welcome to act as its agent to sell the third of those properties, and in fact contracts were exchanged on 26 March 2004 for the sale of that third property for $555,000.00. 24 On 12 March 2004, the mortgages under challenge were entered into, together with a second mortgage given by Neaf over the Dudley Street property. The mortgages were respectively registered as AA662952T and AA662982J; and each of them acknowledged receipt of a principal sum of $700,000.00. Each mortgage gave security for that principal sum, but not for any further advances. Each mortgage was given to all the appellants as mortgagees. 25 There was a shortfall of over $7,000.00 in payment of interest on the Dudley Street loan for the month of April; and between then and September 2004, that shortfall was never made up, and in fact by September 2004 something over $120,000.00 interest was owing. However, during the period the appellants did advance various sums of money to Investments in connection with the Dudley Street project. 26 The principal of around $3 million of that loan became due on 20 June 2004, and it was not paid. 27 Also in June 2004, WBMI sought to take possession of the Dudley Street property, but failed to do so effectively. 28 On 17 November 2004, WBMI applied to wind up Investments. At that time, the Brook Street property had been sold at a public auction on 4 September 2004 to Jack and Jean for $1,310,000.00, this sale being completed after the appointment of the liquidator. The Alexander Street property was sold after the appointment of the liquidator. After payment of the amount due to the NAB under its mortgages over those properties, there was about $160,000.00 which went to the appellants as second mortgagees. It is that amount and interest on it that was the subject of the order for payment to the liquidator made by the primary judge. 29 When the liquidator was appointed, the most recent financial accounts of Investments that were made available to him were the accounts for the year ended 30 June 2003. Those accounts showed current assets at $3,170,480.00 and current liabilities at $3,611,934.00. They showed an overall excess of liabilities over assets of $270,081.00. They showed an operating loss for the year of $451,019.00, following an operating loss of $204,351.00 for the previous year. Among the current assets was land held for resale put in at $2,496,661.00, which appears to be the Dudley Street property. Current assets also included a deposit on 1/37 St. Thomas Street of $473,665.00. 30 The liquidator was given a report as to affairs by Neaf, as at 17 December 2004, which the liquidator subsequently summarised as follows:

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588FF Courts may make orders about voidable transactions (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; (b) an order directing a person to transfer to the company property that the company has transferred under the transaction; (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction; (d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following: (i) money that the company has paid under the transaction; (ii) proceeds of property that the company has transferred under the transaction; (e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction; (f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned - an order directing a person to indemnify the company in respect of some or all of its liability to the assignee; (g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company; (h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time; (i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time; (j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.

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DECISION OF PRIMARY JUDGE 35 Relevantly to this appeal, the primary judge addressed three issues: whether the mortgages were uncommercial transactions within s.588FB(1); whether Investments was insolvent at the time of giving those mortgages; and whether the mortgages were unreasonable director-related transactions within s.588FDA(1). 36 In addressing the first of those questions, the primary judge noted: 15 There was no evidence that Ziade Investments entered into the mortgages in consideration for Mr and Mrs Ziade, Welcome Homes, Ritz Cinema or Janlz Constructions forebearing to sue for recovery of existing debts. Nor was there evidence that the mortgages were granted in consideration of future advances. The mortgages did not secure future advances. 37 He referred to indications that loans made prior to December 2003 were not to Investments but to Neaf, and that the loan of 5 December 2003 was to No.1. 38 He noted detriments to Investments from the transactions, in re-enlivening statute-barred debts of over $800,000.00, and burdening its property by mortgages with the result that it could not raise further finance. He noted benefits to the appellants, from the enlivening of the statute-barred debts and the giving of security for their debts. 39 He noted a submission that, in circumstances where Jack had said he would take over the funding of the Dudley Street project and give assistance for other projects, it could not be said that a reasonable person in Investment's circumstances would not have entered into the mortgages; and he rejected that submission. He concluded that a reasonable person in Investments' circumstances would not have entered into the mortgages, and that the liquidator had made out his case that the grant of the mortgages were uncommercial transactions. 40 On the question of insolvency, the primary judge posed the question whether Investments was, at 12 March 2004, able to pay all its debts as they became payable, having regard to commercial realities, with the onus of proof being on the liquidator. 41 He noted that the most recent financial statements, those for the year ended 30 June 2003, showed an operating loss of $451,019.00 producing a deficiency of shareholders' funds of $270,083.00; and that they showed current liabilities exceeding current assets by almost $500,000.00. He noted that Neaf's report as to affairs as at 17 December 2004 showed no current assets, claims by unsecured creditors of $230,000.00, properties valued at $2 million, and claims by secured creditors of $6.6 million. 42 He noted the liquidator's opinion that Investments was insolvent on 12 March 2004; and he noted Jack's acknowledgement that Neaf and Investments did not have any income to pay expenses. He also noted Jack's evidence that had he known that the payments in February and March made to Willis & Bowring were payments of interest, he would not have authorised them. 43 He concluded that the only inference properly open on the evidence as a whole was that, as a matter of commercial reality, Investments was insolvent on 12 March 2004. 44 On the third question, the primary judge held that the mortgages were dispositions of its property by Investments; and he held that Jack and Jean were close associates of Neaf, a director of Investments. However, he held that the other appellants were not close associates. 45 He concluded that, if he were wrong in the view that the grants of the mortgages were insolvent and uncommercial transactions, he was of the view that the creation of the one-quarter interest in the mortgages in favour of Jack and Jean were unreasonable director-related transactions.

