Reported Decision : 58 ACSR 63 (2006) 24 ACLC 920 New South Wales Supreme Court CITATION : Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2006] NSWSC 617 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 24 – 28 & 31 October, 1 – 4 November, 5 – 7 December 2005, 2 February, 2, 7 & 24 March 2006 JUDGMENT DATE : 21 June 2006 JURISDICTION : Equity JUDGMENT OF : Hamilton J DECISION : Plaintiffs' claims dismissed. CATCHWORDS : CORPORATIONS [256] – Winding up – Conduct and incidents of liquidation – Effect of winding up on other transactions – Other cases – Uncommercial transactions – Meaning of "transaction" - EQUITY [29] - General principles – Priority and notice – Transaction carried out in breach of trust – Whether subsequent recipient of funds on notice of breach of trust or fiduciary duty. LEGISLATION CITED : The Corporations Law s 588FB Corporations Act 2001 (Cth) s 9, Part 5.7B ss 588FB to 588FG Australian Kitchen Industries Pty Ltd v Albarran (2004) 51 ACSR 604 Baden v Societe Generale Pour Favoriser le Developpement du Commerce et de L'Industrie en France SA [1993] 1 WLR 509 Bailey v Barnes [1894] 1 Ch 25 Barnes v Addy (1874) LR 9 Ch App 244 Bartercard Ltd v Wily (2001) 39 ASCR 94 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191, 32 ACSR 124 Hancock Family Memorial Foundation Ltd v Porteous (2000) 201 CLR 347 Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198 Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16 Lifestyle Earls Court Pty Ltd (in liq) v Mentone Mansions Pty Ltd [2006] VSC 2 CASES CITED : Macquarie Health Corp Ltd v Commissioner of Taxation (1999) 96 FCR 238 Mann v Sangria Pty Ltd (2001) 38 ACSR 307 New Cap Reinsurance Corp Ltd (in liq) v Somerset Marine Inc [2003] NSWSC 540 Prentice v St George Bank Ltd (2002) 20 ACLC 923 Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; 24 ACSR 292 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 Sansom v Westpac Banking Corp (1996) 7 BPR 14,615 Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309 Somerset Marine Inc v New Cap Reinsurance Corp Ltd (in liq) [2003] NSWCA 338 V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201 Ware v Lord Egmont (1854) 4 De G M & G 460; 43 ER 586 J D Heydon & M J Leeming, Jacobs' Law of Trusts in Australia (2006) [1337] Kalls Enterprises Pty Limited (In Liquidation) (P1) AA Australian Commercial Laundries Pty Limited (P2) PARTIES : Christopher Damien Darin (P3) Theo Baloglow (D1 & XC) Simon Konstantinidis (D2) Peter Kaliaropoulos (XD) FILE NUMBER(S) : SC 1841/99 M F Holmes QC & P A Fury (Ps) COUNSEL : B W Rayment QC & C P Locke (D1 & XC) G K Burton SC (D2) T A Alexis SC (XD) Koffels (Ps) SOLICITORS : Oliveri Attorneys (D1 & XC) Charles G Roth & Co (D2) Hazan Hollander (XD) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J WEDNESDAY, 21 JUNE 2006 1841/99 KALLS ENTERPRISES PTY LIMITED (In Liquidation) & ORS v THEO BALOGLOW & ANOR JUDGMENT 1 HIS HONOUR: These proceedings are brought by two companies that are being wound up, Kalls Enterprises Pty Limited (In Liquidation) ("KE") and AA Australian Commercial Laundries Pty Limited (In Liquidation) ("AA") and their common liquidator Christopher Damien Darin ("the liquidator"). The companies at different times conducted a laundry business known as Total Quality Laundry Service ("TQLS"). As at November/December 1995 the respective interests in TQLS of KE and AA were on the evidence quite unclear. Con Kalls ("Kalls") was a director and the effective controller of both companies. In November 1995 KE sold TQLS to a third party purchaser. Out of the proceeds of the sale KE paid to Kalls who paid to Theo Baloglow ("Baloglow") $555,000 to settle a judgment debt which Kalls owed to Baloglow in proceedings no 50103 of 1995 in the Commercial Division of this Court ("the Proceedings"). Baloglow, who, as the subject proceedings were conducted before me, was the only defendant, had been, but as at November/December 1995 was no longer, a director of AA. 2 The plaintiffs' claims are that either: 1 The payment to Baloglow was part of an uncommercial transaction within the meaning of s 588FB of the Corporations Law ("the CL"), so that Baloglow ought be ordered to pay that sum to one or the other or both of KE and AA pursuant to s 588FF(1)(a) of the CL. 2 That Baloglow ought be ordered to pay that sum to the companies under the first limb of Barnes v Addy (1874) LR 9 Ch App 244, as being the recipient of moneys paid away in breach of trust or breach of fiduciary duty. 3 The cross claim which was agitated at the trial was by Baloglow against Peter Kaliaropoulos ("Kaliaropoulos"). Kaliaropoulos is Kalls' brother. He was liable to Baloglow under a judgment in the Proceedings and was also discharged from that liability by the payment of the $555,000. The cross claim was for a declaration that, if Baloglow were ordered to repay the $555,000, then he should again become entitled to enforce his judgment against Kaliaropoulos. THE CORPORATIONS LAW PROVISIONS 4 Despite the enactment of the Corporations Act 2001 (Cth) ("the CA"), the parties are agreed and it is correct that the relevant corporations provisions are those of the CL, which continue to apply in respect of the winding up of these companies. However, from the point of view of reference to later authority, there is no difference of substance in the relevant provisions of the CA, including the Part and section numbers. Sections 588FB to 588FG are in Part 5.7B of the CL. The definition of "transaction" in s 9 and relevant portions of ss 588FB to 588FG are as follows: "9 Dictionary ' 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): …… (d) a payment made by the body; and …… and includes such a transaction that has been completed or given effect to, or that has terminated; …… 588FB Uncommercial transactions (1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter. (2) A transaction may be an uncommercial transaction of a company because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. 588FC Insolvent transactions A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and: (a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction. 588FE Voidable transactions (1) Where a company is being wound up, a transaction of the company that was entered into at or after the commencement of this Part may be voidable because of any one or more of the following subsections. (2) The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it: (i) during the 6 months ending on the relation back day; or (ii) after that day but on or before the day when the winding up began. (3) The transaction is voidable if: (a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and (b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation back day. 588FF Courts may make orders about voidable transactions (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction …… (2) Nothing in subsection (1) limits the generality of anything else in it. (3) An application under subsection (1) may only be made: (a) within 3 years after the relation back day; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator within those 3 years. …… 588FG Transaction not voidable as against certain persons (1) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that: (a) the person received no benefit because of the transaction; or (b) in relation to each benefit that the person received because of the transaction: (i) the person received the benefit in good faith; and (ii) at the time when the person received the benefit: (A) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (B) a reasonable person in the person's circumstances would have had no such grounds for so suspecting. (2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction. ……" FACTS 5 The history of the operation of TQLS from February 1994 was, so far as it could be ascertained, proved and cross examined on in extraordinary detail. Bearing in mind the views that I have formed about this matter, it will not be necessary for me to advert to all that evidence in detail in this judgment. Matters will need to be dealt with in some more detail from mid 1995, leading up to the dealings which are central to the decision of this case. 6 It should be noted that the liquidator, Baloglow and Kaliaropoulos all gave evidence, including oral evidence by way of cross examination. Kalls was not called as a witness, although there is nothing in the evidence to suggest that he was unavailable. His absence leaves in mystery a number of important areas. He was in practice the sole controller of both KE and AA during the period from August 1994 to December 1995 and in effect the sole controlling mind of both companies from May 1995. He alone had knowledge of the affairs of the companies during those periods and was alone privy to what arrangements, if any, were made between the companies as to the ownership and conduct of TQLS and its assets. Furthermore, he alone was privy to what arrangements were made among KE, himself, his wife Denise Kalls ("Denise") and Kaliaropoulos concerning the payment by KE to Kalls of the $555,000, including any arrangements as to its repayment to KE. 7 Baloglow and Kaliaropoulos were both satisfactory witnesses, who appeared to me to be attempting to give to the Court accurate and frank accounts and to have good recall of the facts. The liquidator also appeared to be a generally satisfactory witness, although I found extraordinary his answers as to why he made no attempt at any time, even by way of a letter of demand, to recover the relevant sum from Denise or Kaliaropoulos. 8 Prior to 22 February 1994, KE conducted TQLS. On 22 February 1994 KE sold TQLS to AA. AA was a company of which the equal shareholders were KE and Swanhill Pty Ltd ("Swanhill"). Thereafter, the directors of AA were Kalls and Baloglow, who was the controller of Swanhill. Before the sale Kalls made misrepresentations to Baloglow concerning the financial state of TQLS. AA did not trade successfully and by July 1994 Baloglow was complaining about the misrepresentations and seeking to extricate himself and his company from AA. On 24 February 1995 KE, Kalls, Denise, Baloglow and Swanhill entered into a deed ("the February 1995 deed") under which Kalls, Denise and Kaliaropoulos were to pay Baloglow $700,000 in return for his resignation as a director and the transfer of Swanhill's shares to Kalls or as he might direct. The moneys were to be paid by a first instalment of $100,000, followed by a final instalment of $600,000 no later than 31 May 1995. There was default in payment of these moneys. No more than $88,000 was ever paid. From July/August 1994 Baloglow commenced to withdraw from active involvement in the management and affairs of AA. He had ceased to play any part by about September 1994. On 5 May 1995 Baloglow resigned as a director of AA. 9 After Baloglow's departure, it would seem that TQLS was conducted by KE with funds provided by KE. There is no evidence that the sale of TQLS by KE to AA was ever formally rescinded. Nor is there any evidence of any arrangement between AA and KE as to the assets or conduct of the business. There are appearances that AA played some part in the conduct of the business, eg, by continuing to be the employer of the workers, although it would seem that KE provided the wages. AA continued to be the owner of the business name TQLS. However, whatever arrangements there were between the companies concerning these matters are under the veil of mystery drawn by the absence of any evidence, in or out of court, from Kalls, who was the effective controller of both companies at this time, so that the arrangements were known to him alone. 10 On 14 June 1995 Baloglow commenced the Proceedings against Kalls, Denise and Kaliaropoulos for $620,000 ("the Proceedings"). On 7 July 1995 it was noted in the Proceedings by consent that the defendants, KE and AA "undertake to the Court to provide to the Plaintiff seven (7) days prior notice before the disposal of ... any interest owned by the Defendants or of any interest in the business known as" TQLS. This undertaking is important, as it is the basis of Baloglow's later demand to be present at the settlement of the sale of TQLS. On 7 September 1995 the Proceedings were settled with Kaliaropoulos by his consenting to judgment for $620,000 in full settlement of Baloglow's claim. On 27 October 1995 Baloglow obtained judgment in the Proceedings against Kalls for some $640,000. Judgment was not obtained against Denise in the Proceedings and they continued pending against her. 11 During the second half of 1995 negotiations were commenced in the name of KE alone for the sale of TQLS to Decision Technology Pty Limited ("the purchaser"). At first, Baloglow protested at the negotiations in KE's name for the sale of what he said was AA's property, but these protests were not persisted in. The first agreement that KE and the purchaser reached was not completed, but was terminated on 25 October 1995. But there were subsequently negotiations which led to a second agreement for sale between them for $700,000 on 2 November 1995. 12 On 5 September 1995 Kalls' then solicitor, James Jordan, had given an irrevocable undertaking on behalf of Kalls that the balance of the proceeds of the sale should "be to the account of Theo Baloglow or as Theo Baloglow may direct." He further undertook, on behalf both of Kalls and of his firm, that they would arrange to have Baloglow or his solicitors attend on settlement of the sale to collect from the proceeds received moneys towards the debt sued for in the Proceedings. After the second agreement was entered into, Kalls instructed James Jordan to renege on this undertaking and not to inform Baloglow or his solicitors of the settlement of the second agreement. James Jordan, very properly, refused to accept these instructions and terminated his retainer by Kalls. He was replaced as Kalls' solicitor by Dowe Xenos solicitors ("Xenos"). Baloglow's solicitors were Konstan & Associates ("Konstan"). On 14 December 1995 James Jordan informed Konstan of his receipt of those instructions and his termination of his retainer. Konstan wrote to the purchaser's solicitors requiring deferment of the settlement from 15 December 1995 and conveyed to them a copy of the consent orders of 7 July 1995 as the basis of Baloglow's entitlement to be informed of the settlement. There were then further negotiations as to the manner in which the matter was to proceed, which resulted in an agreement recorded in a letter dated 18 December 1995 from Konstan to Xenos. 