New South Wales Supreme Court CITATION : Woodgate v Network Associates International BV [2007] NSWSC 1260 HEARING DATE(S) : 19/02/07, 12/09/07 Supplementary submissions 31/07/07 JUDGMENT DATE : 8 November 2007 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Order to be made for payment of $104,000.00 by defendant to Marketing Results Pty Ltd, together with interest CATCHWORDS : CORPORATIONS - winding up - preference recovery action - no matter of principle Civil Procedure Act 2005, s.100 LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss.9, 513B(b), 513C(b), 588E, 588FA, 588FC, 588FE, 588FF(1), Uniform Civil Procedure Rules 2005, rules 11.2, 11.4, 11.6, Schedule 6, para (a) Dwyer v R-Jay Pty Ltd [2007] SASC 115 New Cap Reinsurance Corp Ltd v Renaissance Reinsurance Ltd (2002) 192 ALR 601 CASES CITED : Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292 Sutherland v Lofthouse [2007] VSCA 197 Woodgate v Scansoft Belgium BVBA (unreported, NSWDC, 13 July 2006) Giles Geoffrey Woodgate in his capacity as liquidator of Marketing Results Pty Ltd and Quadtel International Pty Ltd - First Plaintiff PARTIES : Marketing Results Pty Ltd - Second Plaintiff Quadtel International Pty Limited - Third Plaintiff Network Associates International BV - Defendant FILE NUMBER(S) : SC 2678/06 COUNSEL : Mr E.C. Muston - Plaintiffs SOLICITORS : TurksLegal - Plaintiffs IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY, 8 NOVEMBER 2007 2678/06 GILES GEOFFREY WOODGATE AS LIQUIDATOR OF MARKETING RESULTS PTY LIMITED & 2 ORS v NETWORK ASSOCIATES INTERNATIONAL BV JUDGMENT 1 The plaintiffs are Marketing Results Pty Limited (which I shall call "MR"), Quadtel International Pty Limited ("Quadtel") and Mr Woodgate, who is the liquidator of both those companies. The winding up is, in each case, a creditors' voluntary winding up that followed on from voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). The voluntary administration of each company commenced on 12 May 2003. That day is accordingly the "relation-back day", as defined by s.9, in respect of each winding up: see ss.513B(b) and 513C(b). 2 Mr Woodgate, as liquidator of each of MR and Quadtel, claims that certain payments made to the defendant, Network Associates International BV, were "unfair preferences" as referred to in s.588FA and "insolvent transactions" as referred to in s.588FC. The elements of the claim, briefly stated, are therefore, first, that the defendant was a "creditor" of the relevant company; second, that both the company and the defendant were parties to a "transaction"; third, that, as a result of the transaction, the defendant received from the relevant company, in respect of an unsecured debt owed by the company to the defendant, more than the defendant would have received from the company in respect of the debt if the transaction were set aside and the defendant were to prove for the debt in the winding up of the company; fourth, that a particular situation with respect to insolvency of the company existed at the time of the transaction; and, fifth, that the transaction was entered into during the period of six months ending on the "relation-back day". 3 The originating process seeks, in the first instance, declaratory relief. There are claims, in the alternative, for a declaration that payments totalling $127,200.00 by (or for the benefit and with the authorisation of) MR to the defendant are void as against Mr Woodgate as MR's liquidator and a declaration that payments totalling $127,200.00 by Quadtel are void as against Mr Woodgate as liquidator of Quadtel. The allegation, in each case, is that the payments were "unfair preferences, priorities or advantages" over other unsecured creditors of the relevant company. There is then a claim for an order that "the defendant pay to the plaintiffs" the sum of $127,200.00. That claim does not differentiate among the several plaintiffs (MR, Quadtel and Mr Woodgate) and, on its face, envisages payment to all of them. This last claim is obviously advanced by reference to s.588FF(1)(a). 4 It will be clear from this description of the relief sought that the plaintiffs do not advance any single thesis and that they desire to obtain moneys from the defendant on alternative bases. This is something to which I shall return. 5 There is, however, a preliminary matter. Because there has been no appearance by the defendant and the plaintiffs pursued their claims against the defendant in its absence, I must, at the outset, pay attention to the question of service, the defendant being a Netherlands corporation. 