Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96

DISTRICT COURT OF QUEENSLAND CITATION: Andrew Fielding as Liquidator of Lyngray Developments Pty Ltd v Dushas & Anor [2012] QDC 96 PARTIES: ANDREW FIELDING AS LIQUIDATOR OF LYNGRAY DEVELOPMENTS PTY LTD (IN LIQUIDATION) ACN 084 052 371 (Plaintiff) v SASHA DUSHAS (First Defendant) and SOTIRI THOMAS DUSHAS (Second Defendant) FILE NO/S: 3517 of 2008 PROCEEDING: Application ORIGINATING COURT: District Court of Queensland DELIVERED ON: 11 May 2012 DELIVERED AT: Southport HEARING DATE: 27 March 2012 JUDGE: Newton DCJ ORDER: The plaintiff’s claim against the first defendant should be dismissed. CATCHWORDS: Corporations – external administration – voidable transactions – uncommercial transactions. COUNSEL: Mr T Pincus for the plaintiff Mr C D Coulsen for the first defendant SOLICITORS: MacGillivrays for the plaintiff Rudkin Hitchcock Grant Lawyers for the first defendant. [1] In this matter the plaintiff claims: 1. a declaration that, pursuant to s.588FE(6A) of the Corporations Act 2001 (“the Act”), the transactions between the plaintiff and first defendant and second defendant for the period between and including 5 June 2003 to 12 September 2005 are voidable; -- 1 of 8 -- 2 2. an order pursuant to s.588FF(1)(a) of the Act; alternatively s.588FF(1)(c), that the first defendant and second defendant pay to Lyngray Developments Pty Ltd (in liquidation) an amount of $59,758; 3. interest; and 4. costs. [2] Mr Fielding was appointed liquidator of Lyngray Developments Pty Ltd (“the company”) on 25 February 2007 by order of the Federal Court. The application to wind up the company was filed on 12 December 2006. This is the relation back date for the purposes of this proceeding. Lynette Gray (“Ms Gray”) was the sole director of the company from 25 August 1998 to 25 January 2007. The first defendant (“Mrs Dushas”) is Ms Gray’s daughter. The second defendant (“Mr Dushas”) is the former husband of Mrs Dushas. [3] For the purposes of this proceeding payments were made by the company between 11 April 2003 and 12 December 2005 to a mortgage account held with ANZ bank by Mr and Mrs Dushas in the amount of $59,758. [4] The mortgage account was for repayment of a mortgage over property known as 5453 Merion Terrace, Sanctuary Cove, Hope Island (“the property”). The property was purchased by Mr and Mrs Dushas on 7 March 2001 for $425,000. Mr Dushas subsequently transferred his share of the property to Mrs Dushas as part of their separation settlement. [5] The property was purchased on 15 November 2005 by Ms Gray and her partner Ian Crawford (“Mr Crawford”) for $550,000. The property was sold by Ms Gray and Mr Crawford to an unrelated purchaser on 26 June 2006 for $640,000. [6] By letter dated 25 August 2008 the solicitors for Mrs Dushas informed the liquidator that Ms Gray and Mr Crawford occupied the property as tenants during the period of the relevant payments whilst it was owned by Mrs Dushas (and Mr Dushas, where applicable). This was subsequently confirmed in evidence by Ms Gray and Mrs Dushas. [7] By letter dated 23 October 2008 the solicitors for Mrs Dushas informed the liquidator that the funds deposited into the mortgage account were rental payments for Ms Gray and Mr Crawford’s occupation of the property and were not regular because they often could not afford to make the payments. There appears to be no documentary evidence of any lease agreement, the arrangement between Ms Gray and Mrs Dushas being verbal only. [8] In a questionnaire (undated) completed by Ms Gray for the liquidator, it is stipulated that the property was leased by Ms Gray to the company and that the company ceased to trade on, or around, 1 April 2005. [9] A property search by the liquidator reveals that the property was specified: (a) as the principal place of business of the company only from 31 January 2005; and (b) as the registered office of the company only from 22 February 2005. -- 2 of 8 -- 3 [10] The liquidator states that he cannot, on his examination of the books and records of the company, discern any coherent account of the relevant payments consistent with there having been anything other than payments by the company to meet mortgage obligations of Mrs Dushas and/or payment of rent for the use of the property by Ms Gray and Mr Crawford. [11] In her evidence Mrs Dushas confirmed that Ms Gray was her mother and that she married the second defendant on 12 December 1997. The couple separated on 27 December 2001. At the time of their marriage Mr and Mrs Dushas had two properties at Sanctuary Cove, namely: (a) the family home at 5453 Merion Terrace, Sanctuary Cove (“Merion Terrace”); and (b) an investment property at 5326 Marine Drive North, Sanctuary Cove (“Marine Drive North”). [12] According to Mrs Dushas, she experienced difficulty in servicing the mortgages on both properties following the separation from her husband. In approximately June 2002 Mrs Dushas discussed the situation with her mother and was subsequently informed that Ms Gray and Mr Crawford were interested in purchasing the property at Merion Terrace, however they would not be in a position to do so for a period of approximately six months. [13] An agreement was reached with Ms Gray and Mr Crawford whereby: (a) Mrs Dushas would move from Merion