Ziade Investments Pty Ltd & Anor v Welcome Homes Real Estate Pty Ltd & Ors [2006] NSWSC 457 | Case summary

1365/05 ZIADE INVESTMENTS PTY LTD (IN LIQ) & ANOR v WELCOME HOMES REAL ESTATE PTY LTD & ORS JUDGMENT 1 On 12 March 2004, Ziade Investments Pty Ltd, the first plaintiff, granted mortgages over two of its properties for $700,000.00 each securing past loans said to be owing by Ziade Investments to Welcome Homes Real Estate Pty Ltd, the first defendant, Ritz Cinema Pty Ltd, the second defendant, Janlz Constructions Pty Ltd, the third defendant, Jack Ziade, the fourth defendant and his wife, Jean Ziade, the fifth defendant. The mortgages were registered as second mortgages, the National Australia Bank Ltd holding the first registered mortgages over the properties. 2 Richard James Porter, the second plaintiff, is the liquidator of Ziade Investments. He seeks orders that the mortgages are unenforceable and that he be paid moneys received on the discharge of them. He also seeks an order that the proceedings be referred to an Associate Justice for determination of the amount of the debt, if any, owed by Ziade Investments to the second mortgagees on 12 March 2004. The statutory provisions 3 Mr Porter pleaded his case on three bases. He alleged that the entry into the mortgages constituted insolvent and uncommercial transactions, insolvent transactions for the purpose of defeating creditors, and unreasonable director-related transactions. At trial, Mr Porter did not press the argument that the grants of the mortgages constituted insolvent transactions for the purpose of defeating creditors. Insolvent and uncommercial transactions 4 The Corporations Act 2001 (Cth), s 588FB(1) provides that a transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the benefits (if any) to the company entering into the transaction, and the detriment to the company of entering into the transaction, and the respective benefits to other parties to the transaction of entering into it, and any other relevant matter. 5 If the giving of the mortgages constituted uncommercial transactions, they were insolvent transactions under the Corporations Act 2001 (Cth), s 588FC if, and only if, relevantly for present purposes, the mortgages were granted when Ziade Investments was insolvent. 6 If those circumstances are established, the grants of the mortgages are voidable transactions under the Corporations Act 2001 (Cth), s 588FE(3) if they were entered into during the two years ending on the relation-back day. The application to wind up Ziade Investments was filed on 17 November 2004. It is common ground that it was the relation-back day as that term is defined in s 9. 7 It follows that since the mortgages were granted within two years of 17 November 2004, if each of the above elements is established by Mr Porter, the Court may grant relief under the Corporations Act 2001 (Cth), s 588FF(1). It provides that where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make one or more of a series of orders. The series includes an order declaring the mortgages to be unenforceable, and an order requiring a person to pay to Ziade Investments 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. Unreasonable director-related transactions 8 The Corporations Act 2001 (Cth), s 588FDA(1) provides, relevantly for present circumstances, that a transaction of a company is an unreasonable director-related transaction of the company if, and only if, the transaction is a disposition by the company of property of the company, and the disposition is made to a close associate of a director of the company, or a person on behalf of, or for the benefit of, a close associate of a director of the company, and it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the benefits (if any) to the company entering into the transaction, and the detriment to the company of entering into the transaction, and the respective benefits to other parties to the transaction of entering into it, and any other relevant matter. Unfair preferences 9 Mr Porter also pleaded that the grants of the mortgages were unfair preferences. The Corporations Act 2001 (Cth), s 588FA(1) defines a transaction to be an unfair preference given by a company to a creditor if, and only if, the company and the creditor are parties to the transaction, even if someone else is also a party, and the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company. 10 If the company is insolvent when the transaction is entered into, an unfair preference is an insolvent transaction in terms of the Corporations Act 2001 (Cth), s 588FC. But, s 588FE(2) provides that insolvent transactions of a company are voidable if entered into, or an act is done for the purpose of giving affect to it, during the six months ending on the relation-back day, or after that day but on or before that day when the winding up began. 