Wight, in the matter of I-Prosperity Pty Ltd (in liq) v LZYH Investments Pty Limited

Introduction 1 The plaintiffs, Messrs Barry Wight and Jeremy Nipps, who are the liquidators of I-Prosperity Pty Ltd (in liq) (I-Prosperity) and the company itself, seek default judgment in this action against LZYH Investments Pty Limited (LZYH) pursuant to r 5.23(2)(c) of the Federal Court Rules 2011 (Cth) (FCR). By the originating application and supporting concise statement the plaintiffs claim that certain payments made from I-Prosperity to Mr Huang, who then used them to purchase certain real property in the name of LZYH, constituted a voidable transaction. That "property" is properly described as all that contained in folio reference 102/SP92074 being 1518-303 Botany Road, Zetland, New South Wales. They seek orders pursuant to s 588FF(1)(c) or (a) of the Corporations Act 2001 (Cth) (Corporations Act) as well as orders for the appointment of a receiver to LZYH (as trustee of a trust which it operates) pursuant to ss 23 and 57 of the Federal Court of Australia Act 1976 (Cth).

Service 2 The plaintiffs have established service on LZYH pursuant to the orders of this Court made on 11 February 2022. They have also established service of the application for default judgment together with the supporting materials.

Absence of appearance 3 LZYH has not appeared to the proceedings and there was no appearance on behalf of it when the matter was called on for hearing. 4 The circumstances of this case are slightly unusual, as not only has LZYH plainly demonstrated a failure to engage with the proceedings, the evidence demonstrates that the property constituting the registered office of LZYH has been sold and it seems that the company has no remaining presence there. Further, the liquidators have been unable to communicate with Mr Huang, who was the previous director of LZYH and husband of the current director, Ms Bo, since 2020. They believe, and it should be accepted, that Mr Huang is no longer in the country. Ms Bo, the current director, has not responded to the liquidators' attempts to contact her.

Default judgment 5 Rule 5.23 of the FCR provides: 5.23 Order on default … (2) If a respondent is in default, an applicant may apply to the court for: … (c) if the proceedings were 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 proceedings continue on pleadings - an order giving judgment against the respondent for the relief claimed in the statement of claim or accompanying document to which the court is satisfied the applicant is entitled. 6 In Chamberlain Group, Inc v Giant Alarm System Co Ltd (No 2) [2019] FCA 1606 (Chamberlain Group), Yates J summarised the principles relevant to the granting of default judgment with particular reference to r 5.23(2)(c). His Honour held: 13 The power to give judgment against a defaulting party is undoubtedly discretionary. The discretion must be exercised cautiously. …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 [will be relevant]. 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 … 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… The Court may permit further evidence to be adduced, but not evidence that would alter the pleaded case…

The satisfaction of s 588FF(1) of the Corporations Act 7 In order to exercise the powers under s 588FF(1) the Court must be satisfied that a transaction is voidable. Whilst some authorities indicate that the satisfaction cannot be reached on the basis of consent orders or admissions, there is strong support for the proposition that the Court may act on an admission or a matter not being put in issue: Dean-Willcocks Pty Ltd v Commissioner of Taxation (No 2) (2004) 49 ACSR 325 [25] - [28]; Cooper v Commissioner of Taxation (2004) 139 FCR 205 [28] to [31]; Dwyer v R-Jay Pty Ltd [2007] SASC 115 [16]. I accept the observations of P Lyons J in Greig v Deputy Commissioner of Taxation [2011] QSC 129 [7] where his Honour said: The legislation confers on a court a power, conditioned on the court's satisfaction. In doing so, it seems to me the legislature must be taken to accept the court as it finds it. That includes acceptance of the methods regularly used by courts to determine facts, one of which is that courts commonly act on the admission of facts by parties. 8 In this case, and in accordance with the observations of Yates J in Chamberlain Group, I am prepared to proceed on the basis that the failure to respond to the allegations in the plaintiffs' concise statement has the consequence that they are not in issue, and can be accepted for the purposes of this application.

