New South Wales Supreme Court CITATION : Tirrabella Pty Ltd v Struthers [2007] NSWSC 467 HEARING DATE(S) : 26/04/07 JUDGMENT DATE : 11 May 2007 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Appeal against rejection of proof of debt dismissed CATCHWORDS : CORPORATIONS - winding up - proof of debt - rejection by liquidator - appeal to court - whether existence of debt proved - no matter of principle LEGISLATION CITED : Corporations Act 2001 (Cth), s.1321 CASES CITED : Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 Westpac Banking Corporation v Totterdell (1997) 25 ACSR 769 PARTIES : Tirrabella Pty Limited - Plaintiff Ian Lawrence Struthers as liquidator of Bolting In Pty Limited - Defendant FILE NUMBER(S) : SC 3365/05 COUNSEL : Mr M.W. Young - Plaintiff Mr L.R. deV. Tyndall - Defendant SOLICITORS : Dixon Holmes duPont - Plaintiff Gregory Falk & Associates - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 11 MAY 2007 3365/05 TIRRABELLA PTY LIMITED v IAN LAWRENCE STRUTHERS AS LIQUIDATOR OF BOLTING IN PTY LIMITED JUDGMENT 1 This is an appeal under s.1321 of the Corporations Act 2001 (Cth) against a liquidator's rejection of a proof of debt. 2 The court's function under s.1321 is to "confirm, reverse or modify" the liquidator's decision. The section does not distinguish between different types of decisions. It is available as a means of reviewing the exercise of a liquidator's discretion or a decision on a matter of business judgment. In cases of that kind, the court's main concern is to see whether the liquidator acted unreasonably or in bad faith. But in cases such as the present where the decision under challenge is a decision with respect to the admission of a proof of debt, the court takes a different approach. That approach was described by Brennan and Dawson JJ in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at pp.340-1: "The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo: Re Bird's Stores Pty Ltd (1931) 37 Arg LR 94; Re Kentwood Constructions Ltd [1960] 1 WLR 646; [1960] 2 All ER 655; Re Trepca Mines Ltd [1960] 1 WLR 1273; [1960] 3 All ER 304. In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation." 3 The appellant claiming to be aggrieved by the liquidator's decision to refuse to admit the proof of debt has the onus of proving that the debt should properly be admitted to proof; and the appeal is by way of hearing de novo: Westpac Banking Corporation v Totterdell (1997) 25 ACSR 769. 4 The proof of debt with which I am here concerned is dated 25 January 2006 and was lodged by the plaintiff, Tirrabella Pty Ltd ("Tirrabella"), with the liquidator of Bolting In Pty Ltd ("Bolting"). Tirrabella claimed to be a creditor of Bolting in the sum of $812,705.42. That sum was said to be the balance of principal outstanding in respect of a loan. To be more precise, the proof of debt stated the following under the heading "Particulars of the debt are": " Date Consideration (state how the debt arose) Amount Remarks (include details of voucher substantiating payment) $ & ¢ 26.08.1999 to 18.07.2000 Loan Advance $1,607,371.58 plus interest accruing at the Supreme Court rate of 9.00% pa " 5 There was then reference to two payments having been received, one for $387,666.36 on 21 June 2000 and the other for $406,999.80 on 17 July 2000. Subtraction of the aggregate of these ($794,666.16) from the $1,607,371.58 produces the claimed sum of $812,705.42. 6 Having regard to the form and content of the proof of debt, it is for Tirrabella to prove, in this present proceeding, that the sum of $812,705.42 became owing to it by Bolting in respect of a "loan advance". 7 The case Tirrabella seeks to make has its genesis in a deed made in or about October 1998 between Tirrabella and a company called Centrom Projects Pty Ltd ("Centrom"), which deed was formally terminated by another deed in September 2000. The essence of the arrangement embodied in the deed was that Centrom would provide residential properties to Tirrabella and Tirrabella would sell them. Centrom was not itself the owners of the properties. They were owned by "clients" who had listed properties for sale by Centrom. It was to "clients" that Tirrabella was to provide selling services in accordance with the promise to Centrom. The deed envisaged that Centrom and Tirrabella together would receive part of the gross proceeds of sale of a property and that that part would be split between them in a way prescribed by the deed. 8 There are some uncertainties, to my mind, about the precise meaning and operation of this deed. What is clear, however, is that it gave rise to payment obligations involving Centrom and Tirrabella and was premised on the receipt by each of them of money for services rendered. 9 Mr Martin was, at all material times, the sole director of Tirrabella. In about May 1999 – that is, six months or so after the deed was made between Centrom and Tirrabella – Mr Martin and a then colleague, Mr Peniston-Bird, formed a new company, Bolting. They became the directors and shareholders of Bolting. At or soon after inception, Mr Martin held seven shares in Bolting and Mr Peniston-Bird held three shares. 