FEDERAL COURT OF AUSTRALIA Cole, in the matter of Total Management (Melbourne) Pty Ltd (in liq) v Golden Arch Waste Systems Pty Ltd [2002] FCA 153 CORPORATIONS – winding up – disposal of assets after winding up – fraudulent intent Corporations Act 2001 (Cth) ss 9, 588FA, 588FE IN THE MATTER OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) ROBERT COLE, AS LIQUIDATOR OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) v GOLDEN ARCH WASTE SYSTEMS PTY LTD, TARERAN PTY LTD, CHRISTOPHER LESLIE STANLEY, PETER JOHN LAW and PATRICK AUTOCARE PTY LTD V 3072 of 2001 FINKELSTEIN J 19 FEBRUARY 2002 MELBOURNE GENERAL DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3072 of 2001 IN THE MATTER OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) BETWEEN: ROBERT COLE, AS LIQUIDATOR OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) and TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) Plaintiffs AND: GOLDEN ARCH WASTE SYSTEMS PTY LTD, TARERAN PTY LTD, CHRISTOPHER LESLIE STANLEY, PETER JOHN LAW and PATRICK AUTOCARE PTY LTD Defendants JUDGE: FINKELSTEIN J DATE OF ORDER: 19 FEBRUARY 2002 WHERE MADE: MELBOURNE THE COURT DECLARES THAT: 1. No agreement exists for the sale by the Second Plaintiff to either or both of the First or Second Defendant of the water treatment plant that is presently located on land owned by the Fifth Defendant ("the Plant"). 2. No agreement exists for the assignment by the Second Plaintiff to either or both of the First or Second Defendant of the reversionary interest under a lease dated 15 February 2000 pursuant to which the plant was leased by the Second Plaintiff to the Fifth Defendant ("the Lease"). 3. No agreement exists between the Second Plaintiff and the Second Defendant pursuant to which the Second Defendant agreed to provide "case management" services to the Second Plaintiff in return for 40% of the payments to be made under the Lease by the Fifth Defendant. 4. The First and Second Defendants received as constructive trustees for the Second Plaintiff the following payments by the Fifth Defendant to the Second Defendant: (a) the amount of $16,830.00 which was received on about 24 August 2001; (b) the amount of $5,610.00 which was received on about 20 September 2001; (c) the amount of $5,610.00 which was received on about 10 October 2001. 5. The following payments to the Second Defendant by the Second Plaintiff constituted voidable transactions under s 588FE of the Corporations Act 2001: (a) the amount of $924.00 paid on about 15 March 2001; (b) the amount of $2,274.80 paid on about 25 May 2001. THE COURT ORDERS THAT: 6. Leave be granted to join Total Management (Melbourne) Pty Ltd (In Liquidation) as Second Plaintiff. 7. The first and Second Defendants pay to the Second Plaintiff the amount of $28,050.00 in performance of the trust declared in paragraph 4 hereof. 8. The Second Defendant pay to the First Plaintiff an amount equal to the payments referred to in paragraph 5 hereof, namely $3,198.80. 9. The First and Second Defendants pay the Plaintiffs' costs on an indemnity basis. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3072 of 2001 IN THE MATTER OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) BETWEEN: ROBERT COLE, AS LIQUIDATOR OF TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) and TOTAL MANAGEMENT (MELBOURNE) PTY LTD (IN LIQUIDATION) Plaintiffs AND: GOLDEN ARCH WASTE SYSTEMS PTY LTD, TARERAN PTY LTD, CHRISTOPHER LESLIE STANLEY, PETER JOHN LAW and PATRICK AUTOCARE PTY LTD Defendants JUDGE: FINKELSTEIN J DATE: 19 FEBRUARY 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Total Management (Melbourne) Pty Ltd is in liquidation. It was wound up by order of the Supreme Court on 14 June 2001. Mr Cole was appointed as the company's liquidator. This action is brought by him. It arises out of dealings with the only asset of the company, a waste water treatment plant which the company acquired in February 2000 for $100,000. It was leased to Patrick Autocare Pty Ltd for a term of five years at a monthly rental of $5,100. By an agreement which bears the date 27 April 2000 the company purported to sell the plant and assign the reversion of the lease to Golden Arch Waste Systems Pty Ltd, the first defendant, and Tareran Pty Ltd, the second defendant, for $61,200. That sum was to be paid by appropriating the next twelve monthly lease payments in full satisfaction of the purchase price. In July 2000, at least according to certain company records, the company had resolved to appoint Tareran to act as "case managers" in respect of certain litigation. The fee for that arrangement was "40 per cent of the income stream" derived under the lease. By these two transactions, if valid, the company has disposed of its only asset. The liquidator challenges the validity of the transactions on a variety of grounds. 