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ISSUES ON APPEAL 46 The appellants rely on the following grounds of appeal: 1. His Honour erred in concluding that when the subject mortgages were granted, the first respondent was insolvent. 2. His Honour erred in concluding that the first respondent was insolvent at the time of the granting of the subject mortgages when, as His Honour found, there was a dearth of evidence on that issue and the onus of establishing insolvency was upon the respondents. 3. His Honour erred in concluding that the first respondent was insolvent as at the date of the granting of the subject mortgages when there was no evidence of any particular debts or debts generally which at that time were due but which the first respondent would not be able to pay. 4. His Honour erred in determining whether the first respondent was insolvent in failing to take into account or, alternatively, give sufficient weight to the willingness and ability of the fourth appellant and companies associated with him to provide financial assistance to the first respondent. 5. His Honour erred in considering whether the first respondent was insolvent in failing to take into account or, alternatively, give sufficient weight to the assistance that the fourth appellant and companies associated with him, particularly the third appellant, had agreed to give in respect of the development of property known as 84 Dudley Street, Coogee. 6. His Honour erred in concluding, especially in the context of the financial assistance available from the fourth appellant and companies associated with him, that he was entitled to draw the inference from the state of a particular balance sheet of the first respondent that the first respondent was, at the relevant time, insolvent because such balance sheet showed a deficiency in shareholders' funds. 7. His Honour erred in construing the Acknowledgment dated 28 June 1996 as being inconsistent with the claim by the respondents that moneys referred to therein were advanced to the first respondent when, on its true construction, the said Acknowledgment was consistent with that claim. 8. His Honour erred in concluding that the letter from the former accountants of the first respondent to the fourth appellant dated 10 February 2005 was inconsistent with the claim made by the appellants when, on its true construction, the said letter was consistent with that claim. 9. His Honour erred in concluding that the giving of the subject mortgages were uncommercial transactions. 10. His Honour erred in concluding that there was no real benefit to the first respondent in granting the subject mortgages. 11. His Honour erred in failing to give any or, alternatively, sufficient weight to the consideration that the granting of the subject mortgages would make it more likely that further assistance would be available to the first respondent from the fourth appellant and companies associated with him. 12. His Honour erred in concluding that, because there was no express Agreement entered into at the time of the granting of the subject mortgages to the effect that the fourth appellant or companies associated with him would in consideration of the granting of such mortgages make further advances available, there was no benefit to the first respondent in granting those mortgages. 13. His Honour erred in not giving any or, alternatively, sufficient weight to the lack of commerciality that would flow from the first respondent failing to provide the said mortgages when the appellants were the most likely or, at least, an important source of future funding for the first respondent. 14. His Honour erred in concluding that, in the context that commercial reality would dictate that a party in the circumstance of the first respondent would reasonably not take any limitation point against a party who may well be an important party willing and able to provide the necessary assistance that the first respondent may need, there was no benefit flowing to the first respondent by the granting of the subject mortgages if the debts referred to in the Agreement and Acknowledgment dated 28 June 1996 would otherwise be statute barred and be re-enlivened by the entering into of that Agreement. 15. His Honour erred in concluding that the granting of the subject mortgages was unreasonable within the meaning of Section 588FDA(1) of the Corporations Act. 47 They also sought to lead additional evidence, to show that the debts claimed by Deacons and Tricon were owed not by Investments but by No.1. This evidence was objected to by the liquidator, and it was received subject to the objection, on the basis that the Court would determine the admissibility of that evidence in its final judgment. 48 I will deal first with the question whether there was an uncommercial transaction, and then I will deal with the question of insolvency. I will consider the evidence sought to be led on appeal in relation to the question of insolvency. There is no occasion to deal separately with the question of whether there was an unreasonable director-related transaction.