11 Since the mortgages were granted more than six months before the relation-back day, it follows that the court could not act under the Corporations Act 2001 (Cth), s 588FF(1) on the basis that the grants of the mortgages were insolvent transactions. An argument to the contrary was not pressed in submissions. Benefits and detriments 12 In determining whether the grants of the mortgages were uncommercial transactions, the statute requires the court to consider the benefits, if any, and the detriment to the company and the respective benefits of other parties to the transaction. 13 In Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd (2002) 41 ACSR 369 at [14]-[15], Windeyer J adopted a purposive approach, saying that the Corporations Act 2001 (Cth), s 588FB(1) should be interpreted in the light of its objectives. His Honour cited from the explanatory memorandum to the Corporate Law Reform Bill 1992 at [1034]-[1035] that the provision was specifically aimed at preventing companies disposing of their assets or other resources through transactions that resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice. 14 His Honour went on to endorse what Young J had said in McDonald v Hanselmann (1998) 144 FLR 463 at 470. That case involved the sale and purchase of equipment, the client base, and the goodwill of a business. His Honour said that where a purchaser was a related entity in the corporate sense, or a relation by blood or by law in the individual sense, the court should look at the transaction far more closely and be less inclined to excuse a sale at an undervalue because of some commercial factor. 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. 16 Mr Ziade recorded minimal features of each loan he said was made in folio books that he called his loan books. For example, the following appeared at one folio: "RITZ LOAN TO ZIADE INVESTMENTS 27.6.2002 ELECTRONIC TRANSFER $250,000.00" 17 No other terms were recorded. In particular, there was no mention of an interest rate, of a term of the loan, or any mention of security. 18 In the witness box, Mr Ziade said he had a verbal agreement with his son Neaf, who was the sole director and shareholder of Ziade Investments, that it would provide security if ever it was called for. 19 There was an acknowledgement of loan dated 28 June 1996 signed by Neaf Ziade on behalf of Ziade Investments and signed by Jack Ziade on behalf of himself and his wife and Jack Ziade also signed over the common seal of Welcome Homes. Mr and Mrs Ziade were the sole shareholders of Welcome Homes. It stated that at Mr Ziade's request, Welcome Homes and Mr and Mrs Ziade had lent Mr Neaf Ziade amounts totalling $671,100.00 of which some of the amounts were transferred by Mr Neaf Ziade to Ziade Investments. The documents stated that repayments were to be made on demand and that Mr and Mrs Ziade or Welcome Homes had the right to request mortgage or caveat on title of any of Mr Neaf Ziade's properties or Ziade Investment's properties. The interest rate was stated to be 10%. 20 That document is inconsistent with the claim that the moneys are owed to Mr and Mrs Ziade and Welcome Homes by Ziade Investments. If the loans were made to Mr Neaf Ziade and he on-lent some of the amounts to Ziade Investments, claims against that company would be his and would not be secured by the mortgages. 21 To similar effect was a letter from Bell Partners, the auditors of Ziade Investments, to Mr Jack Ziade of 10 February 2005 in which the accountants confirmed that having reviewed the financial report of Ziade Investments as at 30 June 2002, there was a current liability in the balance sheet being a loan from Mr Neaf Ziade of $829,530.00. The letter continued: "We advise that this balance is comprised of several loans payable to and from various parties. Specifically, we note that the loans relating to the Jack Ziade group included in this balance are loans payable by ZIPL to: Ø Welcome Homes Pty Ltd $731,958.00 Ø Ritz Cinema Pty Ltd $250,000.00 Ø Janlz Constructions Pty Ltd $52,260.00" 22 The letter is confusing because, if the loan was made by Mr Neaf Ziade to Ziade Investments from moneys provided by Welcome Homes, Ritz Cinema and Janlz Constructions, they would not be creditors of Ziade Investments. They would be creditors of Mr Neaf Ziade. 23 If that was so then, clearly, the grants of the mortgages to Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions had no benefit to Ziade Investments. 24 If the loans were made to Ziade Investments, there was no evidence of a claim to security. On 27 June 2002, a loan of $250,000.00 was said to have been made by Ritz Cinema, but no security was sought. Likewise, for a further loan of $200,000.00 from Ritz Cinema on 5 December 2003. 