FEDERAL COURT OF AUSTRALIA Coshott v Prentice [2015] FCA 1224 Citation: Coshott v Prentice [2015] FCA 1224 Appeal from: Coshott & Anor v Prentice [2015] FCCA 241 Parties: RONALD MICHAEL COSHOTT and FEWIN PTY LIMITED v MAXWELL WILLIAM PRENTICE File number: NSD 786 of 2015 Judge: JAGOT J Date of judgment: 2 November 2015 Catchwords: PRACTICE AND PROCEDURE – whether primary judge made finding that was not open on the evidence – primary judge erred – leave granted to adduce fresh evidence on appeal BANKRUPTCY AND INSOLVENCY – whether assignment of debt constituted a sham transaction – insufficient evidence to establish a sham – primary judge erred Legislation: Bankruptcy Act 1966 (Cth) ss 34A(1), 64ZB(8) Cases cited: Commercial Union Assurance Co of Australia Limited v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Coshott v Prentice [2015] FCCA 241 Zaccardi v Caunt [2008] NSWCA 202 Date of hearing: 2 November 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 29 Counsel for the Appellants: Mr A Cheshire SC Solicitor for the Appellants: Martin Place Lawyers Counsel for the Respondent: Mr JT Johnson Solicitor for the Respondent: O'Neill Partners Commercial Lawyers incorporating Sally Nash & Co IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 786 of 2015 ON APPEAL FROM THE FEDERAL CIRCUIT COURT OF AUSTRALIA BETWEEN: RONALD MICHAEL COSHOTT First Appellant FEWIN PTY LIMITED Second Appellant AND: MAXWELL WILLIAM PRENTICE Respondent JUDGE: JAGOT J DATE OF ORDER: 2 NOVEMBER 2015 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The parties confer in light of the oral reasons for judgment delivered by Jagot J on 2 November 2015 and within 7 days submit agreed orders in accordance with those reasons. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 786 of 2015 ON APPEAL FROM THE FEDERAL CIRCUIT COURT OF AUSTRALIA BETWEEN: RONALD MICHAEL COSHOTT First Appellant FEWIN PTY LIMITED Second Appellant AND: MAXWELL WILLIAM PRENTICE Respondent JUDGE: JAGOT J DATE: 2 NOVEMBER 2015 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an appeal from the decision of the Federal Circuit Court of Australia in Coshott v Prentice [2015] FCCA 241 under the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). There are two primary issues on the appeal and a subsidiary issue relating to costs, which is dependent upon the resolution of the two primary issues. The respondent has also filed in court today a notice of contention to which no objection is taken, the relevant issue raised in the notice of contention being, effectively, alive on the appeal in any event. 2 The first issue that needs to be resolved relates to the primary judge's conclusion in respect of a debt said to be owed by the bankrupt to the entity B&W Windows Pty Ltd. In his reasons for judgment, the primary judge said this: [53] The position in relation to the debts claimed by Voits Holdings and B&W Windows is complicated although the evidence produced at trial provided some clarification. The ASIC records show that B&W Windows was a previous name of Voits Holdings. Voits Holdings went into liquidation. It has since been deregistered. The liquidator of Voits Holdings signed the assignment to Fewin and I accept that the assignment was effective. [54] It is not entirely clear whether a separate debt was owed to B&W Windows. The assignment document was signed by a director, Mr Adrian Voits. The applicants submit that B&W Windows was in fact a different company to Voits Holdings and there is no evidence that it was ever in liquidation. Counsel for the applicant in closing submissions put to me that different company numbers were used but I have been unable to verify that from the ASIC records. The only evidence to support that submission is the deeds of assignments themselves. The Voits deed identifies the company by its company number which is typewritten and corresponds with the ASIC record. The B&W Windows deed identifies the company by a different company number which is handwritten and does not correspond with the ASIC record. Another handwritten amendment to the deed is verified by the parties to the deed signing it. The handwritten company number is unverified and it is impossible to tell whether it was an amendment and, if so, when the amendment was made. I prefer the ASIC records to the evidence of the deeds and I find that only one legal entity was involved. [55] The proofs of debt by the company, under its different names, were signed by two different legal firms. The two claims were admitted by Mr Burke. To the extent that he properly admitted the proof of B&W Windows, following the deregistration of the company by operation of s.601AD of the Corporations Act, that claim now vests in ASIC. I find that Mr Voits had no power to give an assignment as the company was then in liquidation. I find that there was no effective assignment of any debt from B&W Windows to Fewin. 