13 This agreement was, on 19 December 1995, embodied in a deed of release and indemnity ("the December 1995 deed"), the parties to which were Baloglow, Kalls, Kaliaropoulos, Denise, KE and AA. The deed recited the judgments against Kalls and Kaliaropoulos; the commencement of the Proceedings against Denise; and the agreement of Baloglow, Kalls, Kaliaropoulos and Denise to settle the judgment debt and the Proceedings. By its operative terms, the December 1995 deed provided that Kalls and Kaliaropoulos should pay to Baloglow upon the execution of the deed $555,000 in full and final satisfaction of the debt. By clause 2, Baloglow undertook to discontinue the Proceedings against Denise and not to undertake enforcement action to recover the balance of the judgment debt. By clause 3, Kalls, Denise, KE and AA indemnified Baloglow and Swanhill against all claims arising from the operation of TQLS or by the purchaser, although it is hard to see how there could be any such claims. It was only in this very peripheral regard that KE was a party to the December 1995 deed. By clause 4, provided payment was received by Baloglow in accordance with clause 1, Baloglow released Kalls, Kaliaropoulos and Denise from all claims arising out of the Proceedings and associated matters. The release given by Baloglow in clause 4 was merely the standard release that one would expect upon settlement of the claims embodied in the Proceedings. 14 It is important to note that, in both the letter of 18 December 1995 and clause 1 of the December 1995 deed, it was specified that it was Kalls, not KE, who was to pay the sum of $555,000 to Baloglow. In the deed that obligation was also undertaken by Kaliaropoulos. 15 Settlement of the sale of TQLS did take place on 19 December 1995. What occurred at settlement was that the purchaser's solicitors, as directed, handed to Xenos a bank cheque for $660,611.17 made out in favour of that firm. Xenos endorsed the cheque to Konstan. It was banked in Konstan's trust account. The excess over $555,000 was paid out as agreed and the $555,000 was accounted for by Konstan to Baloglow as set out in a letter of 8 January 1996. 16 As to whether any arrangements had been made between KE and Kalls, Denise and Kaliaropoulos concerning the repayment to KE of the $555,000, the evidence is exiguous. The liquidator deposed that he could not find any written record of any such transaction, or evidencing the payment out by the company of that sum. The plaintiffs did not call Kalls or Denise as a witness. Kaliaropoulos did give evidence, but the plaintiffs did not ask him any question in cross examination concerning his knowledge of any such arrangement. 17 Before the sale, AA had been wound up, but the winding up had been terminated. Kalls had been served with a bankruptcy notice. On the evidence, these facts were unknown to Baloglow. AA and KE were voluntarily wound up on 3 and 4 April 1996 respectively. Kalls was adjudged bankrupt in 1997. 18 It should be added that, to any degree it is material, it is clear on the evidence that Baloglow was not at any material time or, indeed, ever a creditor of either KE or AA. UNCOMMERCIAL TRANSACTION CLAIM 19 The plaintiff must show in order to succeed on this claim the following: 1 That there was a "transaction". 2 That the transaction was a transaction of a company. 3 That the transaction of the company was an "uncommercial transaction" within the meaning of s 588FB(1), that is, that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the matters specified in the subsection. 4 That the transaction was entered into at a time when the company was insolvent or that the company became insolvent by reason of the transaction. 20 If these matters are established, the Court must turn to the substantive defence under CL s 588FG(2). This requires the defendant to prove that he became a party to the transaction in good faith; that he had no reasonable grounds and that a reasonable person in his circumstances would have had no grounds for suspecting that the company was insolvent or would become insolvent as a result of the transaction; and that he had provided valuable consideration under or changed his position in reliance on the transaction. 21 I shall proceed to consider these matters. 22 For the purposes of this claim, the plaintiffs sought to rely on a composite transaction as being a transaction of a company. That transaction is alleged to have been made up as follows: (a) The entering into of the Agreement for Sale of Business dated 2 November 1995 between KE and the purchaser whereby the former sold to the latter the business of TQLS. (b) The application of the deposit under the earlier agreement between KE and the purchaser as the deposit under the agreement dated 2 November 1995. (c) The dealings between 16 December and 18 December 1995 leading up to and including an agreement being finalised on 18 December 1995 which involved, inter alia, the payment by Kalls to Baloglow of $555,000 from the proceeds of the sale of the business of TQLS. (The relevant dealings are referred to, and the agreement is set out, in two letters dated 18 December 1995 from Konstan to Xenos.) (d) The entering into of the December 1995 deed between Baloglow, Kalls, Kaliaropoulos, Denise, KE and AA. (e) The settlement on 19 December 1995 of the sale by KE to the purchaser of the business of TQLS pursuant to the Agreement dated 2 November 1995. (f) The payment to or for the benefit of Baloglow of the sum of $555,000 in discharge of the liability of Kalls and Kaliaropoulos under the December 1995 deed from the settlement cheque in the sum of $660,611.17 made payable to Xenos. (g) The transfer from Kalls to the purchaser of the lease of the premises from which the business of TQLS was carried on, which lease was held on trust by Kalls for AA. (h) The transfer of the business name TQLS from AA to the purchaser. 23 Alternatively, they submitted that the transaction was made up only of elements (c) to (h) above, omitting (a) and (b). If this alternative submission becomes material, a question may arise as to whether they should be allowed to rely on this alternative "transaction" in light of the form of their pleading. 24 For the plaintiffs to succeed on either of these claims, they must establish that the relevant concatenation of dealings was a single transaction and a transaction of a company. 25 Since the introduction of Part 5.7B by legislation in 1992, which came into effect in 1993, there have been a number of cases as to the meaning of "transaction" in the Part. These include Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; 24 ACSR 292; Macquarie Health Corp Ltd v Commissioner of Taxation (1999) 96 FCR 238; V R Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201; Bartercard Ltd v Wily (2001) 39 ASCR 94; Mann v Sangria Pty Ltd (2001) 38 ACSR 307; Prentice v St George Bank Ltd (2002) 20 ACLC 923; New Cap Reinsurance Corp Ltd (in liq) v Somerset Marine Inc [2003] NSWSC 540 and, on application for leave to appeal, Somerset Marine Inc v New Cap Reinsurance Corp Ltd (in liq) [2003] NSWCA 338; Australian Kitchen Industries Pty Ltd v Albarran (2004) 51 ACSR 604; and Lifestyle Earls Court Pty Ltd (in liq) v Mentone Mansions Pty Ltd [2006] VSC 2. 26 Most of these cases are preference cases, not uncommercial transaction cases. In fact, the only uncommercial transaction case among them is Lifestyle Earls Court Pty Ltd (in liq) v Mentone Mansions Pty Ltd. There must be borne in mind in reading preference cases that there are differences of significance between the concept of transaction in the preference provisions and in the uncommercial transaction provisions. Thus, in the preference provisions, it is a requirement of a transaction that both the company and the creditor be parties to the transaction. In the case of uncommercial transaction cases, the requirement is only that the company, and no other specified person, be a party to the transaction. 