Wily v Terra Cresta Business Solutions Pty Ltd

Supreme Court of NSW|2006-09-19|Before: Young CJ, Austin J

CITATION : Wily v Terra Cresta Business Solutions Pty Ltd [2006] NSWSC 1042

HEARING DATE(S) : 18 and 19 September 2006 JURISDICTION : Equity Division

DECISION : Charge over BACM is voidable. There is insufficient evidence concerning the charge over BACF to fix amount due.

LEGISLATION CITED : Conveyancing Act 1919, s 12 Corporations Act 2001 (Cth) ss 9, 95A, 127, 436A, 439A, 461(1)(k), 588FA, 588FB, 588FC, 588FE, 588FF

Cadwallader v Bajco (2001) 189 ALR 370 Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 Fagenblat v Feingold Partners Pty Ltd (2001) 49 ATR 18 (VSC) Kirch Communications Pty Ltd v Gene Engineering Pty Ltd [2002] NSWSC 485 Liverpool Roman Catholic Archdiocesean Trustees Inc v Goldberg (No 3) [2001] 1 WLR 2337 Olsen v Nodcad Pty Ltd (1999) 150 FLR 174 CASES CITED : Powell and Duncan v Fryer Tonkin and Perry (2000) 18 ACLC 480 Re Universal Management Ltd [1981] NZCLC 95-026 Re Universal Management Ltd [1983] NZLR 462 Regina (Factortame Ltd) v Secretary of State for Transport (No 8) [2003] QB 381 Sheahan v Hertz Australia Pty Ltd (1994) 14 ACSR 209 (SASC) Shomat Pty Ltd v Rubinstein (1995) 124 FLR 284 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587

Andrew Hugh Jenner Wily in his capacity as Liquidator of Business Australia Capital Mortgage Pty Ltd and Business Australia Capital Finance Pty Ltd (P) PARTIES : Terra Cresta Business Solutions Pty Ltd (D1) Richard Albarran and Geoffrey McDonald (D2)

COUNSEL : T S Hale SC and A Mitchelmore (P) J E O'Sullivan (D)

SOLICITORS : M D Nikolaidis & Co (P) Etienne Lawyers (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4200/06 - WILY v TERRA CRESTA BUSINESS SOLUTIONS PTY LTD JUDGMENT 1 HIS HONOUR: The plaintiff is the liquidator of two companies, Business Australia Capital Mortgage Pty Ltd ("BACM") and Business Australia Capital Finance Pty Ltd ("BACF"). 2 The plaintiff became a liquidator of BACM on 14 June 2005, having been appointed administrator pursuant to s 436A of the Corporations Act 2001 on 17 May 2005, and thereafter a resolution of creditors was passed requiring liquidation and a meeting convened under s 439A of the Act. The liquidation, accordingly, in the case of BACM is a creditors' voluntary liquidation. 3 The plaintiff became liquidator of BACF as a result of the following events: On 18 May 2005 ASIC filed a winding up petition based on the grounds in s 461(1)(k) of the Corporations Act. On 9 November 2005 the plaintiff was appointed administrator. On 16 November 2005 the plaintiff was appointed official liquidator of BACF by this Court on ASIC's application in the winding up. He is, accordingly, a court appointed liquidator of BACF. 4 There was some debate before me as to the commencement date of the winding up, however, it was eventually conceded by the plaintiff that in the case of BACM it was 17 May 2005, and in the case of BACF it was 9 November 2005 (see in respect of the latter the decision of Austin J in Olsen v Nodcad Pty Ltd (1999) 150 FLR 174). 5 BACM and BACF each created charges on 18 March 2005 in favour of the first defendant. There are two sets of defendants to the proceedings. The first defendant is Terra Cresta Business Solutions Pty Ltd, the second defendants are Messrs Albarran and McDonald of Hall Chadwick, who purport to be receivers of BACM and BACF appointed by the first defendant under charges the subject of this dispute. For ease of reference, I will use the term "defendant" to refer to the first defendant. The plaintiff seeks, in relation to BACM, a declaration that the charge is not binding against him, or, alternatively, a declaration as to the amount secured by the charge, and with respect to BACF, a declaration as to the amount secured by the charge. 6 The proceedings came into the Expedition List and expedition was granted to deal with a particular problem which was urgent because it was a vital step in some other litigation pending in the Federal Court to find out who can control that liquidation, the plaintiff or a receiver appointed by the defendant, or somebody else. 7 Last week the defendant filed a cross-claim. When the proceedings commenced before me I was asked to hear the cross-claim as well. I declined to do so on the basis that the principal claim was in the Expedition List, expedited for a particular reason, the point needed to be decided urgently and entertaining the cross-claim would, beyond doubt, have extended the hearing time. Accordingly, I have only heard the principal problem. 8 The case was heard by me on 18 and 19 September 2006. The argument finished at 4.45 pm on the latter day. However, much time was wasted on the second day by settlement negotiations, which ultimately proved to be fruitless. However, in case those discussions did bear fruit, I indicated I would give judgment today, rather than yesterday, but I was told yesterday that those settlement discussions had broken down. Accordingly, I must give judgment. 9 At the hearing Mr T S Hale SC and Ms A Mitchelmore appeared for the plaintiff, and Mr J E O'Sullivan for the defendants. The basal problem is the application of ss 588FE, 588FF and associated sections to the facts surrounding the granting of the charge. 10 It is necessary to set out the text of the relevant sections. Section 588FF(1) empowers the court to make certain orders if it finds that a transaction is voidable under s 588FE. 11 Section 9 of the Corporations Act defines "transaction" as including a charge created by the body on property of the body. The two corporations concerned are clearly within the definition of a "body". Section 9 defines the relation-back day, and in respect of the present companies that means the day on which the winding up is taken to have begun. The date in respect of each company I have already noted. 12 Section 588FE (2) and (3) are as follows:

(a) it is an insolvent transaction of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation-back day ...

(3) the transaction is voidable if: (a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day." 13 Section 588FE(2) is relevant in the case of BACM because the charge was given within 6 months of the relation-back day, thus the sole question is whether the transaction was an insolvent transaction. 14 In the case of BACF subs 2 is not applicable. 15 Section 588FC indicates what is an insolvent transaction. For the present purpose it is sufficient to set out the first part of the section: "A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into ... " 16 Section 588FB defines what is an uncommercial transaction in terms of a transaction, that it may be expected that a reasonable person in the company's circumstances would not have entered into, having regard to various matters, and s 588FA(1) defines what is an unfair preference, and it is not necessary to set that out. 17 In the case of BACF the plaintiff says the issue is what sum is secured by the charge. Mr Hale puts forward three possibilities:

(a) $352,902.60 being the full amount claimed by the defendant;

(b) $177,902.66 being that sum less two adjustments;

(i) $110,000 allegedly advanced on 19 April 2005; and

(ii) $65,000 recorded as a loan made 9 February 2005; and

(c) depending on whether one or other adjustment is made, $242,902.60 or $287,902.60. 18 It should be noted that of the $352,902.60 claimed under the BACF charge only $2902.60 was actually for moneys paid (to pay staff wages) after 18 March 2005. The defendant says that $170,000 is owing under the charge given by BACM. I will deal first with the BACM matter, though most of the facts will be relevant to both companies. 19 Both companies were closely connected with a Mr Ian Lazar. He was a director of the company from 14 October 2004. Mr Lazar did not give evidence before me. 20 The background facts, as asserted by the plaintiff, and established by evidence, can be summarised as follows: The defendant provides a business consultancy service and, among other things, provides professional advice to businesses and skilled personnel to keep, maintain, prepare financial accounting and business records. It, among other things, rendered invoices for bookkeeping for both companies. 21 On 18 March 2005 one Owen Salmon was a director of the defendant, and was also secretary of BACM, and also a director or secretary of HLBC Pty Ltd, a company associated with BACM and BACF, Numsbar Investments Pty Ltd, which is a company associated with the first defendant. Its principal appears to be a Mr Myers. 22 It would seem that there was an arrangement between Numsbar and the two companies that Numsbar would advance short term funding for a fixed interest fee, which equates to about 30 percent for a loan of three months. The background material appears to suggest that the companies had a claim against Nauruan interests and they expected that that claim would bear fruit within the three month period. However, that did not happen, and there were discussions between the various interested parties in January and February 2005 as to the ongoing funding. Numsbar appears to have been a little nervous about recovering moneys from Mr Lazar and his companies and a scheme (and I do not use that word in a pejorative sense) was worked out whereby the short-term funding was repaid, longer term funding was put in place and it was proposed that when the companies granted charges to the defendant, the defendant would repay Numsbar and would then re-lend the moneys to the companies which would be secured by the charge. 23 Unfortunately, the way in which the scheme was implemented was quite effective in the sense that there never was any assignment of debts, there never was any actual payment and repayment, it was just done by book entries. Indeed, there is a certain vagueness and nebulous flavour over the transactions, presumably because the defendant and Numsbar were fairly closely connected commercially. 24 I will go into more detail later in these reasons, but it would have helped the defendant's case considerably had things been done according to the book. 25 The plaintiff says that the evidence clearly establishes that on 18 March 2005 both BACM and BACF were insolvent and as such, in the case of BACM, the charge was voidable against the liquidator, and so far as BACF was concerned, certain commercial consequences follow. The principal factual dispute before me was whether either or both BACM and BACF were insolvent on that date. 26 Section 95A of the Corporations Act provides:

"(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent." 27 The plaintiff's amended report with respect to BACM, which is Exhibit PX16 p 21, reaches the following conclusion: "I have formed the view that [BACM] was unable to pay its debts from 30 June 2003 and remained insolvent for all period subsequent to this date. My reasons for forming this view are detailed above in this Report and are primarily based on the following ... " 28 I will summarise the six reasons that follow, which are:

(i) that the balance sheets of the company as adjusted show a shortfall of assets to liabilities for the financial years ended 2003, 2004 and 2005;

(ii) the value of the company's debtors appears to have been significantly overstated;

(iii) trading losses on the adjusted accounts appeared for the years 2003, 2004 and 2005;

(iv) there was negative cash flow for 2004 and 2005;

(v) there was significant liquidity problems for all periods subsequent to 2003;

(vi) BACM failed to repay funds due to debtors/investors in accordance with the terms of the investment agreement and there were a significant number of demands for repayment of investments. 29 Mr O'Sullivan attacked that conclusion. His principal attack can be summarised as follows:

(1) there is no independent expert evidence of the company's alleged insolvency;

(2) the plaintiff did not do the work to prepare the report himself, it was almost completely prepared by his staff, particularly Mr Hosking and Miss Evans. The cross-examination of the liquidator showed he had little personal knowledge of the events which are described in his report;

(3) the report, so far as cash flows were concerned must be flawed, as the plaintiff could not have formed a proper view without having vital bank statements, which, as they were not ever produced, would appear not to be in his possession;

(4) the plaintiff's staff misunderstood the way the company's balance sheet was constructed and in particular that default charges and interest were wrongly assumed to be included in the stated profit;

(5) as a result of mistakes in (4) the plaintiff wrongly wrote off $3,783,000, and had this sum been appropriately treated the liquidator would not have reached the conclusion that he did. 30 As to this, Mr Hale says that:

(a) it was only at the heel of the hunt that the defendant indicated that solvency was an issue in this case, and this explains, or at least to a degree, the deficiencies in preparation;

(b) as to the staff's involvement, the plaintiff offered to put up Mr Hosking and Miss Evans for cross-examination and this offer was refused;