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Decision 52 In my opinion the primary judge did not rely for his decision on any view that the previous loans were made to Neaf and not to Investments; so that even if he had taken too narrow a view on that issue, this would not be a ground for appellate intervention. 53 In my opinion also, the primary judge's finding, at par.[39] of his judgment, that a reasonable person in Investments' position would not have entered into the mortgages, is a strong indication that he applied the correct test, and did not give undue weight to what was normal commercial practice, and also did not simply weigh up detriments and benefits. 54 In my opinion also, Mr. Segal in his submissions stated the test too highly, as requiring that the transaction be so unreasonable that no reasonable person would enter into it. The statutory language is that "it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction". The word "may" is weaker than "must" or even "would"; and in my opinion one reason why something "may be expected" is that it is what normally happens. That is, it is not essential that it would always or necessarily happen. For that reason, what is normal commercial practice, while not decisive, is relevant to the question. 55 There is some force in Mr. Segal's submission that, in considering what a reasonable person would do, it is relevant to have regard to the father-son relationship, the father's track record of providing financial assistance to the son and his companies, and the father's apparent concern to restore the fortunes of those companies. There is also some force in his submission that the primary judge did not expressly consider the immediate importance of the Dudley Street project for Investments, as a guarantor of WBMI's loan to Neaf, and Jack's expression of intention to take over the management and financing of that project. 56 However, the circumstance that there is a family relationship is also a reason for scrutinising a transaction closely: McDonald v. Hanselmann (1998) 144 FLR 463 at 470. The circumstance that a transaction does not define or require benefits that are said to be expected from it, and to justify it, is a factor strongly suggesting that the transaction is not one that a reasonable person in the company's circumstances would enter into. 57 Accordingly, while I accept that a track record of assistance and an apparent willingness to rescue Investments and other companies are relevant factors, I do not think they are enough to outweigh the gross imbalance of legally defined and enforceable benefits and burdens identified by the primary judge, or to vitiate his conclusion that a reasonable person in Investments' position would not have entered into the mortgages.

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Decision 62 In my opinion the primary judge did not make any findings that the debts claimed by Deacons and Tricon were owed by Investments; and he did not base his decision on any assumption to that effect. Accordingly, the evidence offered to the Court of Appeal is not material, and I would not admit it. 63 The primary judge referred to my statement in Skouloudis Group Pty. Limited v. Planet Enterprise Pty. Limited [2003] NSWCA 31 at [25]: 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. 64 Of course, the extent to which Jones v. Dunkel can be relied on in cases brought by liquidators depends on precisely what is in issue and the position of the party against whom the case is brought. In Skouloudis, the asset in question was a business, and the purchaser of the business was a company associated with the wife of the principal of the company in liquidation. So on a question concerning the value of the business at the time of the disposition, the respondent to the liquidator's application was in a position to lead evidence on that issue. 65 In the present case, the respondents were the father and mother of the principal of the company in liquidation and companies associated with them, and the father had become extensively involved in the affairs of the company at the time of the transaction; and also, it was not submitted that the son was estranged from his parents at the time of the hearing. In those circumstances, on the issue of insolvency, there was room for the application of Jones v. Dunkel in this case. 66 Although the test of insolvency is, as stated by the primary judge, whether Investments was as at 12 March 2004 able to pay all its debts as they became due and payable, by reference to commercial realities, the financial accounts of the company as at 30 June 2003, and its assets and liabilities as at 17 December 2004 as stated in Neaf's report as to affairs, amounted to evidence relevant to the question, of a kind that could be sufficient to base an inference of insolvency as at 12 March 2004. 67 In any event, there was further evidence. There was the opinion of the liquidator that Investments was insolvent as at 12 March 2004, although it must be recognised that other opinions expressed in the same report indicated some tentativeness in the liquidator's opinion. 68 In addition, there was some more specific evidence. The notes of the meeting of 27 February 2004 and the letter of 1 March 2004 strongly supported an inference that interest due under Neaf's loan from WBMI could be paid only with Jack's money; and if in fact that interest was not paid, there would immediately be an unpaid debt of Investments as guarantor of the loan. The notes of that meeting also indicate that Jack, with Neaf's acquiescence, had stipulated that there be no further draw-down of the $3 million loan. The requirement of a valuation meant that there was no real possibility of Neaf obtaining the further advance of $396,000.00. 69 Interest was paid on the $3 million loan to Neaf for the months of February and March 2004; but the payment for April 2004 was over $7,000.00 short, and arrears then mounted up until over $120,000.00 was owing in September 2004. Furthermore, Jack's evidence was that he did not understand that the cheques in favour of Willis & Bowring were to pay interest in February and March, and that if he had known this he would not have authorised those cheques. It appears that around this time, Jack was attempting to negotiate concessions from WBMI in relation to its dealings with Neaf and his companies. 70 In all these circumstances, in my opinion the primary judge's conclusion that insolvency was shown was amply justified; and I see no appealable error in his reasons.

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