27 From the above cases the following propositions may be extracted: (1) It is clear that transaction in s 9 is to be given a wide meaning. (2) In particular, it is clear that a number of separate dealings may together be regarded as constituting one transaction. (3) However, in every case, it is vital that, however the transaction is constituted, it must be able to be characterised as a transaction of a company. 28 As to (1) above, see Wily v Bartercard supra at [48] per Austin J; Australian Kitchen Industries v Albarran supra per Barrett J at [24]. 29 As to (2) above, the case most frequently cited is Re Emanuel (No 14) supra. In that case, the Full Court of the Federal Court (O'Loughlin, Branson and Finn JJ) said ALR at 288 - 289; ACSR at 299 – 300: "…… [W]e do not see the language of s 9 (which exemplifies but does not define 'transaction) as precluding a finding of a transaction to which the debtor A is a party merely because that transaction itself is made up of a composite of dealings in not all of which A participates. It is not necessary for the purpose of this appeal to determine in any exhaustive fashion when a composite of dealings can together be said to constitute a s 9 transaction notwithstanding that not all of its component parts considered in isolation could rightly be said individually to be transactions. While s 9 does not define 'transaction', it does through the process of exemplification typify the forms of conduct or dealing engaged in by a company that will be characterised as a transaction for its purposes - 'a conveyance ... of property', 'an obligation incurred', 'a release or waiver', etc. Common to the examples is the characteristic that the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself. We confine our observations for present purposes simply to a course of dealing initiated by a debtor for the purpose of, and having the effect of, extinguishing a debt. It is not apparent to us why it should not be said that, where a debtor so acts and extinguishes a debt, the relevant 'transaction' is the totality of the dealings through which the debtor procures the intended outcome, irrespective of whether one or more of the dealings in the sequence in question does not involve or require the participation of the debtor but does require that of a third party. The transaction, in other words, is the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt. We conclude, then, that a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor's debt can in its totality be a transaction for the purposes of Pt 5.7B of the Corporations Law notwithstanding that the achievement of that end can only be realised through the participation of a third party in a particular dealing (or dealings) within the overall transaction, being a particular dealing (or dealings) to which the debtor is not or may not be a party." 30 As to (3) above, an important case in the present context is the decision of Austin J in Prentice v St George Bank Ltd. Whilst one must continue to bear in mind that the decision in Prentice concerns a preferential transaction, his Honour's analysis of what constituted the transaction is important to the decision of the present case. In that case, A was the sole director of the relevant company. The Bank granted overdraft accommodation to the company and a home loan to A. Both advances were secured by mortgage over A's home. Subsequently both lending facilities were in default and the Bank obtained an order for possession of the home. To avoid eviction, A arranged to borrow $100,000 from his sister. A asked the Bank whether the $100,000 should be deposited into the company's overdraft account or A's home loan account. The Bank asked that the deposit be made to the overdraft account, where it would appear more quickly on the Bank's computer. The liquidator's application for relief on the basis that there was a transaction involving a preference was dismissed. It was held that the payment into the company's overdraft account and the arrangements preceding the payment did not involve a transaction of the company for the purposes of ss 588FC and 588FE. Consequently, there was no unfair preference and no voidable transaction. It is to be noted that his Honour found that the loan was made to A and not to the company and that the sister's intention was to lend money to her brother for the sole purpose of reducing her brother's liability to the Bank, so he could keep his home. In his judgment Austin J said at [41] - [44]: " The general concept of 'transaction' [41] In Re Emanuel (No 14) , A Co contracted with B that in settlement of all claims between them, B would make payments at A's direction to C, a creditor of A. When B paid C pursuant to these arrangements, and C accepted the payment in discharge of A's debt to it, the question arose whether A (the company) and C (the creditor) were parties to a 'transaction' deemed to be an unfair preference (see 24 ACSR at 293). These schematic facts are, of course, distinguishable from the facts of the present case. Here, as in Re Emanuel , A directed B, pursuant to an arrangement between them, to pay C, A's creditor. However in the present case, A is not a company that has subsequently gone into liquidation. A is an individual, namely Mr Armstrong, because of my finding of fact that the payment was made by Ms Armstrong at the direction of Mr Armstrong personally in reduction of his liability to St George on the guarantee. [42] In Re Emanuel the Full Court identified three circumstances in which B's payment to C might be, or be part of, a transaction between A (the company) and C (the creditor). The first (at 299) is where the arrangements are such that it can be said that A has used B as its instrument for the purpose of making payment to C (for example, where the payment by B constitutes part of the consideration B furnishes to A and that consideration is in final settlement of the obligations inter se of A and B). That is clearly not the present case. [43] The second (at 99) is where there is a composite of dealings in not all of which A participates, but the 'transaction' is properly regarded as the totality of the dealings, and to that transaction A is a party. In the present case there is a composite of dealings, comprising the dealing between Mr Armstrong and his sister by which he borrowed $100,000 from her, the dealing between Mr Armstrong and St George by which he arranged to reduce his indebtedness to St George by paying $100,000 into the overdraft account in order to forestall his eviction, and the dealing between Ms Armstrong and St George by which she deposited a bank cheque for $100,000 drawn in favour of Macquarie into Macquarie's overdraft account. However, Macquarie was not a party to any of those dealings, and therefore cannot be regarded as a party to the 'transaction' comprising the composite of the dealings. It is merely the recipient of a benefit arising through performance of the transaction. [44] The third (at 99 - 100) is where A, by authorising B's payment to C in discharge of A's debt, is a party to the extinguishment of the debt even if it may not be a party to the payment to C. The extinguishment of a debt is not one of the examples given in the definition of 'transaction' in s 9. However, according to the Full Court in Re Emanuel (No 14) , the examples given in the definition of 'transaction' in s 9 have the common characteristic that 'the conduct or dealing engaged in by the debtor company has the consequence of effecting a change in the rights, liabilities or property of the company itself' (at 299). Consequently where a debtor company so acts as to extinguish its debt, the totality of the dealings initiated by the debtor so as to achieve the intended purpose of extinguishing the debt is a transaction of the debtor company for the purposes of s 588FA(1)." 