10 It is Mr Martin's evidence (denied, however, by Mr Peniston-Bird) that, at the time Bolting was formed, he and Mr Peniston-Bird agreed that Tirrabella would "fund its operating costs as a loan to the new company" and that this would be achieved by Tirrabella's directing moneys to Bolting out of Tirrabella's "quite decent cash flow". Mr Martin maintains that, by the commencement of the winding up of Bolting, a total of $1,607,371.58, being moneys receivable by Tirrabella, had been diverted by Tirrabella to Bolting. The components of this total, spanning a period from August 1999 to July 2000, were recorded in a schedule accompanying a letter sent by Tirrabella's solicitors to Bolting's liquidator after lodgment of the proof of debt with which I am concerned. The schedule, it was said, "sets out each sum of money received by Bolting In at the direction of Tirrabella to which Tirrabella was beneficially entitled but for the loan purposes as stated in the formal proof of debt lodged by our client". 11 The essence of Tirrabella's claim is that it became entitled to receive moneys from time to time under the deed with Centrom and, by arrangement with Bolting, directed Centrom to pay those moneys to Bolting instead of Tirrabella, but with Bolting thereby incurring or accepting a liability to repay the moneys to Tirrabella. 12 On 17 August 2006, the liquidator rejected the proof of debt, stating reasons as follows: "My grounds for disallowance of the claim for $812,705.42 for Loan Advance are as follows: (a) there exists no Loan Agreement between the companies. (b) Mr Dominic Bird, former Company director and shareholder, informs me there was no Loan Agreement between the companies. (c) client payments made to the Company were a result of Sale Invoices being issued on the Company's stationary [sic]. There is no evidence that clients were paying the Company under directions from Tirrabella Pty Limited. (d) the client payments made to the Company were treated as commission income in the Financial Statements of the Company. These Financial Statements were prepared by the Company's External Accountant. (e) Tirrabella Pty Limited was not treated as a creditor in the Financial Statements of the Company that were prepared by the Company's External Accountant. (f) in relation to the Financial Statements for Tirrabella Pty Limited, prepared by the Company's External Accountant, the loan argument does not apply as the Company is not recorded as a Debtor." 13 It is clear, to my mind, that Tirrabella's claim to be owed money by Bolting on the basis asserted in the proof of debt (that is, for moneys lent) can be sustained only if it is found that there was some express or implied promise by Bolting to pay to Tirrabella seems equal to those which, on the case Tirrabella seeks to make, were paid by Centrom to Bolting at the direction of Tirrabella. 14 Mr Peniston-Bird's account of matters differs radically from that of Mr Martin. He says that the arrangement entered into in or about May 1999 was a partnership or joint venture between his own company Zenitas Pty Ltd and Mr Martin's Tirrabella. He says that it was agreed that Mr Martin (or Tirrabella) would meet the "start up costs" because Mr Peniston-Bird himself did not have ready funds to contribute; that Mr Martin (or, more precisely, Tirrabella) paid expenses until about 7 September 1999, at which point commissions began to be received into Bolting's bank account; that, by February 2000, the partnership or joint venture between Tirrabella and Zenitas had generated enough revenue to reimburse the start up costs that had been met by Tirrabella; that Mr Peniston-Bird asked Mr Martin what the amount was; and that, when Mr Martin quantified this at $72,654.00, that sum was paid to Tirrabella out of the partnership or joint venture funds. 15 From that point onwards, according to Mr Peniston-Bird, the expenses of the business were met from its revenues, with profits being shared between the joint venture partners. He accepts that the revenues of the business were mainly derived from commissions for sales of properties provided by Centrom. Mr Peniston-Bird said that, once Bolting had been formed, a direction was given to Centrom that all commissions were to be paid to Bolting. This may associate Bolting's income from Centrom with the pre-existing arrangement between Tirrabella and Centrom centred on the deed of October 1998. Invoices were regularly rendered by Bolting to Centrom for services rendered. They did not refer to Tirrabella. 16 Mr Peniston-Bird also said that the only moneys paid by Tirrabella to Bolting were the moneys to fund the start-up costs or preliminary expenses later quantified at $72,654.00. 