25 By that time, Mr Jack Ziade had employed his son in law, Jim Katehos, to whom he gave the bookwork for him to go through the loan books to tidy them up. Mr Ziade was ambivalent in his evidence as to whether he instructed Mr Katehos to secure the loans, and whether those instructions were limited to the loans in the loan books, or extended to future advances. I found his evidence in this regard to be unreliable. In any event, there was no evidence that Mr Jack Ziade would make no further advances to Ziade Investments unless he was granted security and, indeed, further loans were said to be made up to and after 12 March 2004. 26 The loan of $200,000.00 of 5 December 2003 was not made to Ziade Investments. It was said to be made to Ziade Investments No. 1 Pty Ltd as trustee for the Ziade Family Trust. Securing of that amount by the issue of the mortgages constituted a detriment to Ziade Investments. 27 Ziade Investments suffered the further detriment on entering into the mortgages, that some of the debts said to be those of the company were statute-barred under the Limitation Act 1969, but were re-enlivened by the form of each mortgage acknowledging a present entitlement of $700,000.00. The claim is that Ziade Investments owed Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions $1,532,992.00 from loans made between 23 February 1994 and 8 November 2004. As at 12 March 2004, amounts totalling $843,925.00 had been lent before March 1998. 28 Having granted the mortgages totalling $1.4 million, Ziade Investments suffered the further detriment that it could not raise additional finance because it could not offer appropriate security. By granting the mortgages any equity upon which Ziade Investments could seek such finance was eliminated. This is clear from the fact that when the properties were sold and the NAB paid out, there was only about $160,000.00 available to Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions. 29 On the other hand, the benefits to Jack and Jean Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions are obvious. They obtained the advantage of security that they had not held before. And this circumstance together with Mr Porter's report that unsecured creditors were unlikely to receive any dividend establishes a clear benefit to them. 30 The benefit was not, however, the obtaining of security over the entire amount said to be due by Ziade Investments. It extended only to the total advances said to have been made up to 12 March 2004 of $1,330,892.00. The $202,100.00 said to have been advanced after the registration of the mortgages was not secured by them. 31 It was argued that Ziade Investments had received considerable benefit from the advances made to it over the years. In my view, that is beside the point. The question is whether Ziade Investments benefited from the grants of the mortgages. 32 It was submitted that there was no detriment in acknowledging the debts and regularising the position. But the position was not established that any loans made to Ziade Investments subsequent to the letter of 28 June 1996 were made only on the basis that security would be taken for them. In fact, security was not taken until 12 March 2004. 33 As at 12 March 2004, Ziade Investments had three properties. At Brook Street, Coogee it owned a property upon which a large residence for Mr Neaf Ziade and his family was under construction. The first mortgage was to the NAB. The second mortgage for $700,000.00 was held by Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions. 34 Then there was a property at 12-16 Alexander Street, Coogee that was the present residence of Mr Neaf Ziade and his family. First and second mortgages as with the Brook Street property had been given. 35 Finally, there was an investment unit at St Thomas Street, Bronte. It was sold for $555,000.00 on 26 March 2004. 36 Mr Neaf Ziade owned a property at Dudley Street, Coogee on which three townhouses were under construction. He had a $3 million finance facility from Willis & Bowring Mortgage Investments Ltd guaranteed by Ziade Investments and Ziade Investments No 1 Pty Ltd. As at 12 March 2004 it was drawn to $2.89 million. 37 Mr Jack Ziade had said he would take over the funding of the Dudley Street project and give assistance for other projects. It was submitted that in those circumstances it could not be said that a reasonable person in Ziade Investment's circumstances would not have entered into the mortgages. I reject that submission. 38 There was no evidence as to what financial assistance Mr Jack Ziade would give to the Brook Street development and, in particular, there was no evidence that the mortgage to the NAB would be taken over by Mr Ziade in consideration for the grant of the second mortgage on that property or that Mr Ziade would cause further advances to be made to Ziade Investments for the Brook Street project in consideration for the grant of the mortgage. As I have said, the mortgages did not secure future advances. 