31 It is vital to the success of the case pleaded and argued by the plaintiffs that the dealing lettered (c) in their alternative summaries of the composite transaction set out in [22] and [23] above respectively be found to be part of the transaction. It is paragraph (c) that contains the allegation that Kalls paid to Baloglow the sum of $555,000 on 19 December 1995. It is significant that the plaintiffs' allegation is in terms that this payment was made to Baloglow by Kalls and not by KE, as is clear on the facts. 32 The conclusion that I have come to is that the plaintiffs' case that there was a voidable transaction fails, because it is impossible to conclude that this payment by Kalls to Baloglow was comprehended in a transaction of a company. It cannot, in my view, be characterised as comprehended in a transaction by KE, much less by AA. The evidence shows that the genesis of this payment was in the claim made by Baloglow against Kalls that misrepresentations by Kalls to Baloglow had led to the acquisition by Baloglow through Swanhill and AA of a half share in TQLS. The pressing of those claims led to the February 1995 deed, by which those claims were compromised upon the promise of payment to Baloglow of $700,000 by Kalls, Denise and Kaliaropoulos. The default in those obligations led to the commencement of the Proceedings by Baloglow, in which judgments were obtained against Kaliaropoulos and Kalls, leaving the claim against Denise outstanding. The undertaking was given to the Court in the Proceedings that no interest in TQLS would be disposed of without seven days prior notice to Baloglow. When Baloglow learned of the proposal to sell TQLS without giving notice pursuant to the undertaking, he insisted on being allowed to attend at settlement of the sale. By the letter of 18 December 1995, followed by the December 1995 deed, he agreed to compromise his claims against Kalls, Denise and Kaliaropoulos, including his rights under the judgments against Kaliaropoulos and Kalls, upon payment to him of $555,000. By both the letter and the deed, the payment was to be made to him by Kalls. At the settlement, a bank cheque for $660,611.17 made out to Xenos was received from the purchaser by Xenos as KE's solicitors. Xenos then as Kalls' solicitors endorsed the bank cheque to Konstan as Baloglow's solicitors, upon their undertaking to deposit it in the firm's trust account and to pay out in agreed ways the excess over $555,000. Konstan was then authorised to account to Baloglow for the $555,000, which was done. In my view, the correct characterisation of what happened upon all the material available is that, upon the receipt by KE of the proceeds of sale, Kalls received from KE the $555,000, which he then paid to Baloglow. As I have said, I have concluded that it is impossible to characterise this payment by Kalls to Baloglow as part of a transaction of KE or AA. The claim that there was a voidable transaction within Part 5.7B accordingly fails. 33 In view of this, I need not consider the remaining components of the uncommercial transaction claim or the substantive defence. BARNES v ADDY CLAIM 34 I turn then to the claim under the first limb of Barnes v Addy. In the well known passage from the judgment of Lord Selborne LC, his Lordship said at 251 - 252 "strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transaction, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property…". 35 The basis on which this claim is made in this case, as pleaded in the amended statement of claim ("the statement of claim"), is, in effect, that the moneys held by Kalls after the completion of the sale of TQLS from the proceeds of that sale were held by him in trust for KE and, to the extent they were paid by Kalls to Baloglow, were paid in breach of trust and thereby misapplied (par 202). It is further alleged: "203 By reason of, inter alia, the aforesaid matters, at the time when the sum of $555,000 referred to in paragraph 87(b) was paid to Mr Baloglow or for his benefit, Mr Baloglow had actual or constructive knowledge that: (a) such part of the said sum of $555,000 as was being paid to or for his benefit as consisted of KE Trust Moneys was comprised of such moneys; and (b) insofar as any part of the said sum of $555,000 consisted of KE Trust Moneys, then such moneys were being paid in breach of trust and thereby misapplied." Corresponding allegations were made concerning AA in pars 139 and 140 of the statement of claim. 36 Essentially, the plaintiffs' submission is that, if a director misapplies money or property of a company by causing those assets to be used for purposes which are not purposes of the company, then that director acts in breach of trust. They cite the judgment of Anderson J in the Supreme Court of Western Australia in Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191, 32 ACSR 124 at [72] and cases there cited. I do not doubt the correctness of that proposition. Mr Rayment, of Queen's Counsel for the defendant, contended that the appropriate factual substratum was not proved in this case. The liquidator deposed that he could find no written record of an arrangement concerning the terms on which the $555,000 was advanced to Kalls or providing for its repayment. Apart from his taking of the $555,000, there is silence. Kalls was not called to give any evidence as to the existence or absence, or the terms, of any arrangement. Nor was Denise. Kaliaropoulos did give evidence, but no evidence was led from him, nor was he cross examined on behalf of the plaintiffs, as to his knowledge, if any, of any arrangements concerning the advance or its repayment. Whether or not Kalls was able to repay the sum, it is not clear that Denise could not at that time repay it and the evidence shows that Kaliaropoulos was able to repay. On the other hand, the evidence establishes that KE was insolvent at the time. I accept the evidence given by the liquidator that leads to that conclusion. This means that the creditors' interests had to be taken into account in relation to dealings of the company. Thus, it could not be said that a dealing otherwise in breach of fiduciary duty could be taken to have the informed consent of all interested parties; indeed, it was not put that such consent was established. Although there was a deal of force in Mr Rayment's submissions, this is a situation where there was a self interested dealing with property of an insolvent company by a person with fiduciary duties to that company and it was not established that that dealing was justified. In those circumstances, I find that, on the evidence, the making and receipt of the advance by KE to Kalls was in breach of Kalls' fiduciary duties towards KE. 37 As there is a breach of fiduciary duty established, then the question arises as to Baloglow's knowledge of it. The pleading avers that Baloglow had knowledge and the plaintiffs claim to have proved it. They also claim that the plaintiffs do not need to establish knowledge, but that, once they have proved that the money was paid in breach of trust or breach of fiduciary duty, the recipient is under strict liability, unless he can prove the defence of bona fide purchaser for value without notice or the defence of change of position. 