Terrace into Marine Drive North; (b) Ms Gray and Mr Crawford would move into Merion Terrace and would pay rent to Mrs Dushas until such time as they were in a position to be able to purchase the property; (c) Mrs Dushas agreed with Ms Gray and Mr Crawford that the rent to be paid by them for Merion Terrace would be the same amount as the mortgage repayments that she was required to make on the property ($2,400 per month); (d) Ms Gray and Mr Crawford were to pay this rent directly into the mortgage account. [14] Mrs Dushas confirmed that her mother and Mr Crawford moved into Merion Terrace and commenced paying rent directly into her mortgage account. She claimed to have been unaware of the exact manner by which Ms Gray would deposit rent into the mortgage account other than by checking occasionally that the payments were being made. The erratic nature of the rent payments was overlooked by Mrs Dushas as she wished to assist her mother in any way she could. [15] A contract for the sale and purchase of the Merion Terrace was entered into on 15 November 2005. The contract settled on 30 November 2005. [16] Ms Gray swore an affidavit (on 22 July of an undisclosed year but probably 2007) in relation to proceedings between herself as defendant and the Deputy Commissioner of Taxation. She states that she incorporated Lyngray Developments Pty Ltd on 25 August 1998 and that she was the inaugural director and secretary of the company. Ms Gray set up the company at the request of Mr Crawford to enable him to carry on his chemical development business through a corporate vehicle. -- 3 of 8 -- 4 [17] Ms Gray claimed that although she was formally the sole director and secretary of the company, she played no active role in the management and operation of the company other than as a signatory to the company’s statutory returns and bank accounts. She never asked Mr Crawford about the details of the business but was content to entrust Mr Crawford with the management of the company’s business. Ms Gray stated that she did not recall ever meeting with either the accountant (Russell Maddox of Casey’s Consulting, a division of P B Irwin Pty Ltd, chartered accountants) or the bookkeeper, personally, to discuss company business or taxation matters, but did speak generally, from time to time, to the bookkeeper when the bookkeeper came to Ms Gray’s house to do the accounts. [18] According to Ms Gray she played no part in keeping company records or inputting data into the accounts package. Mr Crawford kept all the company related cheque stubs and gave the data to the bookkeeper for data processing. Furthermore, Mr Crawford drew the company cheques in payment of company expenses and presented the cheques to Ms Gray for signing. This arrangement was said to have continued unchanged throughout the period between 25 August 1998 and 25 January 2007 (when the company was placed into liquidation). [19] The only oral evidence adduced in this Court came from Mrs Dushas and Ms Gray. Mrs Dushas stated that she had visited Merion Terrace whilst her mother and Mr Crawford were living in it. She observed that the premises were being used for company related work. There was an office in a small alcove off the kitchen containing a desk, fax and computer setup. The garage was used as a storage for beeswax products and the dining room was used for packaging. [20] Ms Gray was shown a bundle of cheque butts and identified only two as having been completed by herself. These butts related to cheque payments by the company into the mortgage account of Mr and Mrs Dushas. She was then shown 16 pages of photocopies of cheques and again confirmed that they were in respect of payments from the company to the mortgage account. All of them had been signed by Ms Gray but none of the details had been completed by her. In each case Mr Crawford had filled in the cheques and Ms Gray had signed it. The cheques were then taken by Ms Gray to Mrs Dushas’ bank and deposited into the mortgage account directly. They were not given to Mrs Dushas. [21] Ms Gray stated that she had no records showing transactions prior to 1 July 2004. On that date, according to the General Ledger (Detail) of the company advanced by way of a director’s loan an amount of $9,938.68. By the end of February 2006 the loan balance had increased to $219,277. Supermarket costs, pharmacy expenses, purchases of perfume, restaurant costs, drawings, ATM withdrawals, hairdressing charges, nursery purchases, doctors’ accounts, utility bills and, of course, payments to the mortgage account of Mr and Mrs Dushas appear regularly in the ledger. It is clear that Ms Gray treated the director’s loans from the company as a substitute for salary or wages. [22] The evidence before this Court, however, is entirely silent as to the terms and conditions attaching to these loans. How these were to be repaid, over what period and at what interest rate have not been explained. Ms Gray certainly could offer no assistance in this regard. It may be inferred that the payments itemised in the general ledger of the company were payments for day-to-day living expenses of Ms Gray which were paid through the company. -- 4 of 8 -- 5 [23] Indeed, this inference is supported by the evidence of Ms Gray contained in her affidavit sworn on 3 November 2011. However, Ms