3 It will be apparent from these paragraphs that the primary judge's rationale for determining that no separate debt was owed to B&W Windows Pty Ltd is that his Honour preferred what he described as the "ASIC records", with the consequence that he concluded that "only one legal entity was involved", that is Voits Holdings Pty Ltd. 4 Leaving aside for the moment an interlocutory application filed by the appellants for leave to adduce fresh evidence, I am satisfied that the finding made by the primary judge at [54] of his reasons was not open on the evidence. This is because the only matter on which his Honour relied to reach the view that there was only one legal entity involved was the ASIC records. The only ASIC records in evidence constituted a company search for Voits Holdings Pty Ltd. The company search disclosed that Voits Holdings Pty Ltd had used the name B&W Windows Pty Ltd from 29 June 1990. However, it also showed that from 22 December 2006 the company was known as Voits Holdings Pty Ltd. The other facts before the primary judge were that the proof of debt on behalf of B&W Windows Pty Ltd was registered on 4 December 2008. That is almost two years after the company began to use the name Voits Holdings Pty Ltd. 5 Accordingly, the ASIC records did not constitute evidence that there was only one legal entity as the primary judge found. To the contrary, the ASIC records on which the primary judge relied proved only that for a period of time up to but not after 2006 the company, Voits Holdings Pty Ltd, used the name B&W Windows Pty Ltd. Otherwise, all of the evidence pointed to the existence of two separate companies. This included the B&W Windows Pty Ltd proof of debt, which set out a different ABN from the proof of debt of Voits Holdings Pty Ltd. It also included the fact that the B&W Windows Pty Ltd proof of debt had a different postal address from the Voits Holdings Pty Ltd proof of debt. It included as well the fact that the deeds of assignment from B&W Windows Pty Ltd and Voits Holdings Pty Ltd to Fewin Pty Ltd each contained different corporate reference numbers which matched the relevant proofs of debt. 6 Although I accept that the respondent had put to the primary judge that there was confusion about this issue and that it should be found that the two companies were one and the same entity, it is not the case that the ASIC records could be "preferred" over the other evidence, given that the ASIC records did not themselves prove anything to the contrary of the other evidence. As such, and even leaving aside the application for leave to adduce fresh evidence, I am satisfied that at [54] the primary judge made a finding that was not open on the evidence which is amenable to review on appeal because it demonstrates error. 7 I also consider that the application for leave to adduce fresh evidence should be granted. The affidavit in support of that application explains the failure to adduce the evidence before the primary judge as confusion on the part of the legal representatives for the appellants and mere oversight. While that kind of explanation may not be satisfactory in some cases, in the present case what has to be taken into account is that it is clear from the affidavit of Bruce Hocking, solicitor, in support of the application for leave to adduce fresh evidence that the confusion and oversight which resulted in the appellants not tendering a company search for B&W Windows Pty Ltd did not involve any deliberate forensic decision. Indeed, confusion and oversight seems to be the only possible reason why a company search for B&W Windows Pty Ltd would not have been put in evidence before his Honour. 8 If the company search which is now before me had been put in evidence before his Honour, moreover, it is clear that the primary judge could not have reached the view that he did in [53] to [55]. This is because the company search shows that B&W Windows Pty Ltd is a corporate entity which came into existence in 2007 and remains in existence today, albeit under a new name, DW509 Pty Ltd. This company search establishes that B&W Windows Pty Ltd is, and was as at 2008, a separate entity from Voits Holdings Pty Ltd. It also proves that B&W Windows Pty Ltd was not in liquidation at the time of the deed of assignment, which was the reason his Honour found that the deed of assignment could not be effective. 9 For these reasons, I consider that leave should be granted to the appellants to adduce fresh evidence, being the company search. That company search confirms the opinion which I would have reached, in any event, that the primary judge erred in deciding that the evidence supported a finding that only one legal entity was involved. 10 The next issue is considerably more difficult. It concerns assignments of debt from Fewin Pty Ltd to Mr Coshott. The primary judge dealt with these issues as follows: [44] I have a general difficulty with the asserted assignments of debt from Fewin to Mr RM Coshott. That is because there is no reliable evidence of any consideration for those assignments. The evidence advanced by the applicants consists of the minutes of a meeting of Fewin held on 23 August 2013 where it was resolved that $359,487.08 payable by Mr RM Coshott under the deed of assignment of debts from Fewin to Mr RM Coshott be paid by way of repayment by Fewin of moneys allegedly owed by Fewin to Mr RM Coshott and that the company's accounting records be adjusted to reflect this. The minutes are signed by Mr RM Coshott. There is, however, no other evidence of the asserted debt owed by Fewin to Mr RM Coshott. He was called upon to produce the books and records of Fewin for the purposes of these proceedings but nothing material was produced. I infer that such records of the company as may exist would not have assisted him. [45] Further, Mr RM Coshott proved to be a