17 Mr Peniston-Bird further testified to a practice or course of conduct under which the surplus moneys in Bolting's bank account were from time to time simply paid out to Zenitas and Tirrabella in the shares 40%/60%. He explained that, when the association between him and Mr Martin came to an end in July 2000, he (or more precisely Zenitas) withdrew from Bolting's account almost 40% of the most recent balance and that Mr Martin had, for Tirrabella, withdrawn 60% shortly beforehand. 18 I refer next to the evidence of Mr Ross Kelly, an accountant who acted for Mr Martin and Mr Peniston-Bird when they established Bolting. He obtained Bolting as a shelf company. He gives the following account of a conversation at a meeting with Mr Martin and Mr Peniston-Bird before the shelf company was obtained: "Mr Martin: 'Dominic [Peniston-Bird] and I have been talking about going into business together to market residential properties. We just want some advice from you as to how to set it up.' Mr Bird: 'Let me give you more background of this new business. We are going to market properties for Century 21 in McMahon's Point. Glenn and I will join forces together in getting stock and then marketing the properties. The deal is that my interest will get 30% of the profits of our new business, and Glenn's interest will get 70%. How should we structure it?' I: 'Glenn, is that what you have in mind as well?' Mr Martin: 'Yes.' I: 'Dominic, do you have your own company?' Dominic: 'Yes. Zenitas Pty Limited.' I: 'In that case, I suggest that you acquire a new company to be the nominee of the joint venture. This nominee company will act like a manager or nominee for the joint venture partners. To the extent that it operates as a business, it does so only as a nominee for the joint venture partners who are the beneficial or real owners of the business. The Company will receive moneys from your joint venture business activities for the benefit of the joint venture partners being Tirrabella Pty Limited as to 70% and Zenitas Pty Limited as to 30%. It will incur all expenses as the nominee or agent for the joint venturers. It will hire staff and pay bills for the joint venture partners. Because the Company does not receive any income beneficially it is likewise not personally liable for any expenses or creditors of the joint venture. It does not pay any tax as profits are distributed to the joint venturers and it is the joint venturers who pay the tax. This way, the joint venture profits can be distributed to the joint venture partners on a 70/30 basis after operational costs have been taken into account on annual basis, unlike a company which pays tax in the entity and dividends to the shareholders. What do you think?' Mr Bird: 'It makes sense to me. What do you think Glenn?' Mr Martin: 'I agree. So, in the new nominee company, I guess we should both be directors and shareholders. Should we be 70/30 shareholders like the joint venture interest split? Do we use our companies or personal names as shareholders?' I: 'It does not really matter, strictly speaking. But for practical purposes, you should both be directors and you can both be shareholders under your personal names based on the joint venture split. The detailed rights and obligations will need to go into a joint venture agreement and that's a lawyer's job.' Mr Martin: 'If that's the case, Ross, please go ahead with the new company on that basis.' Mr Bird: 'I agree.' I: 'OK I will set up the new company. You will need to have a joint venture agreement drawn up by a lawyer along the lines we discussed.' Mr Bird: 'Yes. We will.' Mr Martin: 'OK.'" 19 Mr Martin's version of this conversation is as follows: "I: 'Ross, Dominic and I have had discussions to go into business together to sell real estate. Dominic and I will both have equity in the business. I will have 70% equity and Dominic will have 30% equity in the new business. We want to get some advice from you about how to structure it.' Mr Kelly: 'When you say "Dominic and I" do you mean you two personally or using some corporate vehicles?' I: 'We are not sure. We need some advice from you on this. Currently, my company Tirrabella Pty Limited has been selling real estate under a marketing contract with Century 21 in McMahon's Point to sell their stock for quite a few months now. Under the marketing contract, Tirrabella has already got the right to use the Century 21 name in marketing real estate which is quite valuable. So, I want to continue the Tirrabella business and trade under that corporate vehicle.' Mr Kelly: 'If you both want to continue to trade under your respective corporate vehicles Tirrabella and Zenitas, why don't you start a new company to act as a nominee for both of your companies?' I: 'Nominee company? How does it work?' Mr Kelly: 'Because you both want your corporate vehicles to be intact, you will need a nominee company to act as the joint venture vehicle. When you have a joint venture situation between two companies, very often, you will need a single vehicle to carry out the acts of the joint venture companies. Because, otherwise, it