(d) whether or not the $3,783,000 was properly deducted from the balance sheet profit, it was clear that that amount was wrongly brought to credit. 31 As to Mr O'Sullivan's first point, it must be remembered that it is not necessary that expert witnesses be independent. It is desirable, but not necessary. 32 Mr O'Sullivan spent considerable time in cross-examination putting to Mr Andrew Wily, the plaintiff, the aims and requirements of his professional association, that there should be no conflict of interest and there should be independent advice. However, the authorities show that one can receive evidence, which is admissible, from an expert even though he has a conflict of interest. The initial rejection of that evidence in Liverpool Roman Catholic Archdiocesan Trustees Inc v Goldberg (No 3) [2001] 1 WLR 2337 has not been followed, and, indeed, has been rejected both in Australia (see Fagenblat v Feingold Partners Pty Ltd (2001) 49 ATR 18 (VSC) and Kirch Communications Pty Ltd v Gene Engineering Pty Ltd [2002] NSWSC 485 (J Campbell J) both noted in (2002) 76 ALJ 746) and also in England (see the decision of the Court of Appeal in Regina (Factortame Ltd) v Secretary of State for Transport (No 8) [2003] QB 381). 33 As Anderson J held in Sheahan v Hertz Australia Pty Ltd (1994) 14 ACSR 209 (SASC), where a similar objection was made and rejected as to expert evidence by a liquidator, the objection only goes to weight. 34 Mr O'Sullivan said in his closing address that the evidence presented by the liquidator was woeful. Certainly it was not as well resourced and presented as the Supreme Court would normally expect. Mr Hale says that the case was expedited, as if that was some sort of excuse. I am a little tired of the court being blamed for cases being badly and inadequately prepared because an order for expedition is made. Counsel at an expedition hearing must assess when the case is likely to be ready. If it is really urgent then extra recourses must be devoted to getting it ready at the time fixed. If it is only semi-urgent then the Expedition Judge must be told an accurate estimate as to when it is going to be properly ready. 35 It is not the slightest use to anybody for counsel and judges to have to make decisions of fact and law with inadequate material. However, as we are not infrequently put in that position we learn that the court has to do the best it can with the material that is provided. So although Mr O'Sullivan was justified to a degree in pointing to the inadequacy of the material put by the plaintiff, that is not the end of the matter. 36 The onus of proof was, of course, on the plaintiff. However criticism of the plaintiff's evidence, that it should be discounted, does not mean that there needs to be a verdict for the defendant. The trier of the fact must evaluate what evidence was presented to the court and consider whether on the balance of probabilities the relevant fact is established. 37 Mr O'Sullivan read a report from a Mr Blair Pleash of Hall Chadwicks, another firm of official liquidators. For an unexplained reason that gentleman relied on the definition of insolvency in a New Zealand case, a hard copy of which does not appear to be available in Sydney, Re Universal Management Ltd [1981] NZCLC 95-026 at p 98,246. This is a case unreported in any official set of law reports and was partially reversed on appeal; see Re Universal Management Ltd [1983] NZLR 462. 38 However, what Mr Ronald Davidson CJ said in that case, which is extracted in Mr Pleash's affidavit, appears to be sound, though rather unsophisticated compared with more modern Australian summaries of the position: "The commercial solvency of a company is not proved by merely looking at its accounts and making a mechanical comparison of its assets and liabilities. Insolvency is a question of fact falling to be decided as a matter of commercial reality in the light of all the circumstances with things being viewed as it would be by someone operating in a practical business environment." 39 Although s 95A appears to be expressed in simple language, as Coburn says in Coburn's Insolvent Trading 2nd ed (Law Book Company, Sydney, 2003) p 63, when analysed it really fails to provide any clear guidance. 