38 The relevant defence pleaded in the further amended defence to amended statement of claim is as follows: "8 In further answer to the Amended Statement of Claim generally, the First Defendant says that monies received by him or in his behalf in December 1995 were received in good faith for value without notice of any breach of trust or breach of fiduciary duty on the part of any person." 39 The necessity for and degree of the recipient's knowledge of the breach of trust or fiduciary duty necessary to establish liability under the first limb of Barnes v Addy have long been subject matters of controversy. There have been recent developments in this area of the law in England and Australia. Among Australian authorities, I refer in particular to the decisions of Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16 and of the New South Wales Court of Appeal in Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309. 40 I remind myself that the traditional view was that knowledge or notice had to be established by the plaintiff. The authority usually cited for this was in the decision of the High Court in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, where Stephen J at 410 quoted with approval the following passage from the judgment of Jacobs P in the Court of Appeal: "The point of the difference between the person receiving trust property and the person who is made liable, even though he is not actually a recipient of trust property, is that in the first place knowledge, actual or constructive, of the trust is sufficient, but in the second place something more is required, and that something more appears to me to be the actual knowledge of the fraudulent or dishonest design, so that the person concerned can truly be described as a participant in that fraudulent dishonest activity." Barwick CJ agreed with the decision and reasons of Stephen J. See also per Gibbs J at 398. However, it must be borne in mind that these dicta in Consul are obiter, since that was a case under the second limb of Barnes v Addy, or an accessorial liability case, not a first limb case. 41 In Koorootang, after an analysis of recent material, including particularly the writings of Professor Birks, Hansen J said at 100: "There is considerable persuasion in the third view of recipient-liability. According to that view the liability of a person in receipt of misapplied trust property is most appropriately governed and explained by the law of restitution of unjust enrichment. For this reason, and in order to be consistent with other forms of restitutionary liability (such as restitution of mistaken payments, as to which see David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353), the liability of the recipient should be strict but subject to defences such as bona fide purchase and change of position. In other words, the knowledge of the recipient of trust property is not relevant in considering whether the elements of recipient-liability are established. Rather, the beneficiary is prima facie entitled to restitution of trust property if he can show that the transaction by which the trust property was transferred to the defendant was vitiated by some recognised 'unjust' factor." 42 In Say-Dee in the Court of Appeal, after reviewing the law, Tobias JA (with whom Mason P and Giles JA agreed) concluded: "[232] But in the absence of any High Court authority to the contrary, I see no reason why the proverbial bullet should not be bitten by this Court in favour of the Birks/Hansen approach. In my opinion there is support for the adoption of the restitutionary approach in Lipkin in the House of Lords and in the exposition on the subject by Hansen J in Koorootang at 99 – 105. [233] On the foregoing basis, Mrs Elias and the two children are liable to account for any profit or benefit they derived from the acquisition of their respective interests in No 15 as a result of Mr Elias' and Farah's breach of their fiduciary duties. They hold those interests on constructive trust for the joint venture. [234] As I have observed in [175] above, Mrs Elias and her two daughters, as a consequence of the breach by Farah and/or Mr Elias of its/their fiduciary duties, received the benefit therefrom without payment of any relevant consideration therefor. In other words, they may have been bona fide purchasers but not for value." 43 In Say-Dee, a company, Farah, of which Mr Farah Elias was a director and the controller, entered into a joint venture agreement with the appellant for the development of a number of properties, under which Farah was to manage the progress of the development application, as well as the construction and sale of the development. By reason of participation in the joint venture, Mr Elias owed fiduciary duties to the appellant. In breach of those duties, he arranged for the acquisition of certain of the properties not on behalf of the joint venture and caused them to be vested in his wife and two daughters. On the evidence, the wife and daughters did not have any knowledge that Mr Elias' action in vesting the properties in them was in breach of his fiduciary duties. Despite this, the wife and daughters were declared to hold the properties vested in them on constructive trust. 44 In Say-Dee, the Court of Appeal found a basis for relief against the wife and daughters, which is not applicable in this case. It found that Mr Elias had acted as the agent of his wife and daughters in relation to the transaction. He, of course, had knowledge of his improper actions, which were in breach of his fiduciary duties. That knowledge, the Court found, was to be imputed to his wife and daughters, because they were his principals. In those circumstances, they had the requisite knowledge that the transfer to them was in breach of his fiduciary duty. 45 I should say at once that there is no basis for liability in this case, as was found by the Court of Appeal in Say-Dee on the basis of the husband's knowledge being imputed to the wife and daughters. There is no question that Kalls was in any way acting as the agent of Baloglow in procuring or making the payment to Baloglow. Kalls' knowledge cannot therefore be imputed to Baloglow in this case. 46 Because the Court of Appeal found liability in Say-Dee on the basis of the husband's knowledge imputed to the wife and daughters, the dicta concerning the lack of necessity for a plaintiff under the first limb of Barnes v Addy to prove knowledge in the recipient are obiter dicta, despite the fact that the Court also found liability in that case on that basis. These dicta have predictably been the subject of considerable learned comment, not all of it favourable. Thus, in J D Heydon & M J Leeming, Jacobs' Law of Trusts in Australia (2006), the learned editors state at [1337] that Koorootang and Say-Dee "exhibit a violent approach to authority, and have already been subjected to convincing criticism." 47 A trial Judge in this Court therefore faces the difficult situation of obiter dicta in the High Court some 30 years ago conflicting with recent dicta in the Court of Appeal, which have met with substantial criticism. If, however, the Court finds that the defendant in any event establishes the bona fide purchaser defence, resolution of this conflict of dicta would not be necessary in this case. 48 In relation to Barnes v Addy cases, the knowledge which may be sufficient to impose liability on a stranger was categorised in five classes by Peter Gibson J in Baden v Societe Generale Pour Favoriser le Developpement du Commerce et de L'Industrie en France SA [1993] 1 WLR 509. That was itself a Barnes v Addy case, but under the second limb not the first limb. His Lordship's categorisation was as follows at 575 - 576: (i) Actual knowledge; (ii) Wilfully shutting one's eyes to the obvious; (iii) Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) Knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) Knowledge of circumstances which would put an honest and reasonable man on inquiry. 