would be very unpractical to have two companies to both hire staff, to both send out invoices and to both receive payments from your customers, et cetera. This will be a joint venture vehicle for the joint venture between Tirrabella and Zenitas. The joint venture company will simply act as a nominee, a manager, a conduit, similar to a trustee, for the joint venture companies. It will hire staff, receive income, pay bills, et cetera, for the joint venture companies. In the end, it will own nothing and it will pay no tax as it never receives anything beneficially, as it is only a manager. Tax will be in the hands of Tirrabella and Zenitas as they were the beneficiaries of any income received by the new company. That way, the new company can pay any money it received on behalf of either Tirrabella and Zenitas out to Tirrabella and Zenitas on an on-going basis at any time that you joint venture partners see fit, not as dividends which have to wait until the usual annual accounts to be done.' I: 'Sounds logical to me.' Mr Bird: 'We'll be guided by you.' Mr Kelly: 'Okay, on that basis, I will proceed to acquire a new company to act as the joint venture manager company. I also suggest that you instruct solicitors to draft up some formal document for the joint venture based on what we discussed today.' Mr Bird: 'Ok. But for the time being, could you please also put the share structure in the new company to be 70% to Glenn and 30% to me, to reflect the joint venture interest that we hold.' I: 'That's fine with me.' Mr Kelly: 'Of course, assuming you want to take distribution monthly, you will need to leave enough money in the nominee company to cover on-going running costs. Say, enough money for 3 months of running costs.' I: 'I think 3 months should be enough.' Mr Bird: 'I agree.'" 20 These conversations referred to a 70%/30% split. It is agreed that this was later changed to 60%/40%. 21 It is also relevant to quote the following passages from Mr Kelly's affidavit: "5. In the period after the Company was acquired, my accounting firm received basic MYOB information from the staff of the joint venture business about commission income earned by the joint venture and expenses of the joint venture. Such information was then put into a draft balance sheet by my staff under my supervision for purposes of producing a draft set of financial statements for the joint venture, including the draft profit and loss account. 6. In respect of the draft financial statements, my intention in listing the "commissions received" and "commissions receivable" was that they were all moneys received or receivable by the nominee company for the benefit of the joint venture as a conduit for distribution to the joint venture partners only." 22 Mr Kelly was questioned in the course of the liquidator's examinations about the supposed joint venture arrangement. He said that there were two separate ABNs and two separate TFNs – one for Bolting as an entity and the other for the partnership or joint venture. 23 Mr Martin, in answers to the liquidator's questionnaire provided by him in March 2003, maintained that Bolting "never really traded" and never derived income. He referred to an intention of the shareholders "to enter into some form of joint venture or partnership agreement which would govern the rights and obligations of the two shareholders in the joint venture", but "such an agreement was never entered into". Mr Martin further said that Bolting never had any income. In response to a question about the amount of capital introduced he said: "About $60,000.00 loan from the company Tirrabella Pty Ltd which was later repaid." 24 Mr Martin did not refer in his answers to any debt of Bolting to Tirrabella still outstanding. Nor did he refer to any debt of the magnitude later claimed in the proof of debt. 25 I turn now to accounting records. A general ledger summary of Bolting for the period 1 July 1999 to 5 June 2000 records "commission received" of $1,517,488.76. A profit and loss account for the year ended 30 June 2000 records a sum of $1,381,597.15 as both "operating profit" and "total available for distribution" – however the profit and loss account is stated to be that of "Bolting In Joint Venture". The profit and loss account also shows: "Distribution to partners: Zenitas Pty Ltd 552,638.86 Tirrabella Pty Ltd 828,958.15 1,381,597.15" 26 The only components of the gross profit from which the net profit (or operating profit) was derived are "commissions received" ($2,172,836.66) and "interest received" ($1,508.19). 27 In the balance sheet of "Bolting In Joint Venture" at 30 June 2000, the only liability recorded is "trade creditors" of $1,500.00. An item "partners funds" reflects $508,698.24 for Zenitas (profit of $552,638.86 less drawings of $43,940.62) and $734,271.29 for Tirrabella (profit of $828,958.29 less drawings of $94,687.00), so that total "partners funds" are $1,242,969.53. 