Federal Court of Australia Kim v Ghedia, in the matter of Hammoud Investments Pty Ltd (in liq) [2023] FCA 253 File number(s): NSD 35 of 2022 Judgment of: JACKMAN J Date of judgment: 8 March 2023 Catchwords: BANKRUPTCY AND INSOLVENCY – external administration – proof and ranking of claims – admission of proof of debt by liquidators – appeal against admission of proof of debt under the Corporations Act 2001 (Cth), sch 2, s 90-15 – where purported debt arises from oral agreement – whether reliance should be placed on later formal loan agreement – whether reliance should be placed on balance sheet CONTRACTS – formation – whether oral conversation formed a contract – where conversation was between family members – where no direct challenge to evidence of conversation occurring – whether intention to enter binding legal relations – whether there is a presumption in the context of family relations that there is no intention to enter binding legal relations – where contract is made by one person acting in different capacities – whether alternative action in debt was available Legislation: Corporations Act 2001 (Cth) s 1305; sch 2, s 90-15 Cases cited: Re Azmac Pty Ltd (in liq) (2020) 146 ACSR 113 Young v Queensland Trustees Ltd (1956) 99 CLR 560 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 28 Date of hearing: 8 March 2023 Counsel for the Applicant: Mr T Hall Solicitor for the Applicant: Hall Partners Counsel for the First and Second Respondents: Mr M Mournehis Solicitor for the First and Second Respondents: Piper Alderman Counsel for the Third, Fourth, Fifth and Sixth Respondents: Mr J R Willis Solicitor for the Third, Fourth, Fifth and Sixth Respondents: Watson Webb ORDERS NSD 35 of 2022 BETWEEN: JI SUE KIM Applicant AND: RAJIV GHEDIA First Respondent SHUMIT BANERJEE Second Respondent ALI HAMMOUD (and others named in the Schedule) Third Respondent order made by: JACKMAN J DATE OF ORDER: 8 MARCH 2023 THE COURT ORDERS THAT: 1. The amended interlocutory process of Ji Sue Kim dated 10 February 2023 be dismissed. 2. Ji Sue Kim pay the costs of the third to sixth respondents. 3. The first and second respondents' costs be costs in the winding up. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) JACKMAN J 1 By an amended interlocutory process dated 10 February 2023, Ji Sue Kim challenges decisions made by the liquidators of Hammoud Investments Pty Ltd (in liq) (the Company) to admit three proofs of debt, namely, a proof of debt lodged jointly by Ali Hammoud and Mohammed Hammoud in an amount of $1,236,232, a proof of debt lodged by Zara Hammoud in the amount of $32,960, and a proof of debt lodged by Zeinab Youssef in the amount of $12,930. In final address, Mr Hall, who appeared for Ms Kim, withdrew his application in relation to the last two of those proofs of debt. The interlocutory process is an appeal pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), which is sch 2 to the Corporations Act 2001 (Cth) (Corporations Act). The company was wound up on 23 June 2022, after voluntary administrators were appointed on 15 February 2022. 2 Ms Kim was the wife of Mr Abed Hammoud, who was a director of the Company from 15 December 1998 until 1 August 2012, and the sole director of the company from 12 January 2005 to 1 August 2012. Abed passed away on 1 June 2018. Ms Kim is the holder of 100% of the ordinary shares in the company, which entitle her to participate in any surplus on winding up. 3 There are F class shareholders (who have no such entitlement to share in the surplus on a winding up), and they are the five children of Abed by a previous marriage, including Ali and Mohammed. Ali was the sole director of the company from 1 August 2012 to 15 February 2022. 4 I will refer to the natural persons by those names for convenience and without intending any disrespect to them. 5 The principles concerning the disposition of an appeal against a liquidator's decision to accept or reject a proof of debt were helpfully summarised by Rees J in Re Azmac Pty Ltd (in liq) (2020) 146 ACSR 113 at [41]-[44], which are as follows, omitting the cited authorities: (a) An appeal to the court challenging a decision of a liquidator with respect to a proof of debt was previously brought under s 1321 of the Corporations Act 2001, now repealed, but the case law in respect of the earlier provision is of continuing relevance to appeals brought under s 90-15. (b) An appeal against a liquidator's rejection of a proof of debt is a hearing de novo, and thus the court may make its decision on evidence that was not before the liquidator. The relevant question for the liquidator when called upon to consider a proof of debt is whether the alleged debt is a "true liability of the company" or "is not legally enforceable". (c) In determining whether the debt is "a true liability of the company enforceable against it", ordinarily the general law applies, including statutes of limitation and equitable principles. (d) The creditor on such an appeal is not strictly confined to each allegation and proposition by which it originally sought to advance the proof of debt, and some change in the explanation of the way in which it is said to be a true liability of the company enforceable against it is permitted. 