40 In New South Wales the best statement of what is the test for insolvency was laid down by Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224-225, where his Honour sets out six key propositions. One does have to look, according to Palmer J, and indeed all the authorities, at commercial reality, but one must not go overboard and one must not assume that creditors who are not pressing for payment will be in that happy state forever, and one must look to see whether there is evidence that there has been express or implied agreement between the company and its creditors as to when the creditor will expect the debt to be paid. 41 There are other useful statements in the authorities. Mr O'Sullivan referred to the decision in South Australia of Powell and Duncan v Fryer, Tonkin and Perry (2000) 18 ACLC 480, 482, which was endorsed by Austin J in this Court in Cadwallader v Bajco (2001) 189 ALR 370 at 406, but again this just indicates that commercial realities are to be taken into account. 42 Coburn says at p 66 of his book, having referred to all these authorities: "The courts have moved to a far wider consideration of solvency, rather than just applying a cash flow test, which is viewed as a basic starting point in the consideration of solvency. This is because the statutory emphasis is on "solvency" rather than "liquidity". The consideration will be as a question of fact: in the light of commercial reality, all things considered, could the company pay its debts as and when they became due? Such an approach includes the balance sheet test, and other commercial realities such as access to money from third parties, raising capital or credit and financial support are all relevant considerations in determining a company's ability to pay debts." 43 However, I emphasise that the cases are talking about commercial realities, not of the belief in a fairy godmother. We do from time to time have companies, particularly subsidiary companies, or companies in a group, saying "oh, well, I know we couldn't pay the debt, but we expected our holding company or our associated company to pay it." That is usually not sufficient, unless the factual circumstances show that there are reasonable grounds for believing that the company will be supported. Reasonable grounds are based usually on an agreement, or estoppel, or some other understanding which, if not legally binding, would be accepted by reasonable persons of business as being reliable. It is insufficient that there has been support in the past and that there is no particular agreement as to what is to happen in the future. 44 In the present case, as I will come to shortly, just what the arrangements were between Numsbar and the companies, and how enduring they were to be, is left very, very vague indeed. It would seem that Numsbar was advancing moneys at very high rates of interest in the short term. The moneys were to be repaid by the end of January 2005, and when that did not occur there was very great nervousness as to whether the moneys would be repaid and then this further scheme was entered into. It was at no stage clear to me, on the evidence in this case, that there was some binding agreement that the company would be funded for any purpose for which they might want to use money by the defendant or some company associated with it. 45 There are a number of conclusions in Mr Wily's amended report which to my mind show fairly clearly that even if one resolved Mr O'Sullivan's objections favourably to the defendant, there was still a host of material which goes to show insolvency. 46 As I have noted, BACM was in the business of lending money. Accordingly, the status of its loans was a key factor in its viability. Mr Wily reported at Exhibit PX16 p 10: "The Company's debtors comprised the most significant asset available to it to meet its liabilities. Subsequent to my appointment as Administrator and Liquidator of the Company [BACM] I have endeavoured to recover the Company's debtors. ... Given the significance of the Company's debtors as an asset of the Company and the impact that the recoverability of the Company's debtors has upon its ability to pay its debts as and when they fell due I have closely analysed the position in respect of the Company's debtors and their recoverability. ... I have also noted that the Company is entitled to receive interest and default charges in respect to its loans to its debtors where the debtors have failed to repay their loans to the Company and are in default of their loans." 47 He considers that the company advanced $7.7 million to debtors of the company, but when one took into account interest and default there was owing $13.85 million. He continues that as a result of his attempt to recover the company's debtors he has found that:

"- A number of debtors are unable to pay their loan to the Company;

A number of debtors have disputed the quantum of the Company's claim against them, most particularly in respect of interest and default charges;

The Company had commenced legal action to recover its funds, without success in most cases;

There appears to be insufficient documentation in respect of loans to enable them to be verified and pursued;

A substantial portion of the properties which the Company holds security over have been sold by first ranking mortgagees with no surplus funds resulting from the sale of the property and no funds flowing to the Company; ...

The Company advanced further funds to some of the borrowers after they were in default with their earlier loans and neither the initial loans nor any subsequent advances by the Company have been repaid by the debtors ... " 48 He then said as a result of his endeavours to recover the debts he formed the view that the company's debtors are largely unrecoverable. His current estimate is 50 percent of the debtors ledger may have some possibility of being recovered. 49 Mr O'Sullivan criticised this evidence on the basis that the liquidator has not done much at all to collect the debts. Certainly the liquidator personally had not done anything. He handed it over to Mr Hosking to pursue the matter. Mr Hosking was ready to be cross-examined, but he was not required. 50 There was no contrary material of any reliability to contradict what the plaintiff had said about the matter. There was long cross-examination on the recoverability of the debts, but this was mainly directed to the value of the debts in the balance sheet. I could not really, with respect, see how this could help me, as the debts were included in the balance sheet at face value. There was no substantial challenge to the statements in most of the bullet points which I have set out above. 51 As to cash flow, Mr O'Sullivan makes the point that it would appear that the liquidator did not have bank statements for the whole of the period. Mr Wily in his report says that the analysis undertaken by staff indicated that the main component of the cash flow for the company was represented by funding being deposited into the company's general account by BACF. Further investigation indicates that those funds were made up of amounts advanced by investors for investment by the company. 52 Further analysis indicates that limited amounts were received by the company in respect of repayment of principal, interest or default fees. The outflow was in the main short-term loans to borrowers. The company recorded virtually no transactions from March 2005, which indicates that it may have ceased to trade about this time. The cash flow analysis shows that the company was reliant upon receipt of funds from investors, which were primarily used to place further investments. It also appears that in that period the company failed to pay amounts due to creditors, despite increasing demands from them, which further reinforces the view that the company was unable to pay all liabilities as and when they fell due from its own funds during the year. 53 Again there does not appear to me to be any material going the other way. Indeed, it is quite clear that the companies, and perhaps particularly BACF, had to borrow from Numsbar, or the defendant, even to pay wages, which is not what one would expect of a company that is well able to pay its debts as they fall due. Indeed, in some respects the evidence presented by the defendant was in an even worse state than the evidence presented by the plaintiff. The material was often vague, making assertions without real backup, though there was apparent backup because there were various schedules and copies from ledgers, and what have you, but when one looked at them they were merely created by the people concerned, and the court just did not have the primary facts, thus most of this material was rejected. 54 However, if one looks through the affidavit evidence of Mr Myers, and looks at both what was admitted and also the flavour of what he sought to put forward, one sees that quite a parlous situation had developed. In his affidavit of 23 August 2006 Mr Myers said he was introduced to Ian Lazar by his brother about July 2004, and was told that Ian Lazar had an urgent need for short-term funding at a very attractive return of 30 per cent for 90 days. Then, after meeting Ian Lazar, he agreed to advance him and his company short term funds on a 90 days' term. He sets out a series of payments totalling $412,500, but the schedule did not get into evidence, and although Mr Myers said that he agreed to advance the company, the terms of the agreement never became completely clear. However, the background of other evidence suggests that it was expected that moneys would flow through to the companies from the claims involving the Nauru parties, and that the moneys would be repaid by January 2005. When this did not happen, then Mr Myers and others became a little concerned and the scheme for longer term finance was put in place. 55 Mr Cox, a finance broker, who at the relevant time was an employee of BACF, said that he had a detailed knowledge of the books and that he was repeatedly told to organise funds from Mr Myers, which ranged from moneys required to facilitate finance proposals to payment of wages and bonuses. In October 2004 he was paid $10,000 by Numsbar and Ian Lazar said to him, "in relation to your bonus, I have arranged for John Myers to pay the money I owe you." Then there was about $1,000 paid for legal costs. Then one Heather Anderson complained that she had not been paid wages for two weeks. Mr Cox had a conversation with Mr Lazar and was told that that is down to John Myers not making the transfer for wages. Mr Lazar said "I have organised John to make payments for wages." So that there were consistent moneys flowing from Mr Myers to Mr Lazar, or from them to their corporate entities, including $4,398, which was paid in respect of a motor vehicle lease for the vehicle being used by Mr Lazar belonging to the company. 56 In my view, a company which needs to borrow even to pay its wages, which has problems with its loan book, and the security it has taken, and has problems with collecting its debts, and has no cash, is clearly a company which is unable to pay its debts as and when they fall due. 57 It is a question of fact, and I believe that, despite the deficiencies in the presentation of the plaintiff's case, the material before the court shows that that is the situation. 58 Mr O'Sullivan makes the submission that the company which has the facility to obtain loan funds, and which can discharge its debts as they fall due, is not insolvent. That may be in some circumstances, but in the instant case, where there was only short-term funding, there was no binding agreement that one could see that the cash was going to flow for any particular time, and the only funds that can be borrowed are either short-term at 30 percent, it would seem for 90 days or 120 percent a year, these companies were insolvent. 59 The transaction occurred on 18 March 2005. The effect of the transaction was to give the defendant an advantage, I think it was, in six months of the relation-back date. Therefore the charge of BACM is voidable against the plaintiff by virtue of s 588E of the Corporations Act. 60 So far as BACF is concerned, much the same evidence brings me to the same conclusion. BACF was also insolvent on 18 March 2005. However, the transaction did not take place within six months of the relation-back date. 61 Mr Hale does not now challenge the validity of the charge. He says the matter for me to decide is whether the amount is covered by the charge. Now, in that I have great difficulty because the material that has been presented is not at all satisfactory. One argument, however, I can deal with, which, if it is correct, would put an end to doubt on this particular part of the case. 62 Clause 24.1 of the charge reads as follows:

"24.1 Certificate A certificate signed by the Chargee or its solicitors about a matter or about a sum payable to the Chargee in connection with this charge is sufficient evidence of the matter or sum stated in the certificate unless the matter or sum is proved to be false." 63 There is in evidence a piece of paper which I will set out in full: " Certificate Pursuant to Clause 24.1 of the Deed of Charge between Terra Cresta Business Solutions Pty Ltd ("the Chargee") and Business Australia Capital Finance Pty Ltd (ACN 002 426 726) ("the Chargor") dated 18 March 2005

I, Owen Salmon, company director, certify that: 1. I am a director of the Chargee and am authorised to give this certificate on its behalf. 2. I certify that the sum payable by the Chargor to the Chargee in connection with the charge is $1,325,331.57.

I have merely omitted the signatures. 64 A clause such as cl 24.1 is often referred to as a Dobbs' clause because of the decision of the High Court of Australia in Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643. There the High Court said that it was competent for parties to agree to have their dispute as to the quantum of their liability decided by arbitration and it was also competent for them to agree that the amount might be fixed by the certificate of one of them, or a third party, and in some cases not to be able to be challenged. It is a very useful clause to shorten commercial litigation. However, the abuse of the Dobbs' clause is something that courts have had to guard against. 65 There were a number of cases before me in the early 1990s when I made it quite clear that if a party was to rely on a Dobbs' clause it must comply strictly with the provisions. The latest of these cases was Shomat Pty Ltd v Rubinstein (1995) 124 FLR 284. 66 In State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587 at 609 Einstein J agreed with that approach, but he indicated that whilst one must strictly construe the relevant charge and the certificate, one cannot go overboard with it, and one must interpret the clause and the certificate in a fashion which does not frustrate its purpose. 67 The clause requires a certificate about a sum payable to the chargee in connection with the charge. It is a rather peculiar expression. It does not say that the amount owing is to be certified, but rather there is to be a certificate about the amount owing. However, it is probable that Einstein J would say that it is being too pedantic to rely on that particular distinction. 68 Secondly, one has to look at the form of the certificate. It is, of course, open for a corporation to sign something by a duly authorised officer and see s 127 of the Corporations Act. A director is not necessarily an authorised officer and, indeed, the way in which the certificate goes is that Mr Salmon acknowledges that as a director he would not have the authority, and that is why he said he is authorised to give this certificate on behalf of the company. However, there is no evidence of any such authorisation. Furthermore, the certificate is given by Mr Salmon personally, rather than a certificate by the company. The clause requires the certificate to be signed by the chargee, or its solicitors, which, to my mind, means that the certificate which is presented by Mr Salmon does not fall within cl 24.1 of the charge and, accordingly, is not a conclusive answer to the question as to how much is owing. 69 Now, the evidence as to the title of the defendant to be the chargor is a bit nebulous. The way in which the transaction came about appears to be in accordance with an exchange of correspondence between Mr Salmon, as a director of the defendant, and Mr Myers, as the director of Numsbar, which are OJS6 and 7. These only came to light about a day before the hearing, and although both the exhibits appear to be signed by, respectively, Mr Myers and Mr Salmon, Mr Salmon's evidence was to the effect they were actually found on computer and reprinted. Why they were then signed is really inexplicable. Anyhow, supposing they are correct, and I think despite the suspicion it is more likely than not that they did exist, Mr Salmon wrote to Mr Myers on 20 February 2005: "I acknowledge the numerous discussions we have had over the past few months with regard to monies lent to and owed by the BA Group of companies to Numsbar Investments Pty Ltd. I understand your concerns regarding getting paid in full ... I would be prepared to buy out or have your debt from BACF/BACM assigned to TCBS at its current value. ..." 70 On 1 March Mr Myers replied that he accepted the offer to assign the debt: "I do not want to be left in a position of chasing funds from Ian Lazar".