28 The financial statements of Tirrabella for the same year show a receivable of $734,271.29 at year-end designated "partnership current account". The profit and loss account is prepared on the basis of income of $828,958.29 (designated "partnership distributions"), less expenditure of $297,328.20 to produce net profit of $531,630.09. 29 I am satisfied that these accounts were prepared in the way described in Mr Kelly's affidavit and on the basis of a business structure of the kind to which he referred. 30 The preponderance of the evidence, having regard, in particular, to the contemporary accounting documents, is that Bolting was, as it were, a nominee (or convenient name) for a partnership or joint venture between Tirrabella and Zenitas; that Bolting, as such nominee, had an arrangement with Centrom under which Bolting would market properties in return for commissions; that receipts were derived by Bolting, as nominee, in response to invoices rendered by it to Centrom; that those invoices were issued by Bolting without any reference to the pre-existing deed between Tirrabella and Centrom; that receipts from Centrom were by far the predominant source of Bolting's revenue; that the revenue was applied in meeting the expenses of the business; and that the net profits were held by Bolting for the joint venture partners, Zenitas and Tirrabella, in the agreed shares of 40%/60% and were not beneficially enjoyed by Bolting. 31 On this basis, the funds accruing to Bolting were partnership property and the debts incurred by Bolting were partnership debts. That is the unmistakable message emerging from the way in which the accounts were prepared. It is also consistent with the evidence of Mr Kelly and Mr Martin about the plan of action adopted at the meeting in May 1999. And it is not, I think, inconsistent with Mr Peniston-Bird's evidence. 32 On this basis, Bolting held the partnership property, for the account of the partners, Zenitas and Tirrabella. It is not possible to conclude that the partnership property included any contractual right as against Centrom. While there are references in the evidence to Tirrabella having directed Centrom to make payments to Bolting and there is evidence of a course of payments by Centrom to Bolting, there is nothing to show that rights under the October 1998 deed were vested in Bolting and became part of the partnership property. Nor do the terms of any contract direct between Centrom and Bolting emerge from the evidence, although the rendering of invoices by Bolting and payment of them by Centrom indicates that some contract existed. 33 As for Tirrabella's position after commencement of operations by Bolting, it is clear that it acquiesced in the course of conduct which saw Bolting invoice Centrom for services of the kind contemplated by the October 1998 deed and saw Bolting receive payments accordingly. There is evidence that Bolting paid Tirrabella the sum of $72,654.00 characterised by Mr Peniston-Bird as reimbursement of start-up costs or preliminary expenses funded by Tirrabella. Furthermore, Mr Martin, in answers given to the liquidator in 2003, characterised as capital introduced into Bolting about $60,000 "loan from the company Tirrabella Pty Ltd which was later repaid". I am satisfied that this refers to Tirrabella's right to be reimbursed for start-up costs or preliminary expenses to which Mr Peniston-Bird referred. 34 It is of particular significance that Mr Martin did not, in 2003, refer to any other indebtedness of Bolting to Tirrabella; also that the contemporary accounting documents showed no such indebtedness. 35 On the evidence adduced before me, Bolting, whether as nominee of the partners or in any other capacity, did not become indebted to Tirrabella in respect of any loan made by Tirrabella, except in respect of the sum of $72,654.00 referred to by Mr Peniston-Bird as having been advanced by Tirrabella to cover start-up costs or preliminary expenses. The evidence of Mr Peniston-Bird and the 2003 statement of Mr Martin (who put the figure at about $60,000) are consistent in indicating that that debt was paid. 36 Tirrabella has failed to discharge the onus of proving the existence of the debt to which its proof of debt refers, that is, a debt of $812,705.42 as the outstanding balance of a "loan advance" to Bolting. The appropriate outcome, in terms of s.1321, is accordingly that the court confirm the decision of the liquidator of Bolting to disallow Tirrabella's claim for $812,705.42 for loan advance and accordingly to reject the proof of debt. 37 The orders of the court are accordingly as follows: 1. Order that the decision of the liquidator of Bolting In Pty Limited on 17 August 2006 to reject the proof of debt of Tirrabella Pty Limited dated 25 January 2006 in the sum of $812,705.42 be confirmed. 2. Order that Tirrabella Pty Limited pay the costs of the liquidator of Bolting In Pty Limited of the appeal against the rejection of that proof of debt. ********** 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.