The uncommercial transaction 9 The transaction relied upon by the plaintiffs concerns the transfer of money from I-Prosperity to LZYH via the conduit of Mr Huang. The concept of a "transaction" is wide and may include a series of events in a course of dealings which may occur at different times and in different forms. As was observed by Gordon J in Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83 [116] - [120] the Court must look objectively at the totality of the relationship between the parties when identifying and characterising the "transaction" for the purposes of the relevant provisions of Part 5.7B of the Corporations Act. 10 Here, the allegations in the concise statement show that Mr Huang caused a total of $350,000 to be transferred from I-Prosperity to his personal account on 27 May and 3 June 2019. He then caused $318,000 to be paid from his personal account to for or the benefit of LZYH on 4 June 2019. The nature and purpose of the two tranches of payments appears clear in the circumstances and it should be accepted that they constituted a "transaction" for the purposes of s 588FF(1). In effect, the transaction was a payment to LZYH from I-Prosperity. 11 Pursuant to s 588FB(1) a transaction is an uncommercial transaction if a reasonable person in the company's circumstances would not have entered into it, having regard to the benefit or detriment to the company in entering into it, the benefit to other parties to the transaction, and any other relevant matter. For present purposes, I accept the analysis of this section by Mr Taylor of Counsel in his written submissions at [13] which read as follows: 13. A transaction may be an uncommercial transaction if it is a transaction at undervalue or a reasonable person in the company's circumstances would not have entered into that transaction and other relevant factors include whether the transaction was at arm's length. The court will examine a transaction more closely and be less inclined to accept that a sale at undervalue was required by commercial considerations if the purchaser is a related entity in a corporate sense or a relation by blood or by law in a personal sense. The court may infer that a transaction is uncommercial, even if there is limited evidence of its purpose, if the surrounding circumstances show a departure from normal commercial practice raising an inference of lack of benefit to or detriment to the company, or benefit accruing to other parties, and absent a commercial explanation for those matters, and that may, in practical terms, place an evidentiary onus on a defendant to raise a commercial explanation for the transaction. (Footnotes omitted). 12 The concise statement asserts that the payments from I-Prosperity to Mr Huang and then to LZYH were unconnected with I-Prosperity's business or Mr Huang's services to it. They were also made without consideration and in circumstances where LZYH was insolvent and Mr Huang was already indebted to I-Prosperity. 13 In these circumstances, it is a simple conclusion to reach that the transaction in this case was an uncommercial transaction within the meaning of s 588FB(1).

Insolvent transaction 14 The allegations in the concise statement include that I-Prosperity was insolvent when the transaction was entered into. It was, therefore, also an "insolvent transaction" within the meaning of the Corporations Act.

Voidable transaction 15 According to the concise statement the payment from I-Prosperity to LZYH occurred within two years prior to the relation back day for LZYH: s 588FE(2). As it was both an uncommercial transaction and an insolvent transaction, it was on both accounts a "voidable transaction" pursuant to ss 588FE(2A) and 588FE(2) respectively.

Exercise of the discretion 16 It follows that the discretion to grant relief under s 588FF has been enlivened in this case. 17 The plaintiffs seek relief by payment to it of a sum equivalent to 75% of the net equity in the property purchased by LZYH with the funds received from the voidable transaction, or the sum of $318,063.95 plus interest, whichever of those is larger. 18 On the facts alleged in the concise statement it is apparent that the plaintiffs' claim to a 75% interest in the property acquired by LZYH is equal to some or all of the money I-Prosperity has paid under the transaction: s 588FF(1)(d). This is because: (a) the amount received by or for the benefit of LZYH from the transaction was used to complete the settlement of its purchase of the property; (b) LZYH had available to it for settlement on the acquisition of the property the deposit which it had initially paid and a loan of $610,000 from the National Australia Bank (NAB), but did not otherwise have funds; (c) the property acquired was intended to be and was in fact rented after the settlement and the repayments on the NAB loan have been made from rentals received; (d) putting aside the amount of the NAB loan, the amount received by LZYH from the impugned transaction constituted 75% of the total capital paid by it to acquire the property. 19 It follows that it should be accepted that the amount taken from I-Prosperity and used by LZYH constituted a 75% interest in the net equity in the property acquired and that can be regarded as the money that I-Prosperity paid to LZYH under the transaction. Given that the rent received from the property has been used to meet the mortgage repayments, the existence of the mortgage is neutral insofar as it is necessary to identify the respective interests in the property. It should not be assumed that the mortgage repayments should be credited in favour of LZYH in preference to I-Prosperity's creditors. It might also be kept in mind that the plaintiffs' claim is for 75% of the "net receipts" from the sale of the property in which case the NAB's interest, which is unaffected, need not be brought to account. In other words, I accept the plaintiffs' submissions that it is appropriate to ignore the bank loan in assessing the true sources of the funds which acquired the equity in the property. 20 The plaintiffs have established, on the facts alleged in the concise statement and not put in issue, an entitlement to a 75% interest in the net equity of the property.