39 In my view a reasonable person in Ziade Investments' circumstances would not have entered into the two mortgages. I am of the view that Mr Porter has made out his case that the grants of the mortgages were uncommercial transactions of Ziade Investments in terms of the Corporations Act 2001 (Cth), s 588FB(1). Insolvency 40 The main arguments at trial centred on whether, in terms of the Corporations Act 2001 (Cth), s 588FC, Ziade Investments was insolvent on 12 March 2004 when the mortgages were granted. 41 In Sandell v Porter (1966) 115 CLR 666, the High Court considered the definition of insolvency in the Bankruptcy Act 1960 (Cth), s 95. It was defined as an inability to pay debts as they fell due out of the debtor's own moneys. At 670, Barwick CJ said that the debtor's own moneys were not limited to cash resources immediately available but extended to moneys that could be procured by realisation by sale or mortgage or pledge of assets within a relatively short time. His Honour said that the conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. 42 Jacobs J described a dichotomy between a temporary lack of liquidity and an endemic shortage of working capital in Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 at 328. 43 Those general observations still hold good, but the definition of insolvency has changed in two respects. First, a debtor is not limited to payment from its own moneys. Secondly, the question is to be determined, not when liabilities fall due, but when they are payable. The Corporations Act 2001 (Cth), s 95A provides that 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. 44 As Palmer J pointed out in Lewis v Doran (2004) 184 FLR 454 at [116], the provision requires the court to decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable, by reference to the commercial realities. If the court is satisfied that, as a matter of commercial reality, the company has a resource available to pay all its debt as they become payable, then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party. His Honour's decision was upheld on appeal (Lewis v Doran (2005) 219 ALR 555). 45 Mr Porter has the onus of establishing insolvency (Re Action Waste Collections Pty Ltd (in liq); Crawford v O'Brien [1981] VR 691). The Court's consideration of this issue is based on a cash flow test rather than a balance sheet test (Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 64, Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office (2002) 42 ACSR 501 at [33]. 46 There was a dearth of evidence on this issue. Some financial statements of Ziade Investments were in evidence and Mr Porter gave evidence and his report to creditors was tendered. He was not cross-examined on the issue of insolvency. Mark Hearnden gave evidence. He was the general manager of Willis & Bowring. 47 He gave evidence with respect to proposed refinancing of that project. The defendants chose to rely on the evidence of Mr Jack Ziade alone. He did not address the question of insolvency of Ziade Investments. 48 Criticism was levelled at Mr Porter for some mistakes in his report to creditors, for his lack of cash flow evidence, or the evidence of any expert expressing an opinion on solvency. 49 As Hodgson JA pointed out in Skouloudis v Planet Enterpizes Pty Ltd [2003] NSWCA 31 at [25] a liquidator is faced with difficulties if without funds, without cooperation from the liquidated company's directors, and with virtually no company records. His Honour stated that a liquidator could, in those circumstances, rely on Jones v Dunkel (1959) 101 CLR 298, but had to produce some evidence from which inferences could be drawn. 50 Some analysis of cash flows can be gleaned from the financial statements for the year ended 30 June 2003. They were certified by Mr Neaf Ziade to present fairly the company's position and its performance. They were signed by the auditor, albeit as a special purpose financial report because Mr Neaf Ziade had informed the auditor that Ziade Investments was not a reporting entity. 51 Those statements showed an operating loss before income tax for the 2003 financial year of $451,019.00 in comparison with a loss of $204,351.00 in the previous year. The result was that there was a deficiency in shareholders' funds of $270,083.00. 52 The balance sheet showed that current liabilities exceeded current assets by almost $500,000.00. The current liabilities did not include the claimed debts of approximately $1.5million by Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions. Had they done so, of course, the deficiency in liquidity would have been almost $2 million. 53 Furthermore, the current assets included the Dudley Street property at just under $2.4 million. If that asset was ignored as not realisable in a reasonably short period so as to meet debts that were shortly to become payable, the deficiency in liquidity would increase to about $4.4 million. 54 In my view, that picture of Ziade Investment's cash needs and its inability to raise any further funds following the grants of the mortgages on 12 March 2004 is sufficient, as a matter of commercial reality, to establish insolvency as at 30 June 2003. Other evidence to which I will come does not reveal any improvement in its cash position by 12 March 2004. 