6 Rule 11.2 of the Uniform Civil Procedure Rules 2005 allows originating process to be served outside Australia in the circumstances referred to in Schedule 6. Paragraph (a) of Schedule 6 refers to the following circumstance: "if the proceedings are founded on a cause of action arising in New South Wales." 7 It will be necessary, in due course, to consider the evidence about the state of the account between MR and Quadtel, on the one hand, and the defendant on the other. For the moment, it is sufficient to note that, according to that evidence, the administrative and financial affairs of both MR and Quadtel were centred upon an office or offices in the Hills District of Sydney, that each item of correspondence from MR and Quadtel to the defendant emanated from an office in that location and that acts involved in the remittance of funds to the defendant were performed at such a location. In addition, the winding up of each of MR and Quadtel is being conducted in New South Wales. On that basis, the plaintiffs contend and I accept that the claim for an order under s.588FF against the defendant (as well as the claims for declaratory relief) mean that the proceedings are founded on a cause of action arising in New South Wales. This conclusion is dictated by the reasoning in New Cap Reinsurance Corp Ltd v Renaissance Reinsurance Ltd (2002) 192 ALR 601 the circumstances in which were relevantly indistinguishable from those of this case. 8 As to service itself, I have before me an affidavit of Mr Werle, a lawyer admitted to practice in the Netherlands. He gives evidence of the law of the Netherlands with respect to service of process on corporations. That is a matter made relevant by rule 11.6 of the Uniform Civil Procedure Rules 2005: "A document to be served outside Australia need not be personally served on a person so long as it is served on the person in accordance with the law of the country in which service is effected." 9 Mr Werle's evidence establishes that, under Dutch law, service is properly effected upon a corporation if it is delivered by a Candidate Justice of the Sheriff's Office to the corporation's registered office. I also have before me an affidavit of Mr Koks, a Candidate Justice of the Sheriff's Office at Amsterdam, deposing to delivery of the originating process, supporting affidavit and other documents on 21 July 2006 to a specified address in Amsterdam which, according to the affidavit, is the registered office of the defendant. 10 On the basis of this evidence, I am satisfied that the defendant was duly served. That, plus the circumstance that leave to proceed under rule 11.4 was granted on 17 November 2006, means that there is no reason why the court should not proceed to a determination of the proceedings in the absence of the defendant. 11 I turn, therefore, to the merits of Mr Woodgate's claims. Section 588FF(1) states a condition that must be satisfied before any order under that section may be made upon the application of a company's liquidator, namely, that "a court is satisfied that a transaction of the company is voidable because of section 588FE". Section 588FE refers to various kinds of "transaction", making it clear, in each case, that it is concerned with a transaction "of" the particular company. If a particular "transaction of" the particular company is, by one of the subsections of s.588FE, declared "voidable", then s.588FF empowers the court to make an order. Having regard to the definition of "transaction" in s.9, the making of a payment is a "transaction". 12 In the present case, each of eight distinct payments made to the defendant is said to represent a relevant "transaction". The payments and the dates on which they were made are as follows: $25,000.00 - 3 January 2003 11,020.00 - 8 January 2003 18,000.00 - 15 January 2003 18,000.00 - 22 January 2003 18,000.00 - 29 January 2003 12,000.00 - 6 February 2003 15,000.00 - 11 February 2003 10,000.00 - 21 February 2003 13 There is a question as to which of MR and Quadtel made the payments. Mr Woodgate has put into evidence banking records which show the source of each payment. In relation to all but two of the items, it is, to my mind, clear from these records (and I find) that the relevant payment was made by MR to the defendant through National Australia Bank. The exceptions are the payment of $11,200.00 on 8 January 2003 and the payment of $12,000.00 on 6 February 2003. In those two cases, it appears that the payment was made by Quadtel to the defendant through National Australia Bank. 14 On this basis, I conclude that a total of $104,000.00 was paid by MR to the defendant by means of all but the second and sixth payments listed; and that a total of $23,200.00 was paid by Quadtel to the defendant by means of the second and sixth payments. 