6 The proof of debt lodged by Ali and Mohammed for $1,236,232 is based on a loan by them to the company arising from a conversation in May 2013. In paragraph 21 of Ali's affidavit of 24 February 2023, the conversation is proved in the following terms: Abed: Foxy and Smart-Tel have money that Hammoud Investments can use. Ali, you borrow $400,000 from Smart-Tel, and Mohammed you borrow $1,000,000from Foxy Bikes and Trailers. You will both then lend this money to Hammoud Investments. Hammoud Investments will be able to pay you both back. Mohammed: Ok, do whatever, I don't care. Ali: Ok. 7 Ali then goes on to say that on or around 28 May 2013, his father told him that he had transferred: (a) $428,353, which was all of the available money held by Smart-Tel, directly into the Company's bank account; (b) $998,058 from the bank account of Foxy Bikes and Trailers directly into the Company's bank account. 8 In evidence, there are bank statements of the Company's bank account with Westpac which prove that those transfers were, indeed, made on 28 May 2013. Smart-Tel Accessories Pty Ltd (Smart-Tel) was a company which Abed had caused to be incorporated on 25 June 1998. Between 27 February 2007 and 2 March 2015, when Smart-Tel was deregistered, Ali was the sole director, secretary and shareholder of Smart-Tel. 9 Foxy Bikes and Trailers Pty Ltd (Foxy) was a company which Abed had caused to be incorporated on 1 March 2010. Between 27 March 2010 and 6 September 2021, when Foxy was deregistered following the appointment of a liquidator on 28 September 2018, Mohammed was the sole director, secretary and shareholder of Foxy. 10 The conversation referred to above in Ali's affidavit at paragraph 21 must be seen in the context of the family relationships, which are the subject of further evidence by Ali to the effect that: (a) It is normal practice in his culture for the family to follow the wishes of the father as the head of the household, and Ali's family follows this culture; (b) It is also normal practice in his family that Ali and his younger brother, Mohammed, would share everything and be involved in everything together; (c) Similarly, any money that Ali earnt, Ali considered to be funds for his family, and this money could be used by his father at his discretion; and (d) Ali did not question his father when it came to this practice or his financial decisions. 11 The conversation deposed to by Ali was not the subject of any challenge in cross-examination of Ali, and no submission was put that the conversation did not occur in the terms which Ali had deposed to, although the court was encouraged to be cautious in the acceptance of Ali's version of the conversation. In the absence of any direct challenge to the conversation as deposed to by Ali, and in light of the generally credible and reliable testimony of Ali, I accept that the conversation took place in the terms to which Ali deposed. 12 Both Mr Hall and Mr Willis, who appeared for the third to sixth respondents, drew my attention to passages in reports by the liquidators as to the unreliability of some of the Company's books and records. Mr Hall drew particular attention to a passage in the liquidators' report to creditors to the effect that the liquidators had had difficulty in confirming the loan balances due to inaccuracies of the loan account ledgers and entries, as well as the time period in which the loans were raised, and went on to say that they were in the process of attempting to verify the loan balances. Mr Willis drew my attention to a statement in the liquidators' report to creditors of 23 September 2022 expressing reservations concerning the accuracy of the company's bookkeeping, as maintained by former external accountants, and the reliability of the company's accounts. 13 In those circumstances, the liquidators conducted a detailed examination of the bank accounts of the company, and debited from the loan balance every payment made to Ali and Mohammed, regardless of whether the narration in the bank statement was indicative of being a repayment or otherwise. The result was recorded in a document entitled "List of Transactions (Combined)" that was tendered, along with the corresponding bank statements. The list of transactions indicates that, on the liquidator's analysis, the ultimate balance of the loan in favour of Ali and Mohammed was the figure of $1,236,232. 