2 The principal basis of the attack is that the transactions are void because they occurred after the liquidation of the company, and the documents that purport to show that the transactions had been entered into at an earlier time are false. If the liquidator is not successful on this ground, he says that the arrangements are uncommercial transactions and can be set aside under s 588FE(3) of the Corporations Act 2001 (Cth). The liquidator seeks appropriate declaratory relief, orders for the recovery of any of the lease payments which found their way to the first or second defendant, and other relief. 3 When this action was begun late last year, the liquidator had his suspicions that the two arrangements were not genuine. He had taken possession of the books and records of the company, such as they were, and there was nothing in them that suggested that either of the agreements had been entered into. But suspicion is not proof. To obtain evidence to see whether his suspicions were well founded, the liquidator served a subpoena upon Kelly & Chapman, solicitors, who had acted for the company before its liquidation. Initially the solicitors objected to the production of their documents on the ground of legal professional privilege. After taking advice, the solicitors changed their position, appreciating that the person who had subpoenaed the documents, the liquidator, controlled the client whose privilege the solicitors were trying to protect. In this way the liquidator obtained possession of the solicitors' file. It turned out to be very revealing. 4 I will not summarise all the documents that appear on the file. Most are either extracted or explained in the affidavit of Mr Witt, the liquidator's solicitor. What is clear from the documents is that the solicitor at Kelly & Chapman who was handling matters on behalf of the company, along with the former directors of the company, embarked on a scheme to make it appear that the company had disposed of its principal asset before liquidation, when they knew this had not in fact taken place. The scheme was very simple. The contract of sale was prepared, as it turned out shortly after the date of liquidation, whereupon it was signed by the company and the purchasers (the first and second defendants) and backdated to make it appear that the agreement had been executed before liquidation. The documents suggest that the contract was in fact signed on 5 July 2001. On that day the solicitor asked for the following instructions: "The only date that I need your advice on is the settlement date." A file note written on the following day, 6 July 2001, records the instructions that were received. The file note reads in part: "The date of the sale was to be 12 April 2000. I said that the contracts could be collected at any time from this office as they were now ready to be signed by the purchasers." 5 The contract of sale is not the only document that bears a false date. The solicitor also prepared a letter to be sent to Patrick Autocare advising it of the assignment. This letter was also written after the liquidation of the company and backdated before liquidation, no doubt to give credence to the claim that was to be made that the company had disposed of its asset before liquidation. 6 In view of these documents, and others that are outlined in Mr Witt's affidavit, the inescapable conclusion is that at the date of its liquidation, the company still owned the waste water treatment plant, and the reversionary interest under the lease, and that the documents which were prepared to show that these assets had been sold, amount to nothing less than a fraudulent attempt to keep the company's assets out of the hands of its liquidator. 7 In these circumstances, it will not be necessary for me to consider whether, if the sale transaction had in fact been entered into before liquidation, it could survive s 588FE(3). That said, I cannot avoid making the comment, in passing, that it would be difficult to justify as a commercial transaction an arrangement under which a right to receive approximately $173,718 net after expenses and tax over a period of around four years, could rationally be assigned for $61,200 payable over one year. 8 The evidence shows that the tenant made rental payments totalling $28,050 to Golden Arch and Tareran. In virtue of the findings that I have made, upon receipt of the rent those companies became constructive trustees of the monies for the company. It will be necessary to add the company as a plaintiff so that a declaration as to the existence of this trust can be made, as well as an order requiring Golden Arch and Tareran to pay to the company the amounts collected. 