New South Wales Supreme Court CITATION : JTS Property & Investments No 1 Pty Ltd (In Liq) v Sadri [2010] NSWSC 1384 HEARING DATE(S) : 8, 9 &10 September 2010 8 October 2010 JUDGMENT DATE : 6 December 2010 JUDGMENT OF : Bryson AJ at 1 DECISION : Judgment for the plaintiffs for $520,000 together with $221,919.80 interest, a total of $741,919.80 and with costs. CATCHWORDS : CORPORATIONS - winding up -uncommercial transactions - liquidator sued under Corporations Act s588FB to recover sum paid to defendant in uncommercial transaction - defendant obtained refinancing for company's mortgage finance which was in default but required company to obtain $520,000 more than was required for refinancing, lend that sum to the sole director's brother-in-law and join in arrangements for that sum to be paid to the defendant out of the mortgage advance so as to discharge an unsecured debt owed by brother-in-law to defendant which had been in default for several years - extended consideration of facts relating to solvency - HELD, the company was insolvent and the $520,000 was paid in an uncommercial transaction - judgment for repayment of $520,000 and interest. LEGISLATION CITED : Bankruptcy Act 1924 (Cth) Corporations Act 2001 (Cth) CATEGORY : Principal judgment Cussen v Sultan (2009) NSWSC 1114 Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 CASES CITED : Rees v Bank of New South Wales (1964) 111 CLR 210 Sandell v Porter (1966) 115 CLR 666 Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 Michael John Morris Smith in his capacity as Liquidator of JTS Property & Investments No.1 Pty Ltd (In Liquidation) PARTIES : JTS Property & Investments No.1 Pty Ltd (In Liquidation) Roostam Sadri FILE NUMBER(S) : SC 2006/257510 COUNSEL : Pl: Mr A Spencer / Mr Kerkyasharian Def: Mr M J Dawson SOLICITORS : Pl: Gillis Delaney, Sydney Def: Tress Cox Lawyers, Sydney IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON AJ Monday 6 December 2010 SC 2006/257510 MICHAEL JOHN MORRIS SMITH IN HIS CAPACITY AS LIQUIDATOR OF JTS PROPERTY & INVESTMENTS NO. 1 PTY LTD (IN LIQ) & ANOR v ROOSTAM SADRI JUDGMENT 1 HIS HONOUR: The plaintiffs sue the defendant and claim judgment for $520,000; the principal ground is a claim that the payment of that sum to the defendant was an uncommercial transaction of the company within s 588FB of the Corporations Act 2001 (Cth) in that it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to matters referred to in that section. There are other grounds of the claim and I will refer to them later. 2 Section 588FB is in these terms: (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. I also note ss 588FC and 588FG 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. 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, or an unreasonable director-related transaction of 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. 3 If a transaction is an uncommercial transaction within s 588FB it is an insolvent transaction in the circumstances stated in s 588FC and a voidable transaction in the circumstances stated in s 588FE; and the Court is empowered to make orders of the kinds stated in s 588FF(1) in the circumstances described by that section. The power to make orders in s 588FF is not posited on the transaction having been avoided. It is sufficient that it should be voidable because of s 588FE, and the order made may bring about some result other than avoidance. 4 The company (referred to as JTS1) is the second plaintiff. It was incorporated on 8 March 2005. When formed the only office holder was Ms Roslyn Therese Sheen, who was the only director and the secretary. She held one ordinary share on formation, and no other share was ever issued; she is the only shareholder whose name has ever appeared in the share register. Notwithstanding Ms Sheen's office-holdings she does not seem to have been active, and her sister Ms Cavanough was the person who controlled the company's affairs. Ms Cavanough's husband, Mr Harold Adams, also had some involvement. Ms Cavanough is also referred to as Barbara Adams. Ms Cavanough and Mr Adams were the directors of Australia-Tasmania College of Technology Pty Ltd, to which I will refer. 5 The first plaintiff Mr Smith was appointed Administrator of JTS1 on 16 June 2006 and was appointed Liquidator on 5 July 2006 by order of this Court. The defendant Mr Sadri has never been an officer of the company. 6 By a contract of 22 March 2005 JTS1 agreed to buy four parcels of land in New Norfolk, Tasmania for $1.4 million. This contract was completed on 29 or possibly 30 June 2005. To pay the purchase price JTS1 borrowed $1,500,000 from Mountainview Retreat Retirement Village Pty Ltd; $180,000 of the loan principal was retained by the lender as prepaid interest and the loan money available enabled JTS1 to complete the purchase, with other money paid as deposit and otherwise, the source of which does not appear. The amount actually available when the mortgage loan was settled on 30 June 2005 was $1,268,128.60, after deduction of procuration fee and costs. The loan was secured by registered mortgage over the properties purchased, and also by guarantees given by Ms Sheen, Ms Barbara Cavanough and by Willow Court Village Pty Limited and SMS Advising Group Pty Limited. Securities over real property were also taken from guarantors. 