55 It was pointed out that the St Thomas Street property was entered in the accounts at the lower of cost and net realisable value at $473,665.00. It was submitted that that was an understatement of its value because it sold at $555,000.00. But if one is analysing the situation from a cash flow point of view, one would exclude the St Thomas Street property as an asset unlikely to be realised in the short term to pay debts due and payable. In any event the difference of just over $80,000.00 does not affect the overall picture that the 30 June 2003 accounts show up from a liquidity point of view. That sort of analysis is an indication of prospective cash flows in and out and of the ability of a company to meet its debts when due and payable. 56 Mr Ziade had said that the sale of the St Thomas Street unit created a profit of $20,000.00 to $30,000.00. On the second day of the trial, after addresses had commenced, an application was made to reopen the defence case to tender mortgage and sale details of St Thomas Street. I rejected the tender as too late and an attempt to contradict Mr Ziade's oral evidence. Had the evidence been admitted, however, it would not have made any significant difference to the financial analysis mentioned above. 57 Financial accounts for the period ended 30 June 2004 were not available. 58 Mr Neaf Ziade submitted a report as to the affairs on 17 December 2004. It showed no current assets. The properties at Alexander Street and Brook Street were valued collectively at $2 million. Secured creditors were stated to be $6.6 million. Claims by employees stood at $50,000.00, and unsecured creditors at approximately $230,000.00. The deficiency was $4.8 million. 59 In his report to creditors Mr Porter said that the information available to him was insufficient to draw a conclusion as to a date when Ziade Investments became insolvent. He said: "It appears that the company may have become insolvent based on the balance sheet test sometime during the period 1 July 2003 to 30 June 2004 as evidenced by the erosion of net assets during this period." 60 Mr Porter had said, however, that in his opinion Ziade Investments was insolvent on 12 March 2004 evidenced by a deficiency in net assets at 30 June 2003 of $270,081.00 and the report as to affairs by Mr Neaf Ziade as at 29 November 2004 listing a deficiency to creditors of $4,544,495.00 with some upward adjustment of the value of the Brook Street property and some downward adjustment of unsecured creditors. 61 In my view that opinion of the liquidator is supported by the liquidity considerations set forth above. 62 And there are other considerations. Mr Jack Ziade had not seen his son for approximately twelve months. When they met he offered to make loans at a lower interest rate than was payable under the finance facilities his son had acquired. He was concerned that Willis & Bowring had granted Ziade Investments No 1 an $11.5 million finance facility for the development by Ziade Investments No 2 Pty Ltd of 19 apartments at 11-15 Alexander Street, Coogee. 63 Mr Ziade investigated his son's projects and, in particular, became familiar with the Dudley Street project. The builder had walked off the site claiming moneys overdue to it. It ultimately entered a judgment for approximately $520,000.00. The builder also walked off the other sites, so that the three projects had stopped. 64 Mr Jack Ziade acknowledged that Mr Neaf Ziade and Ziade Investments did not have any income to pay expenses. It was in the nature of a developer's business that moneys would flow when projects were completed or sold. In the meantime, Welcome Homes, Ritz Cinema and Janlz Constructions caused debts of Ziade Investments to be paid. 65 It was submitted that the fact that payments were made by Welcome Homes, Ritz Cinema and Janlz Construction was explained, not as an indication of insolvency, but by Mr Ziade's evidence that he would assist with financing not only the Dudley Street property, but other projects as well. But many of the cheques were for interest payments and Mr Ziade said that had he known that they were payments of interest he would not have authorised them. 66 On 27 February 2004, a meeting took place at the offices of Welcome Homes attended by Mr Hearnden and Peter Hatheier who made a file note of the meeting, as did Mr Jack Ziade. Mention was made that Mr Jack Ziade would take over the financing of the Dudley Street property. 67 On 1 March 2004, Janlz Constructions wrote to Willis & Bowring indicating that Janlz Constructions would finance the remaining construction on that project. That was not done. Mr Ziade said he was frustrated in his attempts by Willis & Bowring taking possession of the site. That was not until September 2004. 