Wight, in the matter of I-Prosperity Pty Ltd (in liq) v LZYH Investments Pty Limited - [2022] FCA 209 - FCA 2022 case summary — Zoe

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

[2022] FCA 209

Federal Court of Australia|2022-03-07|Before: Derrington J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2022-03-07

Before

Derrington J

Source

Original judgment source is linked above.

Judgment (14 paragraphs)

[1]

Pursuant to r 8.21 and r 8.23 of the Federal Court Rules 2011 (Cth) the plaintiffs: (a) have leave to amend the originating application by amending the name of the defendant to "LZYH INVESTMENTS PTY LIMITED ACN 607 460 300 as trustee for the LZYH Trust"; (b) must file the amended originating application within 48 hours of the date of this order; (c) are relieved of the obligation to serve the amended originating application on the defendant.
The plaintiffs have default judgment against the defendant in the proceeding on the following terms: (a) Pursuant to s 588FF(1)(c) and (1)(a) of the Corporations Act 2001 (Cth) and s 51A of the Federal Court of Australia Act 1976 (Cth) the defendant must pay to the second plaintiff the greater of $357,572.05 (being an amount inclusive of interest in the sum of $ 39,508.10) or an amount comprising 75% of the net proceeds of sale of real property folio reference 102/SP92074 being 1518-303 Botany Road, Zetland, New South Wales ("Property"), being sale proceeds less repayment of funds and associated fees secured by mortgage over the Property, ("Net Proceeds of Sale"). (b) Pursuant to r 40.02(b) of the Federal Court Rules 2011 (Cth) the defendant must pay the plaintiffs' costs in a lump sum in the amount of $66,728.02. (c) Pursuant to ss 23 and 57 of the Federal Court of Australia Act 1976 (Cth), Michael Korda and Catherine Margaret Conneely of KordaMentha, Level 5 Chifley Tower, 2 Chifley Square, Sydney, New South Wales, be appointed, without security, as joint and several receivers and managers ("Receivers") of the assets and undertakings of the defendant or alternatively the LZYH Trust ("LZYH Trust") comprising ("Assets"): (i) the Property; (ii) bank accounts of the LZYH Trust held with the National Australia Bank. (d) The Receivers have, in respect of the Assets and their proceeds, all of the powers provided by ss 420 (1) and 420(2)(a) - (g), (k), (n), (p) and (q) of the Corporations Act 2001 (Cth) (Act) as if the reference to the corporation therein were to the LZYH Trust, including, without limitation, the power to do all things necessary and convenient to preserve and effect the sale of the Property. (e) The costs and expenses incurred by and the remuneration of the Receivers in acting as receiver and manager of the LZYH Trust be paid from the assets of the LZYH Trust. (f) The Receivers be entitled to charge and be paid remuneration for their services, from time to time, calculated on a time basis at the rates ordinarily charged by KordaMentha, without further order of the Court. (g) After realisation of the Net Proceeds of sale, the Receivers must pay to the second plaintiff the sums specified in orders (a) and (b) above from the Net Proceeds of Sale and the Assets. (h) The Receivers' costs, expenses and remuneration shall be paid in priority to the amount payable to the second plaintiff under order (a) above, with any shortfall in the Net Proceeds of Sale and the Assets to be borne by the second plaintiff. (i) Any Net Proceeds of Sale remaining after satisfaction of orders (e) to (g) must be paid to any bank account held by the LZYH Trust with the National Australia Bank. (j) The Receivers are not required to file an account. (k) The parties and the Receivers have liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[7]

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).

[10]

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.

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

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Judgment (14 paragraphs)

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