9 I now turn to the attack on the so-called "case management agreement". The only record of this agreement appears in the minutes of the meeting of directors of the company purportedly held on 11 July 2000. The relevant resolution reads: "It was resolved to appoint Tareran Pty Ltd to act as Case Managers for this matter. A fee of 40% of income stream was approved to increase the equity of the Lease Contract with TDG Autocare to Tareran Pty Ltd under the existing Memorandum of Understanding adopted in April 2000. This would provide an assignment of 45% of the gross income to Tareran Pty Ltd for the Lease of 'Treatment Plant' to TDG Autocare Pty Ltd." 10 The minutes which record this resolution were also prepared after liquidation. They were prepared by the same solicitor who arranged to backdate the contract of sale. On the evidence that has been tendered, I am satisfied that the solicitor was not instructed to prepare the minutes on the basis that they were to record a resolution that had been passed at an earlier time but which had not been formally documented. The file notes maintained by the solicitor make it clear that he was acting on the understanding that the company had not disposed of any of its rights under the lease at the time of liquidation. If the solicitor had received other instructions, there would be a note to that effect. And there is no such note. Thus, to the extent that the minutes purport to be evidence of a disposition of "40% of [the] income stream" from the lease in consideration for the "case management" agreement, I reject them as such. No other evidence of such an agreement exists. 11 The next agreement which is attacked is what is described as a "memorandum of understanding agreement". This agreement was apparently entered into on about 6 April 2000. It records that the company had appointed Tareran to "manage the administration of the lease rental contract" for a "consulting fee, being five per cent (5%) of the total gross sum obtained from [the tenant]". 12 The liquidator contends that this agreement was not made in April 2000. On the other hand, the company appears to have made payments of approximately $18,000 under some arrangement with Tareran and so I am not in a position to make a finding that no arrangement was entered into. To the contrary, there must have been some arrangement between the company and Tareran to explain the payments that were made to it at various times between August 2000 and the date of the liquidation. 13 In these circumstances the liquidator seeks to recover the amounts paid as unfair preferences. As to the meaning of "unfair preference" see s 588FA. According to s 588FE(2) payments are recoverable as unfair preferences if made by a company that is insolvent in favour of a creditor during the six months ending on the date of the winding up. The period may be extended to four years if the unfair preference is in favour of a related company. 14 Having regard to the liquidator's evidence as to the insolvent position of the company in the six months before liquidation, and to the documentary evidence which indicates that Tareran was a creditor in respect of the services that it rendered, as its practice appears to have been to render an account for those services after the work has been performed, the payments during the six month period do constitute unfair preferences as defined. The only question is whether the liquidator can recover payments that were made earlier than six months before the winding up began. This depends on the liquidator establishing that the company and Tareran are related. The relationship is said to arise because each company is allegedly accustomed to act in accordance with the instructions or wishes of one Mr Moss: see the definitions of "related entity" and "director" in s 9. 15 Although I am prepared to concede that the evidence hints at the possibility that the directors of both the company and Tareran were accustomed to act under the direction of Mr Moss, the evidence is not sufficient to justify a finding to that effect. Accordingly the liquidator is only entitled to recover as preferences the amounts paid to Golden Arch and Tareran after 14 December 2000. According to the liquidator's affidavit those amounts total $3,198.80. There will be an order to that effect. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 25 February 2002 Counsel for the Plaintiffs: Mr J Moore Solicitor for the Plaintiffs: Findlay Arthur Phillips No appearance for First and Second Defendants. Counsel for the Third Defendant: Mr R Greenberger Solicitor for the Third Defendant: L K Donaldson & Co Fourth Defendant in person. No appearance for Fifth Defendant. Date of Hearing: 18 and 19 February 2002 Date of Judgment: 19 February 2002