reluctant, and at times evasive witness under cross-examination in relation to the financial affairs of himself and Fewin. His credibility also suffered in dealing with questions from counsel for the trustee about his motivation in his dealings with Mr Prentice, including in respect of numerous legal proceedings instituted by him and Fewin. In my view, the purported assignment of debts from Fewin to Mr RM Coshott was simply an artificial device intended to permit him to either gain control of the administration of the bankrupt estate or at least to exert a substantial influence upon it. That would not matter if there had been valid assignments to him by Fewin for good consideration. However, the evidence of any real consideration is lacking which reflects the artificiality of the arrangement. The arrangement reflected in the Fewin company minutes is in my opinion a sham. I have concluded that none of the debts passed by way of assignment from Fewin to Mr RM Coshott. 11 It will be apparent from these paragraphs that the primary judge was satisfied that the arrangement reflected in the Fewin Pty Ltd company minutes was a sham with a consequence that none of the debts passed by way of assignment from Fewin Pty Ltd to Mr Coshott. 12 At this point it is necessary to refer to the terms of the deed and the company minutes to which his Honour had reference. The deed of assignment records as follows: 1 In consideration of the payment by the Assignee to the Assignor of the amount of $359,487.08 the receipt whereof is hereby acknowledged, the Assignor does hereby assign to the Assignee all its right, title and interest in and to each and every one of the said debts as listed in Recital B herein. … 3 The Assignor acknowledges, agrees and declares:- 3.1 It has received full payment of the consideration herein; 3.2 each and every Debt has been assigned to the Assignee; 3.3 the Assignor no longer has any claim in, to or against the bankrupt estate of the said Robert Gilbert Coshott Bankruptcy No. NSW 9145/05/08 in competition with or to the prejudice of the Assignee in respect of any of the said debts; and 3.4 the creditor of the abovementioned estate for all of the said debts totalling $359,487.08 is now the Assignee. 13 The minutes of a meeting of Fewin Pty Ltd, dated 23 August 2013, being the same date as the execution of the deed, record this: RESOLVED: THAT the $359,487.08 payable by Ronald Michael Coshott under Deed of Assignment of debts from the company to Ronald Michael Coshott be paid by way of repayment by the company of monies owed by the company to Ronald Michael Coshott (the shareholder) and the company's accounting records be adjusted to reflect this. DATED: 23rd August, 2013 14 As the appellants pointed out, there is clear authority in respect of what constitutes a sham. In this regard, I adopt the appellants' submissions as follows: [I]n Traxys Europe SA v Balaji Coke Industry PVT Ltd (No 5) (2014) 318 ALR 85, Foster J addressed the issue of whether a transaction was a sham thus at [119]: A sham allegation is akin to an allegation of fraud. The allegation must be firmly alleged and cogently proved. It is essential to the notion of a sham in Australian law that the parties do not intend to give effect to the legal arrangements set out in their apparent agreement. It is the parties' subjective intentions which must be determined. In order to justify a conclusion that a transaction or set of documents constitutes a sham, the requisite intention to mislead must be a common intention of all of the parties to the transaction. In analysing whether a transaction is a sham, the court is not confined to examining the documents alone, but may examine and draw inferences from other evidence, including the parties' explanations as to their dealings and evidence describing their subsequent conduct. [I]n Lewis v Condon (2013) 85 NSWLR 99, per Leeming JA (with whom McColl JA and Sackville AJA agreed): [58] The essence of a sham for present purposes is as stated by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46]: "[46] … [Sham] refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences." … [63] Because a finding of sham requires a finding of an intent to deceive, considerations associated with Briginshaw v Briginshaw (1938) 60 CLR 336 require a cautious approach: Raftland Pty Ltd v Federal Commissioner of Taxation at [36]. Thus there is a "strong and natural presumption against holding a provision or a document a sham": National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] per Neuberger J. "A court will only look behind a transaction's ostensible validity if there is a good reason to do so, and 'good reason' is a high threshold, since a premium is placed on commercial certainty": Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45 at [52] per Robertson and O'Regan JJ. Lockhart J referred to "a strong finding, and one which cannot be made if another inference is at least equally open" in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 461. … [68] Critical to this appeal is the proposition that a transaction will not be a sham merely because it was entered into with an improper motive. 15 The difficulty in the present case is that the existence of a sham was never pleaded nor put to Mr Coshott, who gave evidence in the proceeding. 