68 It was submitted that in order to take over the Dudley Street property it was necessary for Janlz Constructions to organise insurance, change the certifier and speak with the State government and that a thwarted attempt to take possession was made in June 2004, in consequence of which the notion of taking over the Dudley Street finance was thwarted at an earlier stage than September 2004. That may well be so. The issue is peripheral to the question whether Ziade Investments was insolvent on 12 March 2004 69 Mr Neaf Ziade was not called to explain the financial position of Ziade Investments. The 2004 financial accounts were not provided. Mrs Ziade was not called, nor was her daughter Antoinette who wrote and signed the Ritz Cinema cheques to pay debts. Mr Katehos who was given the task of tidying up the loan books and who was responsible for the preparation of the two mortgage documents was not called. 70 Inferences could be drawn in terms of Dunkel that their evidence would not have assisted the defence. I do not need to draw such inferences to conclude that the only inference, properly open on the evidence as a whole, was that, as a matter of commercial reality, Ziade Investments was insolvent on 12 March 2004. 71 In consequence, the grants of the mortgages were insolvent transactions in terms of the Corporations Act 2001 (Cth), s 588FC. Available relief 72 It follows from the findings I have made that since the grants of the mortgages were insolvent transactions and also uncommercial transactions made within two years of the relation-back day, the transactions were voidable in terms of the Corporations Act 2001 (Cth), s 588FE(3) and the Court may make orders under s 588FF(1). Director-related aspects 73 In view of my above findings it is unnecessary to consider whether the grants of the mortgages constituted unreasonable director-related transactions under the Corporations Act 2001 (Cth), s 588FDA(1). In case I be wrong in my view that the grants of the mortgages were insolvent and uncommercial transactions, I will consider this issue. Mortgages as dispositions 74 The Corporations Act 2001 (Cth), s 588FDA(1)(a)(ii) required the grants of the mortgages to constitute dispositions by Ziade Investments of its property. 75 The Real Property Act 1900, s 56(1) provides that whenever any land or estate or any interest in land under the provisions of the Act is intended to be charged with, or made security for, the payment of a debt, the proprietor shall execute a mortgage in the approved form. A second mortgage is created in the same manner as the first mortgage. Under s 57(1), a mortgage has effect as a security but does not operate as a transfer of the land mortgaged. Thus a mortgagee whether a first mortgagee or a second mortgagee obtains a statutory charge over the mortgaged property. 76 As such, the mortgagee obtains indefeasibility of title. The Real Property Act 1900, s 42(1) provides that the registered proprietor of any estate or interest in land recorded in the Register shall, except in the case of fraud, hold the same absolutely free from other estates and interests that are not recorded. This protection is not limited to the registered proprietor of the fee simple but extends to a registered mortgagee (NRMA Insurance Ltd v Martin (1988) 91 FLR 479). 77 A registered mortgagee, whether first or second, having acquired such an interest, there is no reason why the execution of the document giving rise to that result should not be regarded as a disposition of property within the meaning of the Corporations Act 2001 (Cth), s 588FDA(1)(a)(ii). Indeed, creation of a floating charge has been held to be a disposition by a company of its property (Re Helmar Pty Ltd (in liq) (1992) 8 ACSR 301). 78 In my view, therefore, Mr Porter has made out a case that the grants of the mortgages were dispositions by Ziade Investments of its property. Close associates 79 The statutory provision requires that the dispositions should have been made to close associates of a director of Ziade Investments. 80 As I have indicated, Mr Neaf Ziade was the sole shareholder of Ziade Investments. The mortgages gave Jack Ziade and Jean Ziade a quarter share as joint tenants. The words "tenants in common" also appear on the mortgages and it is unclear in which capacity their quarter share was to be held. But nothing turns on the distinction as the mortgages were discharged after the commencement of these proceedings. 81 Since Jack and Jean Ziade are the father and mother of Neaf Ziade they are close associates of a director of Ziade Investments for the purposes of the Corporations Act 2001 (Cth), s 588FDA(1)(b)(ii). The term "close associate of a director" is defined in s 9 to include a relative of the director, and the term "relative" is defined in the same provision to include a parent. 82 It was argued on behalf of Mr Porter that the mortgages were granted to Welcome Homes, Ritz Cinema, Janlz Constructions on behalf of, or for the benefit of, Jack and Jean Ziade in terms of the Corporations Act 2001 (Cth), s 588FDA(1)(b)(iii). 