15 The next question is whether either of MR and Quadtel was, at the time of the making of the payments, indebted to the defendant. The first point of significance, in that respect, is that there appears to have existed a distribution agreement of 5 June 1997 between MR and the defendant under which MR was to distribute the defendant's products. Not surprisingly, therefore, MR was considered by the defendant to be indebted to the defendant. The indebtedness was regarded by the defendant as being $159,819.23 on 12 December 2002, being the date of a statutory demand served by the defendant on MR. Internal correspondence between employees of Quadtel Limited (the holding company of both MR and Quadtel) referring to the statutory demand did not suggest that MR was not indebted to the defendant – merely that, because of stock returns, the debt "should be closer to A$143,909.58". On 6 January 2003, it was agreed that the balance outstanding was $134,8l9.23. It is clear that this related to the indebtedness of MR the subject of the statutory demand of 12 December 2002 and the later internal correspondence. Following the agreement of 6 January 2003, a payment plan was negotiated, involving payment of $11,200.00 on 8 January 2003, $18,000.00 on each of 15 and 29 January 2003 and 5, 12, 19 and 26 February 2003 and $15,619.23 on 5 March 2003. 16 On the basis of this evidence, I conclude that MR was indebted to the defendant to the extent of at least $134,819.23 (the aggregate of the agreed instalments) as at 6 January 2003. 17 In the case of Quadtel, there is really no evidence of indebtedness to the defendant. Nothing in the way of correspondence about the state of any account is in evidence. The list of creditors lodging proofs of debt in the winding up of Quadtel does not include the defendant. 18 There is evidence showing that the affairs and finances of MR and Quadtel were intermingled. Each was a wholly owned subsidiary of Quadtel Limited. While each company had its own bank account, it appears that payments were sometimes made from a particular company's account without regard for whether the debt being paid was a debt of that company or of the other company. This was the basis for a submission that the two payments made by Quadtel might properly be regarded instead as payments made by MR. The submission was based on the following passage in the judgment of the Full Federal Court in Re Emanuel (No 14) Pty Ltd; Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292 at pp.298, 299: "Before a payment made by B to C can be effective to discharge A's debt to C, ordinarily it must be made with A's authorisation or ratification: see Mason and Carter, Restitution Law in Australia , para 846, (Butterworths, Sydney, 1995); Goff and Jones, The Law of Restitution , p 17, (4th ed, Sweet and Maxwell, London, 1993); and see generally on payment of another's debt, Beatson, The Use and Abuse of Unjust Enrichment , ch 7, (Clarendon Press, Oxford, 1991). Where a payment is so made it can properly be said that it is A's act that makes B's payment efficacious at law to discharge the debt to C. This, of itself, does not provide reason for saying that the payment itself is made by A. Nonetheless where that payment constitutes part of the consideration B furnished and A required in the A-B contract and where (inter alia) that consideration is in the final settlement of the obligations inter se of A and B, then we see no compelling reason for not concluding that A has made the payment to C albeit by using B as its instrument for the purpose." 19 It is not possible to draw any inference that, on this or any other basis, money paid by Quadtel to the defendant in truth represented payment by MR to the defendant. The evidence shows that MR was indebted to the defendant and that an agreed payment plan envisaged payments by MR corresponding with those actually made by Quadtel. But there is no way of concluding what the consideration was, as between MR and Quadtel, and therefore no basis for reaching conclusions of the kind to which the Full Federal Court referred. 20 I proceed, therefore, on the basis that payments totalling $104,000.00 were made by MR to the defendant in the period 2 January 2003 to 21 February 2003; that each such payment was made in reduction of indebtedness owing, due and payable by MR to the defendant at the date of the payment; and that the two payments made by Quadtel to the defendant ($11,200.00 on 8 January 2003 and $12,000.00 on 6 February 2003) were not referable to MR's indebtedness to the defendant (nor did they, on the evidence, relate to any indebtedness of Quadtel to the defendant). The two Quadtel payments therefore do not need to be considered further. 