Gray places all the responsibility for the situation at the feet of Mr Crawford: “At the time when the company was trading, Ian told me that rather than taking a regular wage from the Company, we would run many of our personal and household expenses through the Company accounts. Ian explained to me that the accountant would deal with these appropriately through the books and records of the Company as either wages, drawings or loans.” [24] The general ledger was acknowledged by Ms Gray to be consistent with her understanding of the arrangement at the time as it was explained to her by Mr Crawford. Those transactions which appear under the heading “Director’s Loans” reflect the types of personal and household expenses made by Ms Gray using company funds. This was consistent with her instructions from Mr Crawford. [25] With respect to the purchase of Merion Terrace, Ms Gray stated that a verbal agreement was reached between herself and Mr Crawford and Mrs Dushas whereby Ms Gray and Mr Crawford would move into Merion Terrace and pay rent to Mrs Dushas until such time as they were in a position to purchase the property (hopefully in six months time). The rent to be paid was to be equivalent to the existing mortgage payments. [26] Merion Terrace was used by Ms Gray and Mr Crawford as their family home as well as premises from where the company operated its business. All of the company administration was said to have been predominantly carried out at the house. [27] The 22 payments made by the company to the mortgage account of Mr and Mrs Dushas between 5 June 2003 and 12 September 2005 are the subject of an application by the liquidator for repayment on the basis that each is voidable as an unreasonable director-related transaction. The term “unreasonable director-related transaction” is relevantly defined in s.588FDA of the Corporations Act 2001 as follows: “(1) a transaction of a company is an unreasonable director- related transaction of a company if, and only if: (a) the transaction is: i. a payment made by the company; …… (b) the payment… is, or is to be, made to: i. a director of the company; or ii. a close associate of a director of the company; or iii. a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and (c) it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to: i. the benefits (if any) to the company of entering into the transaction; and ii. the detriment to the company of entering into the transaction; and iii. the respective benefits to other parties to the transaction of entering into it; and -- 5 of 8 -- 6 iv. any other relevant matter. … (3) a transaction may be an unreasonable director-related transaction because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; …” [28] Section 588FE(1)(b) of the Act provides that a transaction of the company may be voidable because of s.588FE(6A) of the Act, if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003. That Act commenced on 11 April 2003. [29] Section 588FE(6A) of the Act provides that a transaction is voidable if: (a) it is an “unreasonable director-related transaction” of the company; and (b) it was entered into, or an act was done for the purposes of giving effect to it, during (relevantly) the four year period ending on the “relation-back day”. [30] It may be accepted that as the company was wound up in insolvency, by s.513A of the Act the winding up is taken to have begun or commenced on the day when the winding up order was made. Consequently, by the definition of “relation back day” in s.9 of the Act, that day is the date on which the application for winding up was filed; 12 December 2006 (see paragraph 11 of the affidavit of the liquidator, Mr Fielding). I accept that, despite the four year period referred to in s.588FE(1)(b) for the purpose of this proceeding, a transaction may be voidable pursuant to that provision if it occurred between 11 April 2003 and 12 December 2006. Each of the 22 payments made by the company into the mortgage account of Mr and Mrs Dushas has occurred within that period, and therefore the payments are voidable if they are unreasonable director-related transactions. [31] Section 588FF(1) relevantly provides as follows: “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 the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; … (b) an order requiring a person to pay to the company, an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction; …”. [32] Section 588FF(4) of the Act provides as follows: “If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the Court may make orders under ss.