IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 3321 of 1997 BETWEEN: LAWRENCE CHENG Applicant AND: BRENDAN JOHN MARCHESI (in his capacity as Liquidator of Goodluck Pty Ltd (In Liquidation) ACN 054 495 386 Respondent JUDGE: RYAN J DATE: 5 june 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT This is an application under s 1321 of the Corporations Law in which the applicant is seeking to challenge the rejection of his proof of debt by the respondent who is the liquidator of Goodluck Pty Ltd ("the company"). The applicant, a shareholder in the company, alleges that on 13 July 1995, after the company had ceased trading, an agreement was reached between himself and the other four shareholders, all of whom were directors of the company, to sell the non-current assets of the company to the applicant. At that time the company's current assets in the form of cash at the bank were not sufficient to satisfy the liabilities owed by it to the shareholders on their loan accounts. The applicant alleges that it was agreed that he would make payments to the other shareholders on behalf of the company to discharge its liability for the amount standing to the credit of each of those loan accounts. The applicant claims that it was also agreed that he should pay further sums to the other shareholders by way of a notional distribution of a surplus created in the company's accounts upon the sale of its assets to the applicant. It was alleged that, in return for these payments by the applicant, each of the other shareholders agreed to transfer his orits share in the company to the applicant and to take no further part in the company's business. The applicant now seeks to prove in the winding up of the company for a debt claimed to be due to him from the company. That debt is said to be composed of two elements; first, the alleged payments made by him to the shareholders on behalf of the company to satisfy its liabilities on the shareholders' loan accounts ("the first debt") and, secondly, the alleged payments made by him to the shareholders by way of a notional distribution of surplus upon the company's accounts following the sale of its assets to the applicant ("the second debt"). Mr Squirrell of Counsel for the respondent submitted that, while the liquidator as late as 11 September 1996 had acknowledged that the first debt could be characterised as a provable debt against the company, the liquidator was entitled to resile from that view upon the presentation of further evidence to him. It was further submitted by Mr Squirrell that, in any event, the absence of proper books of account and other evidence in support of the applicant's contention, and the existence of evidence of the transfer to the applicant of the other shareholders' shares in the company, supported the inference that any agreement between the shareholders was solely as between them and did not create, in favour of the applicant, a debt provable against the company. I accept the suggestion made by Mr Glacken of Counsel for the applicant that the Court should confine itself to indicating the legal principles to be applied in resolving the competing contentions of the applicant and the liquidator and leave for later determination the ascertainment of the amount of the debt (if any) due to the applicant which should be admitted to proof. In my view, the evidence, limited though it is, supports the inference that in July 1995 the company had current assets of $265,000. It is a further appropriate inference that the company appropriated those funds in the first instance in payment of the amounts owing on the shareholders' loan accounts. However, it seems on the evidence that the company's liability on those loan accounts would not thereby have been extinguished. Accordingly, to the extent that the other shareholders, as creditors of the company, accepted further payments from the applicant by way of discharge of the balance due to them from the company under their respective loan accounts, it follows that those further payments were made by the applicant on behalf of the company. Thus, it follows that the applicant not only remains a creditor of the company to the extent of any outstanding liability of the company in respect of his own loan account, but also, in my view, became a creditor of the company to the extent that he discharged out of his own funds the liability of the company which had been represented by the loan accounts of the other shareholders before that liability was extinguished. However, I do not consider that the second debt can be characterised as a debt provable against the company. Such evidence as there is suggests that the applicant agreed with the other shareholders, except Mr Cheung, that payments made to them by him in excess of the amounts required to repay their loans to the company were in consideration of the transfer to the applicant of their rights and interests in the company as shareholders. That is supported by the fact that their shares were transferred to him. That had the effect of increasing the applicant's proprietorship account in the books of the company to the exclusion of the equity formerly attributed to the other shareholders. However, on this analysis, the so-called "second debt", unlike the first debt, is not provable in the winding up in parity with debts due to other unsecured creditors. The parties should prepare and submit draft minutes of order to give effect to this ruling, including a reservation of liberty to apply in the event of a failure to agree on the amount of the debt for which the applicant should be allowed to prove in the winding up as an unsecured creditor. The draft minutes should be accompanied by each party's written submissions as to the order in respect of costs which should be included in the order of the Court in its final form. I certify that this and the preceding two (2) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: Counsel for the Applicant: Mr S A Glacken Solicitor for the Applicant: Coltmans Price Brent Counsel for the Respondent: Mr R G Squirrell Solicitor for the Respondent: Deacons Graham & James Date of Hearing: 9 February 1998 Date of Judgment: 5 June 1998