I should interpolate there that this confirms my suspicion that people were getting concerned about the solvency of Mr Lazar and his company. The letter continued: "As per our discussion, the assignment will become effective on the date of you instigating your charge security over the companies assets. I understand in your discussions with Colin Steingold that this will be formally lodged in the next few weeks. I look forward to this confirmation and receipt of the said $200,000 into the Numsbar Investments Pty Ltd bank account. The terms pre existing between Numsbar Investments Pty Ltd and Ian Lazar parties are a fixed 30% interest on all monies forwarded for 90 days only. Any funds not returned within 90 days go into default at 8% per month". 71 If there was to be an assignment of a debt it would have to be effected in accordance with s 12 of the Conveyancing Act 1919 to be an effective legal assignment. This just did not happen. It might be said that there was some equitable assignment. This would mean that Numsbar was the trustee for the defendant to enforce its rights against the company, and would put some doubt as to whether the defendant itself was owed any moneys under the charge, other than those which were advanced after 18 March. 72 There is also the problem that the letter of 1 March says: " … the assignment will be effective on the date of you instigating your charge security over the companies' assets". 73 Now, this never happened because the charge of BACM never was effective. It may have appeared to have been effective from March onwards, but it was not effective at any stage from the present viewpoint. 74 My problem with this analysis is that neither counsel argued for it, though I did point out the problem. Judges are supposed to decide the point put up for decision by the parties, and not the point they would have raised if they have been arguing the case. So I think I must put aside the question as to whether because of some technicality nothing is owing on the charge to the defendant, in the case of BACF, and look, as I said near the commencement of these reasons, at which of the amounts mentioned there is due. 75 The disputes are over $110,000 allegedly advanced to BACF on 19 April 2005, and $65,000 made on 9 February 2005. As to the $110,000, Mr Wily says in his affidavit on 29 August that the money went into a suspense account and did not find its way into the company. Mr Salmon says that there certainly was a mistake with respect to the initial payment, but that that mistake was corrected the next day and thereafter that $110,000 was used to pay the debts of the company. 76 I am not convinced by that. I just do not consider the court has sufficient material to show that what Mr Salmon says is correct. The parties knew that the court would be making a decision on this matter and that the court would expect the material to be placed before it. However, the onus of proof is on the plaintiff to show what is the amount owing, and I just have a little unease in making a final judgment on the matter. I will come back to this after I have dealt with the $65,000. 77 As to the $65,000, I was not impressed with Mr Salmon's explanation that there were two discrete transactions, each involving that sum. Accordingly, I would accept Mr Wily's version in the report. 78 Now, it seems to me that it would be wrong for me to make a conclusive declaration as to how much was owing under the charge, partly because the parties really gave secondary consideration to this matter being principally concerned with the main aspect, namely the validity of the charge. I will stand the matter over for a couple of weeks so that short minutes can be brought in, but, in my view, I should make a declaration that the BACM charge is void against the plaintiff, and as to the BACF charge I would advise the liquidator under the Corporations Act (the section would have to be different because for one company he is a court liquidator and the other a voluntary liquidator) that he would be justified in treating the charge in favour of BACF as being security for no more than $177,902.66, unless he is convinced by material placed before him by the defendant that he should treat the charge as being for some higher amount. 79 The short minutes will also then have to deal with any outstanding issues that were not subject to the expedited hearing and what is to happen to the defendant's cross-claim. 80 So far as costs are concerned, it would seem to me that the defendant has basically failed and should pay the costs of this hearing. Again, I will consider that when short minutes are brought in. 81 I stand the matter over to 12 October 2006 at 9.30 am for short minutes. Should my Associate be advised no later than Friday 6 October that that date is unsuitable it may be changed. 82 I will give leave for the amended statement of claim to be filed in court. The question of costs I will deal with at the short minutes stage. Material produced to the court, which did not become an exhibit, is to be returned to the parties.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

Corporations Act 2001(Cth)ss 588FC, 588FE, 588, ss 9, 95A, 127, 436A, 439A, 461(1)(k), 588FA, 588FB, 588FC, 588FE, 588FF

At a glance

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Judgment (46 paragraphs)

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Legislation Cited (1)

Cases Cited (7)

Cited By (4)