21 The next question to be addressed in relation to each of the six payments made by MR to the defendant is whether it resulted in the defendant's receiving from MR, in respect of an unsecured debt of MR owed to the defendant, more than the defendant would receive from MR in respect of the debt if the payment were set aside and the defendant were to prove for the debt in the winding up of MR. This is the question posed by s.588FA(1)(b). 22 The evidence of Mr Woodgate is that, after allowing for the claims of a secured creditor and the preferred unsecured claims of employees, there is, in the winding up of MR, a deficit of $94,881.00. If the payments to the defendant now under discussion were added back, the deficit of $94,881.00 would become a surplus of $9,119.00. But as Mr Woodgate's evidence shows, preferred costs and expenses of the winding up, in the form of approved remuneration, are outstanding and unpaid to an extent greatly in excess of $9,119.00. Even with the payments in question reversed, there would therefore be no return to unsecured creditors in the winding up of MR. 23 It follows that the result of the making of the six payments by MR to the defendant was such that the defendant received in respect of its debt $104,000.00 more than it would have received if the payments had been set aside and the defendant had proved in the winding up of MR. 24 This conclusion means that, in terms of s.588FA(1), each of the six payments was an "unfair preference" given by MR to the defendant. The next question, therefore, as whether it is an "insolvent transaction" of MR. The answer, by virtue of s.588FC, depends on certain findings regarding MR's solvency. Having regard to s.588FC(a)(i), a positive answer will be given if MR was insolvent when each of the six payments was made. 25 In this particular case as regards MR, I am relieved of the need to make an assessment of the company's solvency at the several relevant dates. This is because, in the absence of proof to the contrary, I must presume that MR was insolvent at each such date. The presumption arises in this way. Section 588E(2) says that ss.588E(3) to (9) inclusive have effect for the purposes of a "recovery proceeding" in relation to a company. The present proceeding is a "recovery proceeding" in relation to MR, being, as referred to in paragraph (a) of the definition of "recovery proceeding" in s.588E(1), "an application under section 588FF by the company's liquidator". Section 588E(4)(8)(a) applies where, "for the purposes of another recovery proceeding in relation to the company", a matter of the kind referred to in s.588FC has been proved – which matters include insolvency at a particular time or times. The effect of s.588E(8) is then to require that it be presumed, in the recovery proceeding at hand, "that that matter was the case". It follows that if the question of solvency material to determination of this present proceeding was "proved" in some earlier "recovery proceeding", I must now accept that result in this proceeding, there being no suggestion, in the circumstances of absence of the defendant, that, in terms of s.588E(9), "the contrary" has been "proved for the purposes of the proceeding concerned", that is, this proceeding. 26 The earlier "recovery proceeding" to which I must have regard is a proceeding in the District Court of New South Wales (which is "a court", without a capital "C", as referred to in s.588FF(1)). On 13 July 2006, His Honour Judge Rein delivered judgment in Woodgate v Scansoft Belgium BVBA (District Court proceedings 5189 of 2004). That was an application by Mr Woodgate as liquidator of MR under s.588FF in which it was sought to recover money for MR on the basis of unfair preferences constituted by payments made by MR to Scansoft Belgium BVBA in the period 1 January 2003 to 30 April 2003. Scansoft put in issue the question of MR's insolvency during that period. Rein DCJ was therefore required to determine that question by reference to the evidence placed before the court. His Honour's conclusion was stated at paragraph 8 of the judgment as follows: "Mr Woodgate, the liquidator, has prepared a report (Exhibit 'GGW 10'), in which he expresses the view that as from 31 December 2002, the Company was insolvent. The Company, on liquidation, was established as having unsecured assets of approximately $400,000 and unsecured debts in excess of $4 million. There