7 A number of other companies were involved in various ways in development projects at New Norfolk. These companies and the dates of their incorporation were as follows: 13 June 2003 Willow Court Village Pty Ltd 21 January 2004 JTS Property & Investments Pty Ltd 4 March 2004 Willow Court Retirement Village Pty Ltd 18 August 2004 Australia-Tasmania College of Technology Pty Ltd 8 March 2005 JTS Property & Investments No. 1 Pty Ltd 8 March 2005 JTS Property & Investments No. 2 Pty Ltd 8 March 2005 JTS Property & Investments No. 3 Pty Ltd 8 Mr Sadri said in evidence that these companies were formed by Ms Cavanough and Mr Adams. Ms Cavanough and Mr Adams were not officers of JTS1 or of three other companies similarly named. They were the directors of Australia-Tasmania College of Technology Pty Ltd of which Mr Adams was the only shareholder. Ms Cavanough was the only director of the two Willow Court companies. 9 The terms of the loan from Mountainview were extremely harsh. Interest of $60,000 was payable every 30 days, and $75,000 in default. The principal was repayable 90 days after the loan on 27 September 2005. The implied interest rate in the absence of default was about 48% per annum. Interest to 27 September 2005 was prepaid. There was default in paying principal of $1,500,000 from 27 September 2005 onwards. $60,000 interest was paid on 28 September, 24 October and 23 November 2005. The remaining $45,000 and further interest remained unpaid on 22 December 2005 and was brought into account when the amount repayable to Mountainview was calculated. There is no indication in evidence that Mountainview threatened or took enforcement action; the urgency of discharging this mortgage and escaping the large continuing obligation for interest is obvious. The Mountainview mortgage was redeemed and $1,594,505 as the balance of principal and interest and other charges secured was repaid on 22 December 2005. 10 There was no indication in the records of JTS1 that Mountainview took part in any arrangement to extend time for payment or to defer enforcement. In evidence (Exh B p 127) is a copy of a fax message from solicitors representing Mountainview to the Hobart agents of solicitors for JTS1 setting out the amount required to pay out the loan calculations; there are handwritten notations altering some of these figures and a note at the foot "He agreed to roll over, but charged $15,000 plus month penalty interest. Missed $60,000 in November, 2005 payment." No evidence shows that anyone agreed to roll over the mortgage debt. No evidence shows when, where or by whom this note was made, and it was not accurate in that payment of $60,000 was made on 23 November 2005. I do not regard this note as in any way supporting a finding that Mountainview entered into any agreement which had the effect that payment of principal of $1,500,000 ceased to be in default. 11 The four parcels of land were part of land at New Norfolk formerly known as Royal Derwent Hospital. The hospital was operated by the Tasmanian State Government for many years; then it was closed down and the land was owned for a time by Derwent Valley Council, then sold to various persons including Lachlan River Community (Holdings) Pty Ltd, the vendor to JTS1. Some former hospital buildings stood on the land purchased and they are referred to as the "Nurses Home", the "Social Centre" and "Ward 12"; one lot was vacant. The buildings were dilapidated and they had not been occupied for ten years or so. Other land which had been part of the Royal Derwent Hospital came to be owned by various companies, one of which was Willow Court Village Pty Ltd, a company controlled by Ms Cavanough. 12 A valuation report, which does not bear a date but appears to have been prepared in April 2005 by R L Jones & Associates, Valuers of Hobart, valued the four lots purchased at figures totalling $1,957,500; this valuation appears to have been available to JTS1 at about the time of purchase. There are several later valuations in evidence and the figures given vary widely. 