Prentice v St George Bank [2002] NSWSC 358

Reported Decision : (2002) 20 ACLC 923

New South Wales Supreme Court

CITATION : Prentice v St George Bank [2002] NSWSC 358 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3796/01 HEARING DATE(S) : 23 April 2002 JUDGMENT DATE : 26 April 2002

Maxwell William Prentice (P1) PARTIES : Macquarie Construction Co Pty Ltd (in liq) (P2) St George Bank Ltd (D & XC) Peter Armstrong (XD) JUDGMENT OF : Austin J

Mr J T Johnson (P) COUNSEL : Mr C R C Newlinds (D & XC) Mr J H Stephenson (XD) Sally Nash & Co (P) SOLICITORS : Gray & Perkins with Laurence & Laurence (D& XC) Regina Vickery, Solicitor (XD) CATCHWORDS : CORPORATIONS - winding up - unfair preference - meaning of 'transaction of the company' - whether sole director of insolvent company caused company's debt or his own debt to be paid LEGISLATION CITED : Corporations Act 2001 (Cth) ss 9, 588FA, 588FC, 588FE, 588FF CASES CITED : Re Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292 DECISION : Originating process and cross-claim dismissed

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

FRIDAY 26 APRIL 2002

3796/01 MAXWELL WILLIAM PRENTICE & ANOR V ST GEORGE BANK LTD JUDGMENT 1 HIS HONOUR: The resolution of this case depends principally upon the answer to a narrow question of fact. When Sandra Armstrong deposited a bank cheque into the overdraft account of Macquarie Construction Co Pty Ltd ("Macquarie"), was the payment made · by direction of Macquarie, to reduce its overdraft to St George Bank Ltd ("St George"), or · by direction of Peter Armstrong, to reduce his personal liability to St George? Facts 2 Macquarie was a building and construction company whose sole director was Peter Armstrong. St George granted overdraft accommodation to Macquarie, and a home loan to Mr Armstrong. St George's advances to Mr Armstrong and Macquarie were secured by two mortgages over Mr Armstrong's house at Windsor, but there was no security over the assets of Macquarie. Therefore when Macquarie subsequently went into liquidation, St George was an unsecured creditor of the company. 3 On 26 August 1999, St George made a demand upon Macquarie for the balance of its overdraft facility in the sum of $154,363.93, together with legal fees. That amount was not paid, and by December 1999 St George had commenced to dishonour cheques drawn on the account of Macquarie. At some stage Mr Armstrong also fell into default in his home loan repayments to St George. 4 On 15 May 2000, this Court made an order for the winding up of Macquarie and appointed the plaintiff, Mr Prentice, as liquidator of the company. The "relation-back day" in respect of the administration of the winding up was 15 February 2000, the date upon which a creditor presented a winding up summons against Macquarie in proceedings No 1379 of 2000. 5 St George took proceedings for possession of Mr Armstrong's house at Windsor and on 17 February 2000 it obtained an order for possession. By late February 2000 it had become obvious to Mr Armstrong that St George would sell his home unless he could come to some accommodation with the bank. On about 20 February 2000 he called Mr Conrad of St George to discuss the situation, and on the following day he approached his sister, Sandra Armstrong. He asked her whether she could help him with his finances, because he was about to be evicted from his house. She said: "How much do you need?" He replied: "Can you arrange $100,000?" She said that she would see her bank and let him know. 6 Ms Armstrong sent a facsimile to her bank, the Commonwealth Bank of Australia, on 23 February 2000, which said in part: "Due to extreme cash flow difficulties my brother, Peter Armstrong of 53 George Street, Windsor, is experiencing, who has received a Notice to Vacate his premises by Friday 25 February 2000 by 10:30 am, I have offered to give him $100,000 from my accounts." 7 The letter proceeded to specify a balanced fund account and an income account, and it asked the bank officer at the Commonwealth Bank to verify that a transfer of funds was being processed, in the event that Mr Conrad from St George made contact. Ms Armstrong gave evidence that the letter and facsimile were typed by her niece Kerry, who was an employee of Macquarie, but she did not say that the letter was typed by Kerry in her capacity as an employee rather than as her niece. 