Interest 21 The plaintiffs claim interest in respect of the amount advanced to LZYH. The date from which interest should run is, perhaps, problematic and there are different possibilities. On one view, the interest might run from the date of the demand by the liquidators for the repayment of the money and that might correlate to the concept of the transaction being voidable at the instance of the liquidator. The other is that the interest ought to run from the dates of the making of the payments by I-Prosperity. There are some good arguments as to why it ought to be the latter. In particular, although the transaction was not voidable when the payments were made, it was clothed in those characteristics which rendered it voidable as the events came to pass. In this case, where the payment or payments from I-Prosperity seem to have been a blatant misapplication of that company's funds which has been denied their use by Mr Huang and LZYH, with no corresponding consideration, the appropriate date for the commencement of interest is from the date of the payments. On that basis, interest is to be calculated in the amount of $39,508.10.

Appointment of a receiver 22 The plaintiffs also seek the appointment of a receiver pursuant to ss 23 and 57 of the Federal Court of Australia Act 1976 (Cth). The power of the Court to make such an order is wide and the class of circumstances in which it might be exercised is not closed and neither are the purposes for which a receiver might be appointed. Similarly, the powers and conditions attaching to such appointment are untrammelled. 23 On the basis of the facts alleged in the concise statement, it is just and convenient to appoint a receiver because: (a) the receiver's sale of the property is critical to realising the net equity in it and quantifying the amount payable in respect of the order under s 588FF(1)(c) in relation to the distribution of proceeds; (b) the NAB (as a secured lender over the property) is an interested party. It has been notified but does not oppose the orders; (c) the evidence establishes that LZYH's default is not only in relation to appearing in this matter. It is apparent that it and those who stand behind it are no longer within the jurisdiction, nor are attending to its affairs; (d) it can be safely assumed that LZYH will not actively make payment of any sum awarded to the plaintiffs nor take steps to realise the property in order to do so; and (e) the alternative is, the liquidation of LZYH with the additional associated costs and delays. 24 In these circumstances, it has been shown that the receivers should be appointed.

Costs 25 The plaintiffs seek their costs of the application, to which they are, obviously, entitled. 26 They seek a further order that the costs be paid as a lump sum as assessed by the Court. The circumstances of this case justify the making of such orders. In particular, the absence of the defendant in participating in any taxation makes that process problematic. Mr Finch, the solicitor for the plaintiffs, has deposed to the work performed by his firm and Counsel as well as the disbursements made. He has also deposed that, in his experience, on taxation, a full recovery of Counsel's fees and other disbursements is allowed and 70% recovery of solicitors' fees is usually expected. 27 I am prepared to accept Mr Finch's evidence on this topic and it is appropriate that the plaintiffs have their costs of the application assessed in the sum referred to by Mr Finch of $66,728.02.

Amendment of originating application 28 In the interlocutory application, leave is sought to amend the originating application by amending the name of the defendant to "LZYH Investments Pty Ltd as the trustee for the LZYH Trust". That amendment is not substantial and, ultimately, it probably has very little relevance. I am prepared to make an order to that effect at this stage. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.