16 Further, in the points of claim filed below the appellants contended as follows: 23. By Deed of Assignment dated 23 August 2013 the following debts were assigned for full value by the second applicant Fewin Pty Ltd to the First Applicant: a. Voits Holdings Pty Ltd -$61,327.60 b. B & W Windows Pty Ltd -$20,772.00 c. Gary Doyle -$10,831.70 d. Principle Strategic Options Pty Ltd -$37,916.68 e. Shipton Lodge (Cobbitty) Pty Ltd -$228,639.10 17 In the points of defence of the respondent, this was said: 23. In answer to paragraph 23 of the Points of Claim the Respondent: (a) admits that on 23 August 2013 Fewin Pty Limited and Ronald Michael Coshott entered into a Deed of Assignment; (b) says that in respect of any assignment Ronald Michael Coshott could only ever be entitled to such interest as was held at the date of the assignment by Fewin Pty Limited to participate as an ordinary unsecured creditor in the administration of the bankruptcy of Robert Gilbert Coshott; and (c) otherwise does not admit the paragraph. 18 It is true that in the lead up to the hearing the respondent served upon the appellants numerous notices to produce in order to obtain access to various documents including, in particular, the books and records of Fewin Pty Ltd. It is also true that Mr Coshott, who gave evidence, was cross-examined at some length about the failure to produce documents including any documents constituting the books and records of Fewin Pty Ltd, such as might have shown the existence of the loan referred to in the minutes of meeting and the set-off by way of repayment also referred to in those minutes. 19 For example, in the transcript, at page 41, this exchange occurred: Have you produced any books or financial records of any payments on your account? --- On my account? Yes? --- No – well, as I said, I've got written instructions here I brought with me, but I haven't tendered them at this stage because I wasn't sure whether they're going to be required. Well, have you produced ---?--- They're minutes. You took an assignment – you took an assignment from Fewin to set off against a loan account? --- Correct. Have you produced any ledger recording how that loan account was made up? --- No. It's in my – it's in my books and the books --- Right. But you haven't produced those books, have you?---No. The book are with the accountants. They're still working on them. 20 However, it was never put to Mr Coshott that the transaction recorded in the deed of assignment in fact had not taken place. Nor was it put to Mr Coshott that there was no loan from him to Fewin Pty Ltd or any adjustment to the accounts of Fewin Pty Ltd to show any payment of the consideration under the deed by way of repayment by Fewin Pty Ltd of moneys owed to Mr Coshott. 21 The respondent's position in this appeal is that it was not a matter for the respondent to put these issues to Mr Coshott. This is because it is clear from s 34A(1) of the Bankruptcy Act, that the burden of proof lay on the appellants on the balance of probabilities. According to the respondent, in circumstances where Mr Coshott was called to give evidence and failed to produce any documents evidencing the transactions recorded in the deed and the minutes in circumstances where he also said those documents existed, an inference of the kind identified in Commercial Union Assurance Co of Australia Limited v Ferrcom Pty Ltd (1991) 22 NSWLR 389 (Ferrcom) at 418 – 419 arose. In particular the respondent relied upon the observations in [27] of Zaccardi v Caunt [2008] NSWCA 202 as follows: [27] The proper inference to draw from the evidence is that at no time did the vendor-respondents sign a counterpart of the contract that exactly mirrored the counterpart that had been signed by the Purchasers, including the amendment that the Purchasers had made to cl 32. The only evidence there is of the vendor-respondents signing any counterpart contract is that they signed a counterpart contract on 20 December 2004, which contained cl 32 in its unamended form. There is no evidence that they, or their solicitor on their behalf, altered cl 32 of the counterpart they had executed to bring it into conformity with cl 32 of the counterpart that the appellant had executed. If there had been any such amendment to cl 32, it was well within the capacity of the vendor-respondents to give evidence of the amendment occurring. In my view this is a situation where the variant of the principle in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 that was discussed by Handley JA in Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419 is applicable. In accordance with that principle, when a party who called a witness who could have given direct evidence on some particular topic refrains from asking questions that would have elicited evidence on that topic that can in some circumstances be a legitimate reason for not drawing inferences in favour of that party. Just as Jones v Dunkel licenses but does not require certain inferences to be drawn when a witness is not called, this principle does not prohibit the drawing of inferences favourable to such a party, but merely provides one reason against doing so. The same principle applies when an affidavit is read, that says nothing about a relevant topic concerning which the deponent could have given evidence. 