was an extensive attack on Mr Woodgate's credit, which included reference to his failure to clearly state who had been involved in the preparation of the report, and his having spoken to a member of his staff whilst he was under cross examination and having given, it was alleged, a deliberately false answer in relation to that aspect. The problem with the attack is that it did not focus upon any of his material conclusions in his report. It was never put to him that he was in error or that his assertion that he had himself checked the entire contents of the report was false. I am satisfied on the basis of his opinion and the documentary material attached to it including the statutory demand for $159,819.23 made on 12 December 2002 (p A92 Exhibit 'C') by another creditor and not met within 21 days, that the Company was at least from 31 December 2002 insolvent, that is unable to pay out of its own money all of its debts as and when they became due and payable: Sandell v Porter (1966) 115 CLR 666, and see s 95A of the Corporations Act 2001 and the discussion at pp 434-8 of McPherson, 'The Law of Company Liquidation', LBC Information Services." 27 It is clear from this passage that insolvency of MR during the period January to April 2003 was positively "proved" in the earlier District Court proceedings and that it was not established by concession or presumption: compare Dwyer v R-Jay Pty Ltd [2007] SASC 115. Accordingly and by virtue of s.588E(8), it must be presumed in this present proceeding that MR was insolvent during the period January to April 2003. 28 The conclusion just stated leads on to a finding that each of the six relevant payments by MR to the defendant was made at a time when MR was insolvent. Each such payment was made in January or February 2003, that is, within the period to which Rein DCJ's finding of insolvency relates. Each payment was therefore an "insolvent transaction" within s.588FC. 29 The final question is that posed by s.588FF(2)(b), namely, whether each "insolvent transaction" was entered into within a period made relevant by that section. One such relevant period is the period of six months ending on the "relation-back day" which, as I have said, is 12 May 2003. The period of six months to which regard is thus to be had began on 12 December 2002. Each of the six payments was made in January or February 2003. The transactions were therefore entered into within the period of six months to which s.588FE(2)(b)(i) refers. 30 I pause to recapitulate the central findings: 1. Each of the first, third, fourth, fifth, seventh and eighth payments referred to at [12] entailed a "transaction" entered into by MR with the defendant. 2. Each such transaction resulted in the defendant receiving from MR, in respect of unsecured indebtedness of MR to the defendant, more than the defendant would have received from MR in respect of the indebtedness if the payment were set aside and the defendant proved for the indebtedness in the winding up of MR. 3. MR was insolvent at the time each such transaction was entered into. 4. Each transaction was entered into within the period of six months ending on the "relation-back day" in relation to the winding up of MR. 31 I am accordingly satisfied that each such transaction (payment) is "voidable" because of s.588FF(1). It is therefore open to me to make an order under s.588FF(1) on the application of Mr Woodgate, as liquidator of MR. 32 I see no need for declaratory relief. The appropriate course is simply to make an order directing that the defendant pay to MR an amount equal to all of the money paid by MR under the transactions, that is, $104,000.00. This is a form of order expressly contemplated and authorised by s.588FF(1)(a). There is no reason why that order should not be made. 33 Mr Woodgate maintains that the defendant should also pay interest from the date of demand upon the defendant (12 May 2004) until judgment. Section 588FF(1) does not contemplate an order for the payment of interest, but I am satisfied that s.100 of the Civil Procedure Act 2005 allows inclusion of interest – something which is commonly done in cases of this kind: see, by way of recent example, Sutherland v Lofthouse [2007] VSCA 197 at [52]. Interest at Supreme Court rates on $104,000.00 should be included in this case. 34 The plaintiffs are also entitled to their costs. 35 I direct that short minutes giving effect to this judgment and accompanied by a written explanation of the interest calculation be forwarded by the plaintiffs to my Associate within seven days. ********** 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.