13 JTS1 embarked on repairs and renovation of the former hospital buildings with the object of establishing a technical college to be named Australia-Tasmania College of Technology. The proposed college was to be conducted by another company or companies, to which the land and buildings were to be leased. On 22 December 2005 work by builders or tradesmen engaged by JTS1 was proceeding, but was not completed. Significant building work was carried out, repairs and renovations directed to fitting the buildings for their new purpose, but this work had not been completed to a standard suitable for use as a college by the time JTS1 was wound up. The building known as Ward 12 had been internally demolished and required major refurbishing; the building known as the Social Centre was in reasonable condition but required some refurbishment and further repair; the building known as the Nurses Home or Nurses Combination Block, a four level building apparently contemplated for student residence, was in fair condition but required further work. 14 The liquidator's activities, investigations and inquiries after his appointment show that the affairs of JTS1 were not conducted and accounts were not kept in proper or reasonable ways or as required by law. There is nothing in the nature of director's minutes or other minutes of significant decisions, and in particular there are no records which establish the basis upon which cheques for money which apparently should have been available to JTS1 were paid into the bank accounts of other companies. In places in his report and evidence the liquidator speaks of these as loans, but it has not been established and he does not accept that in fact there were loans; rather, money remitted to JTS1 was paid to other companies for reasons and under arrangements which are not recorded. 15 JTS1 entered into three leases of its land, for terms which commenced on 22 September 2005. The Nurses Home was leased to Australia-Tasmania College of Technology Pty Ltd. Ward 12 and the Social Centre were leased to AMBA Investments of which Mr Adams was the sole director and shareholder. The rents reserved by these leases total $550,000 pa. However, no payments of rent were ever received. Although the leases do not provide for this, and according to their terms they created an obligation to pay rent forthwith, the buildings were not in September 2005 available for the lessees to conduct operations and gain revenue, or in a state where the operations could be conducted, in view of the continuing building work. They never were, and it is not surprising that no rent was in fact paid, and there cannot ever have been any likelihood that rent would be paid until the actual benefit of occupation was given, which it never was. 16 It does not appear what resources were available to JTS1 with which it paid the part of the purchase price which was not borrowed from Mountainview; there was of course no significant subscribed capital. By 27 September 2005 the company had a well-established in-flow of funds, which continued thereafter, from responses to an Information Memorandum which had been circulated to investors. Large sums of money were paid by many investors, many of them through associations with Ms Cavanough, in response to the Information Memorandum (Exh E Vol 1, p 114). 17 The Information Memorandum (referred to as the IM) is a curious document in many ways. Its terms suggest that an object of the document was circulation to a limited class of persons so as not to incur obligations under Part 6D.2 of the Corporations Act with respect to prospectuses. Whether those obligations were incurred or avoided is not my concern, although it seems unlikely that they were avoided. The IM contains many curiosities of expression and grammar and some of spelling. 18 It is not easy to understand by whom the IM was issued; there are a number of references to Australia-Tasmania College of Technology Pty Limited, and to Australia-Tasmania College of Technology, as if that entity issued the IM and sought funds, but the text when read closely shows that it relates to a proposed issue of redeemable preference shares by JTS1. It was said that JTS1 will "purchase buildings for the Australia-Tasmania College of Technology Pty Ltd". The IM contains several exhortations that it is to be read as a whole. On its front page it bears the date 17 March 2005, but in the body of the document it is stated that it is dated 13 June 2005. The text also suggests that SMS Advising Group Pty Ltd may have issued the IM; in any event that company, which is a business vehicle of Ms Cavanough, is referred to as if it were the appropriate party to which to address an application form relating to an investment. There are ambiguities throughout. For example on page 119 it is said "This Offer gives investors the opportunity to invest in the college", yet JTS1 was to own land and it was not contemplated that it would conduct a college. It is also stated "the Company is seeking to raise up to $1,000,000 in this IM". The identity of the company referred to at this place is not clear, but on a whole view it refers to JTS1. A later reference (p 134) to fundraising confirms this indication that the maximum amount to be raised was $1 million. It is also stated: "The offer is to raise capital for the development of a multiple use development site located in New Norfolk, Tasmania. Funds raised will develop the site as an International College. The money raised will extensive refurbishment existing building/s to create the College for New Norfolk Tasmania." 