14 On 7 September 2021, a formal loan agreement was entered into reflecting the original debt of $1,426,411, together with what was expressed to be a facility limit of $1.5 million, which had not been discussed in May 2013. I do not place any reliance on that loan agreement. I was also referred to an unsigned balance sheet prepared as at 31 January 2022 by the company's accountants on Ali's instructions, again reflecting the amount of the original debt of $1,426,411. While Mr Willis placed some reliance on that balance sheet, including reliance on the presumption under s 1305 of the Corporations Act, I do not myself place any reliance upon that balance sheet in deciding the issues between the parties. 15 Mr Hall submitted that the conversation deposed to by Ali at paragraph 21 of his affidavit did not disclose that there was any intention to enter binding legal relations. The focus of the submission was on the statement attributed to Mohammed: "Ok, do whatever, I don't care." It was also submitted that Ali's statement "Ok" was a response to that statement by Mohammed, rather than a response to what Abed had said just beforehand. It was submitted that Mohammed's statement showed an indifference to the transaction, including indifference as to the role of particular entities in the transaction, and it was also submitted in writing by Mr Hall that the comment reflected a degree of flippancy on Mohammed's part. 16 Looking at paragraph 21 of Ali's affidavit as a whole, in my view Abed's words show careful and precise attention to the role of particular entities in what were, undoubtedly, contemplated to be loans. What Abed proposed was that that the loans would be in two steps: Foxy would lend to Mohammed, who would then lend money to the Company; and Smart-Tel would lend to Ali, who, in turn, would lend to the Company. In my view, Mohammed's response was to agree to the transaction which Abed had proposed, using the conventional affirmative expression, "Ok". The same goes for Ali's use of the word "Ok", expressing agreement with what Abed had proposed. In my opinion, that was a sufficient expression of an intention to enter binding legal relations on the part of both Mohammed and Ali, and what Abed had said also contemplated that legal relations would be entered into between the entities referred to by Abed. In my view, Mohammed's additional words, "do whatever, I don't care", are properly seen as an expression of filial resignation, in the context of the family relationship which Ali had deposed to, whereby the wishes of the father as head of the household would be followed by the family. 17 Mr Hall submitted that there is a presumption in the family context that there is no intention to enter binding legal relations. While that may be true of ordinary dealings between family members as natural persons, I doubt whether the so-called presumption has any application in the context of family companies which, by definition, involve legal relations and presuppose that those involved in the conduct of those companies (whether as directors or shareholders or other officers) are engaging in legal relations. In any event, any such presumption, in my opinion, was rebutted by the obvious legal intent expressed by Abed, with which his two sons expressed agreement. 18 Mr Hall also draws attention to the fact that Abed was not a director of the company in May 2013, and had no ability to bind the company at that time. In my opinion, there are two answers to that proposition. The first is that the evidence given by Ali concerning the context in which transactions were dealt with by members of the Hammoud family indicates that Ali had conferred on his father a general authority to conduct affairs of the company, despite the fact that Ali himself was the sole director. The second point is that it is not necessary to find that Abed was acting on the company's behalf in order to find that the conversation in paragraph 21 gave rise to binding loan transactions. 19 Even if one treats Abed as expressing a proposed transaction, which his two sons agreed to adopt, the two sons had undoubted authority to enter into the transaction on behalf of all the entities involved. Ali's agreement was in three capacities: his personal capacity, his capacity as sole director of Smart-Tel, and his capacity as the sole director of the Company. Mohammed's agreement was expressed in two capacities: his personal capacity and his capacity as sole director of Foxy. Paragraph 21 proves the mutual assent by the two sons in those various capacities. 