8 On 22 February 2000 Ms Armstrong signed a document which said: "I Sandra Armstrong am giving Peter Armstrong of 53 George Street Windsor $100,000. $20,000 from Commonwealth Income Fund. $80,000 from Commonwealth Balanced Fund." 9 Ms Armstrong went to the Commonwealth Bank Windsor branch on 25 February 2000 to arrange for a bank cheque to be drawn upon the accounts that she had specified. She telephoned her brother Peter while waiting in the bank. She asked him: "Which account will I need to pay the money into?" Mr Armstrong contacted Mr Conrad at St George and asked him: "What account would you like the money put into, the overdraft account or the home loan account?" Mr Conrad replied: "Put it into the overdraft account, it's a simple way and it shows up on my computer straightaway". Mr Armstrong then telephoned his sister and said to her: "Put it into the overdraft account. That's what the bank wants." 10 In his affidavit Mr Armstrong gave the following evidence about his state of mind, which has not been challenged: "At all times prior to 15 May 2000 I made all important business decisions on the part of the company. At no time did I understand or intend that the $100,000 that my sister, Sandra Armstrong, paid to the credit of the company's account would be available for the company's general purposes. Rather, it was always my understanding and intention that the money was to be paid to, or at the direction of the bank, so that the bank would not take possession of the property. I requested my sister to pay the money into the company's account with the bank because that is what the bank informed me it required." 11 Sandra Armstrong gave similar evidence, also unchallenged, about her state of mind. She said her understanding and intention was that the payment she made by depositing the bank cheque with St George was for the sole purpose of reducing her brother's liability to St George so he could keep his home. She understood that she was paying the money to the bank and that the bank for its own reason directed payment into the company's account. She said: "If the bank had directed that that cheque be made payable to my brother or some other account I would have arranged for that to happen. At no stage did I intend or understand that I was lending or giving money to the company for its general use. I understood my brother would repay me the money because he was getting the benefit of keeping his home." 12 Ms Armstrong arranged for a bank cheque to be drawn by the Commonwealth Bank against her accounts in the sum of $100,000, in favour of Macquarie. She then went to the St George branch in Windsor and deposited the bank cheque into Macquarie's overdraft account. These steps were completed on 25 February 2000. 13 Mr Armstrong completed a Report as to Affairs in the liquidation of Macquarie on 29 May 2000, in which he listed himself as a creditor in the sum of $130,000, but he did not list his sister as a creditor. 14 On 7 June 2000, Mr Prentice as liquidator of Macquarie made a written demand upon St George for payment of the amount of $100,000 as an unfair preference. 15 On 30 April 2001, Ms Armstrong wrote to Mr Prentice saying that after seeking legal advice as to "the money I had lent to my brother to prevent his eviction from his home", she had been informed that she was a creditor of Macquarie and that she was entitled to participate in any distribution in the liquidation of that company. On 7 September 2001, she signed a proof of debt in the liquidation of Macquarie, for the sum of $100,000. Under the column in the document headed "Consideration" she wrote "lent my brother money to prevent his eviction from his home", and in the column headed "Remarks" she said "This proof of debt is subject to the liquidator's establishment that the payment made by me is a voidable preference." 16 Mr Armstrong became bankrupt and entered into a deed of arrangement under s 73 of the Bankruptcy Act 1966 (Cth). He gave evidence at the hearing that his sister had lodged a proof of debt in his bankruptcy in the sum of $100,000. The proceedings 17 In the present proceedings, commenced by an originating process filed on 27 July 2001, Mr Prentice seeks a declaration that the payment of $100,000 on 25 February constituted an unfair preference, because it was an insolvent transaction void against him, and an order that St George pay him $100,000 together with interest from 7 June 2000 (the date of his demand on St George for payment). On 7 November 2001 St George filed a cross-claim against Peter Armstrong, seeking a declaration that the mortgages over his house secure any money required to be paid by St George to Mr Prentice in these proceedings, and also a declaration that St George is entitled to offset any money ordered to be paid by it to Mr Prentice in these proceedings against the proceeds of sale of Mr Armstrong's Windsor property. 