49 Although the decision in Baden was disapproved by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, this classification of the categories of knowledge has continued to be cited frequently with approval, although there has been a deal of criticism. Thus in Jacobs' Law of Trusts ibid the learned editors described it as attaining the "zenith of complexity". And in Royal Brunei Airlines it was said at 392 that the Baden "scale of knowledge is best forgotten". It is important to note that, whatever criticisms there have been, both sides argued this aspect of this case in terms of the Baden categories. To correspond with the submissions and because they appear to me to provide a useful categorisation in the present context, I have proceeded by reference to that classification. 50 For the reasons stated in [47] above, I shall consider first whether Baloglow can be taken to have established what has been called the bona fide purchaser without notice defence in relation to the claim against him under the first limb of Barnes v Addy. The point is made in Jacobs' Law of Trusts ibid that this defence in this context is not to be taken to be identical with the position of the bona fide purchaser of value of the legal estate in trust property. 51 The situation as to the categories of knowledge relevant in a first limb case I take to be accurately stated by Anderson J in Hancock at [79] as follows: "[79] As to recipient liability, there is less certainty about what must be proved to sheet home liability to the non-trustee but I adopt, with respect, the reasoning and conclusions of Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16 on the question. In the first place, it is not necessary to establish that a recipient of trust property acted dishonestly or with want of probity. Recipient liability may be established if the defendant had actual or constructive knowledge at the time he received the relevant property that (a) it was trust property and (b) it was being misapplied. The defendant will be taken to have constructive knowledge if it is proved that he wilfully shut his eyes to the obvious; that he wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make in the circumstances; and that he knew of circumstances which would indicate the true facts to an honest and reasonable man. If all that is proved is that the defendant had knowledge of circumstances which would put an honest and reasonable man on inquiry, that is not enough: see Koorootang at 85 and 105." That case went on appeal to the Full Court of Western Australia ( Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198) and by way of special leave application to the High Court ( Hancock Family Memorial Foundation Ltd v Porteous (2000) 201 CLR 347), but nothing was said to derogate from that passage in Anderson J's judgment. 52 In determining these questions of knowledge, I bear in mind judicial cautions over a long period against too readily imputing knowledge to a defendant. In Bailey v Barnes [1894] 1 Ch 25, Lindley LJ said that the limitations of the test would be exceeded if a bona fide purchaser were required to conduct inquiries as a "suspicious purchaser". His Lordship continued at 34 - 35: "The doctrine of constructive notice is based on good sense, and is designed to prevent frauds on owners of property; but the doctrine must not be carried to such an extent as to defeat honest purchasers; and although this limitation has sometimes been lost sight of, still the limitation is as important and is as well known as the doctrine itself. This will be seen both from well-known decisions and from the language of the Conveyancing Act, 1882, s 3, which is now the authority to be regarded." 53 His Lordship cited the passage from the judgment of Lord Cranworth LC in Ware v Lord Egmont (1854) 4 De G M & G 460 at 473; 43 ER 586 at 592 concerning the inexpediency of the extension of the doctrine of constructive notice. 54 This warning has been repeated in modern authority: see Consul v DPC supra per Stephen J at 413; Baden per Peter Gibson J at 582 – 583; Sansom v Westpac Banking Corp (1996) 7 BPR 14,615 at 14,626 per Sheller JA. 55 The plaintiffs' submissions concerning which of the Baden categories are conceivably applicable in this case were far from crystal clear. However, I understand that the plaintiffs submitted that Baloglow had knowledge within one or more of categories (iii), (iv) and (v). The plaintiffs eschewed reliance on category (v), on the basis that this was not sufficient in a first limb case, citing Hancock supra and Koorootang at 105. 56 The requisite knowledge in this case is knowledge that the moneys paid to Baloglow were moneys of KE or AA taken by Kalls in breach of trust or fiduciary duty as a director. If they were so taken, Kalls' payment of them to Baloglow would equally be a breach of trust or duty. The relevant question is whether Baloglow received that payment without notice of that characterisation of Kalls' actions in making the payment. 57 I shall approach this first on the basis most favourable to the plaintiffs, that is, on the basis that the question is whether Baloglow has negatived category (iv) knowledge, ie, knowledge of circumstances which would indicate the facts to an honest and reasonable man. 58 The evidence concerning this subject matter is slight when compared with the general mass of the evidence in this case, most of which was concerned with the uncommercial transaction aspect, including the substantive defence pleaded under 588FG(2) of the CL, where the issues involving notice concern a different and more stringent criterion and quite different subject matter. 59 The evidence in chief of Baloglow was contained in an affidavit of 25 October 2005, where he stated: "2 I did not consider that either Kalls Enterprises Pty Ltd or AA Australian Commercial Laundries Pty Ltd had any obligation to pay me the sum of $555,000. I thought that it was only by reason of a direction given to Kalls Enterprises Pty Ltd by Con Kalls, Denise Kalls and Peter Kaliaropoulos (my debtors) that I would receive (and did receive) payment of that amount from the company. 3 I believed that my debtors had made or would make arrangements with Kalls Enterprises Pty Ltd to repay the company the amount paid to me in December 1995 and that those persons were able to repay those funds. 