20 While it may be thought to involve some artificiality, that is no more than the product of the fact that companies are artificial entities. There is no legal objection to the concept that one person can enter into a contract personally on his own behalf at the same time as doing so on behalf of another company, or other companies, of which he is a sole director. That is so even though there is only one person who is engaging in the relevant mental activity in bringing about that transaction. 21 Mr Hall also submitted that there is no evidence that the loans were actually implemented in the two-step process which paragraph 21 of Ali's affidavit referred to. That appears to be the case, given that Abed's comment as to how he had transferred the funds, together with the bank statements of the company, appear to show that there was a single mechanical step in implementing the transaction by advancing monies directly from Foxy to the Company and from Smart-Tel to the Company. However, that was simply a shortcut in the mechanical implementation of the transaction, and does not affect the fact that the conversation in paragraph 21 of Ali's affidavit spoke of the transaction occurring in two steps, which, as a matter of law, is what was, in fact, carried out. 22 Mr Hall also pointed to the fact that the proof of debt had been signed only by Ali, and did not bear a signature by Mohammed. I did not see any significance in this point. The standard Form 535, which was completed and signed by Ali, was clearly signed by Ali on behalf of both himself and his brother, Mohammed. In his written submissions, Mr Hall accepted that the proof of debt was submitted not only on Ali's behalf, but also on Mohammed's behalf: paragraph 27.3. The fact that only Ali signed the standard Form 535 is probably a reflection of the use of the first-person singular in that form, rather than giving an option of using the first-person plural in making the various declarations which the form requires to be made. 23 Mr Hall also appeared to make some criticism of Mohammed for not having given evidence in the proceedings before me. I do not see any significance in his absence as a witness, given that there was no challenge to the terms of paragraph 21 setting out the conversation in May 2013. In any event, I observe that Mohammed has been incarcerated since late 2022, which would have presented some difficulties (although not an impossibility) in the way of him giving evidence before me today. 24 I note that Mr Hall expressly disclaimed any reliance on the expiry of any limitation periods, a concession which strikes me as entirely appropriate. 25 Mr Willis argued that in addition to a contractual claim, Ali and Mohammed's proof of debt was supported also by a claim in debt, relying on the well-known passage in Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 567, to the effect that the common law does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract. While it is not necessary to decide whether the proof of debt could also be supported by a claim in debt, Mr Willis submits that although it was Foxy and Smart-Tel which advanced the funds to the Company, it should be inferred that they did so on the direction of Mohammed and Ali respectively, that inference arising from the terms of the conversation deposed to by Ali at paragraph 21 of his affidavit. 26 Had it been necessary for me to decide the point, I would have accepted Mr Willis' submission in that regard and upheld an action in debt as an alternative basis to the claim in contract. The significance of that would have been that there would not have been any requirement on the part of Ali and Mohammed to establish, objectively, an intention to enter binding legal contractual relations in the conversation deposed to at paragraph 21, but merely to have proved that the advance took place on the direction of Ali and Mohammed as creditors, and that the advances were not made by way of gift. 27 Accordingly, I am of the view that Ms Kim's challenge to the liquidator's decision should be dismissed. 28 As to costs, Ms Kim does not resist an order for costs against her in favour of Mr Willis' clients, the third to sixth respondents. As to the position of the liquidators, the first and second respondents, they do not seek costs against Ms Kim, and submit that their costs should be costs in the winding up, a submission with which I agree. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman. Associate: Dated: 22 March 2023 SCHEDULE OF PARTIES NSD 35 of 2022 Respondents Fourth Respondent: MOHAMMED HAMMOUD Fifth Respondent: ZARA HAMMOUD Sixth Respondent: ZEINAB YOUSSEF