18 If Mr Prentice succeeds in recovering $100,000 from St George, it is likely that St George will correspondingly succeed on its cross-claim against Mr Armstrong. In fact the Windsor property has been sold and there is a surplus of about $140,000, for which St George will account to Mr Armstrong. Consequently if Mr Prentice succeeds, St George will deduct $100,000 plus interest from the proceeds of sale, and the real loser will be Mr Armstrong (and perhaps his sister, to the extent that Mr Armstrong may plan to use the balance of the proceeds of sale of his property to reimburse her). Unfair preferences under Part 5.7B 19 Section 588FF (1) of the Corporations Act empowers the Court to make orders of the kind sought by Mr Prentice in this case where it is satisfied that a transaction of the company is voidable because of s 588FE. By s 588FE (2) (b) (ii) a transaction is voidable if it is an insolvent transaction of the company, entered into after the relation-back day but before the day when the winding up began. If there is a "transaction of the company" in the present case, it was entered into within the time period specified by s 588FE (2) (b) (ii). By s 588FC a transaction is an insolvent transaction of the company if and only if (relevantly) it is an unfair preference given by the company when the company was insolvent. It is clear in the present case that Macquarie was insolvent during the period from 20 to 25 February 2000, when the events which may constitute a "transaction of the company" occurred. That being so, the only question in the present case is whether there has been a transaction of the company that is an unfair preference given by the company. 20 Section 588FA (1) is, so far as relevant, in the following terms: "(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company …". 21 The evidence establishes that by virtue of the deposit of $100,000 made by Sandra Armstrong into Macquarie's overdraft account, St George has received, in respect of the unsecured debt constituted by the overdraft account between it and Macquarie, more than it would receive in respect of that debt if the deposit were reversed and St George were to prove for that amount in the winding up. The unchallenged evidence of Mr Prentice is that if St George pays the $100,000 to him, it is likely to receive a dividend of under $9000 in respect of the total debt claimed by it. 22 Consequently s 588FA (1) (b) is satisfied in this case. It has not been contended, perhaps surprisingly, that the transaction is an integral part of a continuing business relationship for the purposes of s 588FA (3). Therefore the only question is whether the payment of the $100,000 in the circumstances surrounding it constituted a transaction of Macquarie falling within s 588FA (1) (a). That requires the Court to identify the "transaction" in the present case and to determine whether Macquarie and St George were parties to that transaction. "Transaction of a company" 23 The word "transaction" is defined in s 9 of the Corporations Act. To the extent that it is relevant, the definition is as follows: " "transaction" , in Part 5.7B, in relation to a body corporate …, means a transaction to which the body is a party, for example (but without limitation): (a) a conveyance, transfer or other disposition by the body of property of the body; and … (d) a payment made by the body; and (e) an obligation incurred by the body; and … (g) a loan to the body …." 24 As the Full Federal Court remarked in Re Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292, at 294, this makes no attempt to define the word "transaction" itself. As well as giving examples of transactions, the definition confines the word "transaction" to a transaction to which the body is a party. It seems to me that, where the "body" in question is a "company", that limitation is no different from the limitation in ss 588FC and 588FE (2), which confines the scope of the insolvent transaction provisions to "a transaction of a company". 25 For present purposes the important issues are how to identify a "transaction", and how to determine when a transaction is one to which the company and the creditor are parties. I shall first consider each of the quoted subparagraphs of the definition of "transaction", and then the general concept of "transaction".