83 The basis for this argument was that Jack and Jean Ziade were the sole shareholders of Welcome Homes and Ritz Cinema and they, together with Ziade Holdings Pty Ltd, were the only shareholders of Janlz Constructions. 84 Mr Ziade maintained that he and his wife were the only shareholders of Ziade Holdings, but an ASIC company extract showed that a change to members' shareholdings was lodged on 7 March 2005 indicating that Mr and Mrs Ziade held 5 A and B class shares respectively and Neaf Ziade and his siblings, Leo Ziade and Antoinette Ziade, held 400 C, D and E class shares. 85 Each of Welcome Homes, Ritz Cinema and Janlz Constructions held a quarter share in each of the mortgages. 86 So far as Welcome Homes and Ritz Cinema are concerned, I doubt that it could be said that their interests in the mortgages were created on behalf of, or for the benefit of, Mr and Mrs Ziade as the sole shareholders of those companies. In my view, the companies as separate legal entities gained the benefit of the grants of the mortgages in their own right and not for the benefit of their shareholders. 87 I would not have thought that it was the intention of the legislature to include derivative interests constituted by value increases in shares of a company or trust benefited by the transaction. Had that been the intended result of the provision, one would expect the definition of a "close associate of a director" to have been expanded. 88 The second reading speech to the Corporations Amendment (Repayment of Directors' Bonuses) Bill 2002 (Hansard, House of Representatives, Wednesday 16 October 2002, at 7677) does not support such a contention. What the Treasurer said was: "It will also apply to transactions entered into with third parties, where they are made on behalf of, or for the benefit of, either a director or close associate. This will prevent people avoiding the new provisions through restructuring or redirecting transactions." 89 In my view, the benefit held by a third person that will bring a close associate of a director within the statutory provision must be a direct benefit and not a derivative benefit constituted by an increase in value of shares in a company or units in a trust. 90 The same argument applies to the quarter interest of Janlz Constructions. True it is that the shareholders of Janlz Constructions were Mr and Mrs Ziade and Ziade Holdings and the apparent shareholders in Ziade Holdings were Mr and Mrs Ziade and their children. The children being a director of Ziade Investments and his siblings who were his close associates. But, again, I am of the view that the benefit of Janlz Constructions' quarter interest in the mortgages was for it, and it was the benefit to it that might have created some derivative benefit to the shareholders. For the reasons set out above, however, that is too remote to answer the description in the Corporations Act 2001 (Cth), s 588FDA(1)(b)(iii). 91 The test under the Corporations Act 2001 (Cth), s 588FDA(1)(c) is the same as the test for an uncommercial transaction under s 588FB(1). For the reasons already expressed, I am of the view that Mr Porter has succeeded in establishing that requirement. 92 So, if I be wrong in my view that the grants of the mortgages were insolvent and uncommercial transactions and thereby voidable under the Corporations Act 2001 (Cth), s 588FE(3), I am of the view that the creation of the quarter interests in the mortgages in favour of Mr and Mrs Ziade were voidable as unreasonable director-related transactions under s 588FE(6A) as they were entered into within four years before the relation-back day. Conclusion 93 In my view, Mr Porter has established that the grants of the mortgages were voidable transactions, being insolvent and uncommercial transactions entered into within two years prior to the relation-back day in terms of the Corporations Act 2001 (Cth), s 588FE(3). He is entitled to the exercise of discretion by the Court to grant one or other of the orders under s 588FF(1). I will hear the parties on the terms of appropriate orders under that provision. 94 So far as the question whether any debt is owed by Ziade Investments to Mr and Mrs Ziade, Welcome Homes, Ritz Cinema and Janlz Constructions is concerned, I will hear the parties on whether it is appropriate to refer that matter to an Associate Justice or leave it to Mr Porter to determine whether he admits or rejects any proof of debt lodged with him. A dissatisfied person has the right to appeal to this Court under the Corporations Act 2001 (Cth), s 1321. 95 I will also hear the parties on costs. I direct the parties to bring in short minutes orders reflecting my reasons.

Ziade Investments Pty Ltd & Anor v Welcome Homes Real Estate Pty Ltd & Ors

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Judgment (11 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (8)

Cited By (7)