22 The difficulty with this reliance, as the appellants pointed out, is that this is not a case where a witness was called who could have given direct evidence on a topic but refrained from doing so. The reason for this is that before the Court below, the appellants' evidence-in-chief was the deed of assignment and the minutes of meeting. It was the appellants' case before the primary judge that these documents themselves established the consideration that had been given for the assignment of the debts, with the consequence that Mr Coshott was a relevant creditor having regard to the terms of s 64ZB(8) of the Bankruptcy Act as follows: (8) For the purposes of determining whether a motion proposed at the meeting is resolved, the value of a creditor who: (a) has been assigned a debt; and (b) is present at the meeting personally, by telephone, by attorney or by proxy; and (c) is voting on the motion; is to be worked out by taking the value of the assigned debt to be equal to the value of the consideration that the creditor gave for the assignment of the debt. 23 In the appellants' case, the failure to produce documents could not, of itself, undermine the efficacy of the deed of assignment and the minutes of meeting as prima facie evidence of what they recorded. As the appellants put it, given that an allegation of sham is akin to an allegation of fraud, the allegation must be put clearly, in particular in circumstances where the failure to produce relevant documents apply to numerous transactions and not merely the particular assignment from Fewin Pty Ltd to Mr Coshott. It could not be said that it was obvious, in the circumstances of the case, that the respondent was challenging the transactions recorded in the deed and minutes as a form of sham so that it was unnecessary for these matters to be put squarely and directly to Mr Coshott. This follows, said the appellants, upon the reference, for example at [38(c)] of the primary judge's reasons, which identify the fact that the lack of records did not merely relate to the assignment from Fewin Pty Ltd to Mr Coshott but also to each of the other creditors. 24 In my view this is a case where it is necessary that the parties be taken to be bound by the way in which the case was run below. The inescapable facts are these: (1) The sham was not pleaded; (2) The sham was not particularised; (3) It was never put to Mr Coshott that either the deed and the minute of the meeting constituted any form of sham; and (4) It was not put, in opening or closing submissions, that the transactions were a sham. 25 Indeed, the closest that the case before the primary judge came to the issue of sham was the observation by the appellants in closing submissions that no such case had been put. 26 In these circumstances, I am not satisfied that this is a case where it was unnecessary to squarely raise the issue because it was otherwise obvious from the course of the proceedings. I am also not satisfied that this is a case where the Ferrcom inference can arise because in the present matter there was evidence of the relevant topic, being the deed and meeting minute. Further, the respondent's cross-examination about the failure to produce documents has to be understood in the context of the appellants' case that the deed and the minutes spoke for themselves, such that if the respondent wanted to be able to sustain a finding of sham about those documents it was incumbent upon the respondent to put the matter directly, preferably in the pleadings, but at the least in cross-examination of Mr Coshott. This was not done and it follows, in my view, that the finding of sham was not open. 27 In respect of the notice of contention, I also accept the appellants' submission that on the state of the matter before the primary judge, there is no basis on which to do anything other than accept the deed and the minute of meeting at face value. On their face, they record the relevant transactions and were never directly or indirectly challenged below as doing otherwise. As a result, I consider that the appeal by the appellants must be upheld. 28 The only other issue relates to the terms of s 64ZB(8) in relation to the assignment from B&W Windows Pty Ltd to Mr Coshott. While B&W Windows Pty Ltd assigned its debt to Fewin Pty Ltd for an amount in the order of $4000, the deed of assignment between Fewin Pty Ltd and Mr Coshott provided for consideration of the full amount of the debt, that is some $20,000. It was put by the appellants that in accordance with s 64ZB(8) the voting rights of Mr Coshott are to be determined on the basis of the full amount of the debt being the consideration that Mr Coshott gave for the assignment of the debt, not the lesser amount that Fewin Pty Ltd gave for the assignment of that debt. The respondent contended to the contrary on the basis that Fewin Pty Ltd could not transfer anything more than it had. The difficulty with the respondent's contention in this regard is that, as the appellants said, it is not the voting rights that are being transferred, it is the debt and it is the consideration for the assignment of the debt which is called up by s 64ZB(8). In my view this means the consideration that Mr Coshott gave to Fewin Pty Ltd for the assignment of the debt to it is the amount in the order of $20,000. 29 Consequently, the appellants have succeeded in all their grounds of appeal and I will make orders accordingly. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 13 November 2015