4 In particular, I believed that my debtors had substantial equity in the Marrickville and Blakehurst properties (well in excess of $555,000). I also believed from what Peter Kaliaropoulos had told me in late 1995, that Peter Kaliaropoulos was earning an annual salary of approximately $600,000." His cross examination concerning this contained the following: "Q My question is, in December 1995 did you have any knowledge of any such arrangement? A No. Q That is just sheer speculation on your part? A No, because the persons involved with Kalls Enterprises and the owner, namely, the shareholders being Peter Kaliaropoulos and Con Kalls and the directors being Con Kalls and Denise were all involved in the deed in 1995, so they are 100 per cent of the people that matter, and, as far as I was concerned, they were well aware of it and it was up to them to make arrangements with to their own company. Q You had no knowledge of any such arrangement? A I had no specific knowledge, no." He was subsequently asked: "Q In your affidavit, in paragraph 2 of your affidavit of 25 October, judge's bundle 366, do you see that in paragraph 2: 'I thought it was only by reason of a direction 368 given by Con Kalls, Denise Kalls and Peter Kaliaropoulos'? A Yes. Q Do you have any knowledge of any direction given by Denise Kalls? A Apart from signing the deed, am, I don't recall being aware of anything else. Q Do you have any direct knowledge of a direction given by Mr Con Kalls? A Well, again, I don't recall apart from the deed of December. Q I want to suggest to you, do you have any knowledge? A Sorry, if I may withdraw that, because there was earlier correspondence going to, back to I think about August where Kaliaropoulos and Con Kalls had agreed that the balance of funds be paid across to me, so in effect they were giving a direction to whichever vehicle sold the laundry and as it turned out to be Kalls Enterprises so in effect they were directing Kalls Enterprises. Q That is just a speculation on your part as to what you believed might have occurred, is that right, or can you point to a particular document? A Well, there was various correspondence but also the deed summed it up; I think the deed says no it is the individuals that are paying me the amount and I had no intention of taking any money from a company, I was only taking it from the individuals, I mean, I was only suing the individuals and it was them paying their own personal debt to me. That's how I saw it. Finally on this subject matter, he was asked "Q Mr Baloglow, you received the funds out of the proceeds of the sale of the business to TQLS to your knowledge in December 1995, didn't you? A It came around that way but I received the funds from Con and Peter and they in turn had received it from the, from the sale of the business." 60 I bear in mind in assessing the relevant material that it is not uncommon for proprietary companies to pay sums, sometimes large sums, on behalf of directors or to advance to directors funds to meet private obligations or for private purposes. This is illustrated by the facts in Hancock. Occasionally, the taking of these sums constitutes bald misappropriation of company funds by a director. But generally the takings are part of perfectly proper transactions under which the funds are debited to the director's loan account with the company, or there are other arrangements between the company and the director for the due repayment of these funds to the company. In those circumstances, such transactions are not generally in breach of trust or in breach of the director's fiduciary duties to the company. In so far as knowledge of KE's solvency is relevant, Baloglow had no knowledge of anything that pointed to insolvency. He had never been privy to KE's financial affairs and it had been carrying on the business of TQLS, apparently in the ordinary course. I also bear in mind that, although Kalls had been guilty of a misrepresentation to Baloglow, Baloglow said in cross examination that, in the course of his dealings with Kalls, Kalls had in many instances been truthful to him. I have also recorded that I found Baloglow a truthful and generally reliable witness. In all the circumstances I find that Baloglow has established that he did not have the requisite knowledge on a category (iv) basis for the purpose of the bona fide purchaser defence, ie, knowledge of circumstances which would indicate the facts to an honest and reasonable man. 61 If this be so, then, a fortiori, he has established that he did not have the requisite knowledge on a category (iii) or a category (ii) basis. On the evidence, one must equally reach the conclusion that he could not be said to have wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make, much less that he wilfully shut his eyes to the obvious. 62 There can be no question but that Baloglow was a purchaser for value. By the transaction under which he received the $555,000 he gave up entirely his claim against Denise and accepted a smaller sum to settle than was owing to him under judgment debts by Kalls and Kaliaropoulos. He also released all three from all claims arising out of the Proceedings and the February 1995 deed. It is my conclusion that the defence of bona fide purchaser is made out, so that the claim under the first limb of Barnes v Addy based on a breach of duty to KE fails. 63 In my view, the case is even clearer in relation to the first limb claim based on a breach of duty towards AA. First, unlike the case based upon breach of duty towards KE, I am not prepared to find that the plaintiffs have established that the advance of funds to Kalls or the payment of $555,000 to Baloglow constituted a breach of trust or a breach of fiduciary duty in relation to AA. During the hearing, the evidence as to the relations between KE and AA as to the ownership and conduct of TQLS after the departure of Baloglow and while Kalls was the controller of both companies was described as a morass. Nothing ever happened to dispel that impression. It would seem that the money to fund the operation came from Kalls via KE; there is certainly nothing to suggest that AA had the requisite funds. Perhaps the reason the employees were continued on in the name of AA was to avoid the redundancy payments that would likely have been necessary had their employment been terminated with AA and resumed with KE. The cupboard is bare of any evidence as to what arrangement was come to (presumably through the agency of Kalls on both sides) concerning these matters. However, equally it is not clear that it was to the detriment of AA that KE should take over and run with its funds a business that it would seem AA could not afford to run. Baloglow initially questioned the apparent assumption of proprietorship by KE, but desisted from any protest. I cannot conclude on the evidence that any breach of trust or of fiduciary duty was established vis a vis AA. That is enough to determine that aspect of the claim. 64 The above determinations are made upon the basis that the statements in the judgment of Tobias JA in Say-Dee correctly represent the present state of the law. If they do not, then the onus is on the plaintiffs to prove that the defendant had knowledge that the receipt of the $555,000 by the defendant was in improper circumstances. In view of my findings above in the defendant's favour, a fortiori, the plaintiffs, if they bear it, have failed to discharge that onus in respect of either KE or AA. 65 It seems to me on the facts, as I have stated them, that the defendant may also have succeeded in resisting the claim under the first limb of Barnes v Addy by reference to the defence of change of circumstances. However, this defence was not pleaded or argued, so no more need be said about it. 66 The plaintiffs' claim under the first limb of Barnes v Addy therefore fails. CONCLUSION 67 My conclusion is that the plaintiffs' claims fail and that the proceedings should be dismissed. 68 As a result of this, the defendant's cross claim against the cross defendant falls to the ground. It need not be determined and should be dismissed. ********** 23/06/2006 - Inadvertent omission - Paragraph(s) 13, 14 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.