(1) only for the purposes of recovering for the benefit of the creditors of the company the difference between: -- 6 of 8 -- 7 (a) the total value of the benefits provided by the company under the transaction; and (b) the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in para 588FDA(1)(c).” [33] The applicant is not required to prove insolvency. Good faith and reasonable grounds (the defence provided by s.588FG(2) of the Act) does not apply where the transaction in question is an unreasonable director-related transaction. [34] With respect to the test in s.588(FDA)(1)(c) of the Act, an objective standard is applied in determining whether a transaction is uncommercial. The four criteria to be considered, i.e. the benefits enjoyed by the company, the detriment to the company, the respective benefits others received and any other relevant matters, are not considered in a vacuum but by reference to the circumstances of the company including the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors. For a transaction to be uncommercial it must result in “the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice”, or where “the consideration… lacks a commercial quality”. See Capital Finance Australia Limited v Tolcher [2007] FCAFC 185 per Gordon J. [35] The Court should examine the transaction in question very closely when considering the commerciality where that transaction involves a relative of a company’s director. See McDonald v Hanselmann [1998] 144 FLR 463 at 470. [36] I accept that the 22 impugned payments were each made by the company (s.588FDA(1)(a)). Each payment was made to the respondent’s mortgage loan account and therefore to a close associate of a director of the company (s.588(1)(b)(ii)). Ms Gray was a director for the entire relevant period and the first respondent (Mrs Dushas) is her daughter. Section 9 defines “close associate” of a director to include a relative of the director, and “relative” to include a person’s child. [37] In determining whether it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, the benefits and detriment to the company must be identified. The applicant points to the lack of any benefit to the company from the payment of the mortgage of its director’s daughter without any agreement (or suggestion of a prospect) of repayment. However, the respondents contend that although the director of the company received a benefit in that she had a house in which to live, the company also gained an asset, being the debt owing to it by its director. Accordingly, it is said, in paying money to the respondents the company suffered no detriment in terms of s.588FDA(1)(c) of the Act. [38] I am extremely suspicious of the manner in which Ms Gray and Mr Crawford used the company account for all types of personal and living expenses. Precisely when a loan account was established to debit such expenses against their names remains unclear. Similarly, the evidence is silent as to the terms and conditions of repayment of the loans. Although the identity of the respondent’s accountant was known to the applicant, no attempt was made to adduce evidence from that person -- 7 of 8 -- 8 which may well have enabled a more complete understanding of the financial relationships between the company and Ms Gray. [39] The respondents note that it is not suggested by the applicant that the amount of $2,400 per month was an overpayment of rent or that that amount did not otherwise reflect something more than the market value for the rental of the Merion Terrace property. Nor does the liquidator contend that the payments were an undervalued transaction or one intended to defeat creditors. In accepting the force of these observations it nevertheless remains apparent that the company did suffer a detriment in the loss of the funds used to make the payments into the respondents’ mortgage account. [40] The relevant date for assessing the transaction in terms of any detriment to the company is the date it was entered into and not the date of liquidation or the date of hearing (s.588FDA(1)(c)(ii) of the Act). There is no evidence from the liquidator that in 2002 (and thereafter) the company was insolvent or almost insolvent. Nor is there any evidence that during the relevant period Ms Gray and Mr Crawford could not have repaid the debt otherwise owing to the company on the loan account. Many of these gaps in the evidence may well have been avoided had the company’s accountant testified as to the true position of the company at the relevant time. [41] The power found in s.588FF(1) of the Act can only be used to make orders for the purposes of recovering for the benefit of the creditors of the company, the difference between: (a) the total value of the benefits provided by the company under the transaction; and (b) the value (if any) that it may have expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in this paragraph, s.588(1)(c). [42] I accept the submission of the first defendant that it is not unreasonable for a person in the company’s circumstances to lend money to its directors to pay rent on a residence, provided that a loan account is raised against the directors. The difficulty in this case lies in determining whether (and under what conditions) a loan account was raised against Ms Gray. If Ms Gray had been required by the terms of a loan account to repay monies sourced from the company’s account, then it would be the case that there existed no difference in value between the benefits provided by the company and the value that the company would have provided having regard to the matters in s.588FDA(1)(c) of the Act. [43] It is regrettable that the liquidator was unable to recover monies from Ms Gray because of her bankruptcy. However, in my view it is not appropriate in this case to use the provisions of s.588FDA of the Act to recover monies from Mrs Dushas for the reasons expressed above. The plaintiff’s claim against the first defendant should be dismissed. I will, if required, receive submissions from the parties with respect to costs. -- 8 of 8 --