19 The IM also says (p 119): "The Preference shares will provide Investors with – o 10% pa income from the lease to the College. (5X5 years). o 40% immediate capital gain (between the difference of the purchase price and the recent valuation). Every dollar invested is immediately worth $1.40. The site was value with no use. Having a lease and improvements only adds to the value of the next valuation. o The trust is for maximum 6 years. At that time the property will be revalued and the investors share 20% of the new valuation." 20 The reference to 10% pa income, in the context of preference shares, cannot be reconciled with provisions of the constitution of JTS1 which relate to preference shares. The constitution provides (Exh E Vol 1, p 94 and following) that issued shares may include ordinary shares and 24 other classes of shares including H Class Redeemable Preference Shares. The rights of holders of H Class Redeemable Preference Shares are indicated by clause 18 of the constitution and include a right to receive a non-cumulative preferential dividend at the rate of 5% pa on the paid issue price. Two other classes of redeemable preference shares are provided for but these carry no more than the right to participate in dividends, if any, declared on them. 21 There is no relation between dividend on preference shares and the lease to the College. There is no provision in the constitution for dividends to represent 10% income, or income from a lease. The reference in this passage to 40% immediate capital gain cannot be understood; on a whole reading of the IM it has no comprehensible meaning. The reference to a trust does not relate to any other provision of the IM; no trust is provided for; issue of preference shares is an altogether different mechanism and the company has a right under clause 16 of its constitution to redeem preference shares at any time on seven day's notice. There is no provision in the constitution for sharing any advantage relating to a revaluation. 22 At pp 119-120 there are explicit statements about what use will be made of amounts raised by the issue of preference shares. The passage is: " 1.2 Use of proceeds Amounts raised by the issue of Preference Shares will be - (a) As mezzanine funding for the refurbishment and towards part of the purchase price. The redevelopment and upgrading of the site for a college, and refurbish up to three buildings in this purchase contract to be used as a College, and (b) Buildings have been presented to Derwent Valley Council and their independent assessors (certifying agents) Pitt & Sherry have given a list of the required amendments which we have a copy in our possession if any one requires this information. The Company may invest amounts raised by the issue of Preference Shares in Authorised Investments such as a Cash Management Accounts with a leading Bank and we have recommended Macquarie Bank pending or redemption of the Preference Shares." 23 At a later point (p 134) there is an indication that the funds are to be used for Australia-Tasmania College of Technology Pty Ltd. This passage is: "3. FUNDRAISING (a) For – Australian Tasmanian College of Technology Pty Ltd (i) Mezzanine facility. (ii) Purpose – assist buying and funding some of the purchase of the College and to a lesser extent, assist in the redevelopment of other buildings where rooms will be used as a College. (iii) Amount – up to $1,000,000. (iv) Shares can be sold to other investors term is up to 6 years. (v) Drawdown – Drawn in stages as required by the Landowner based on the progress of development. (vi) Dividends will be payable quarterly end September, December, April and June on the balance owing. (vii) Repayment of principal – after 6 years." 24 Part of the IM is an application form (pp 137-138). Although headed "Australia-Tasmania College of Technology Pty Ltd" the text of the application form shows that the applicant applies to invest in redeemable preference shares to be issued by JTS1. Among other things the form states that JTS1 "is not bound to accept your application, but may accept it in part or in whole". Applicants were directed to mail the completed application form and cheques to SMS Advising Group Pty Ltd. Cheques were to be payable to JTS1 and investments were to be at least $10,000. SMS Advising Group was a company controlled by Ms Cavanough. It became a guarantor of the Mountainview loan. 25 Remarkably large sums were received in response to the IM. The total was over $4.8 million. The liquidator had a staff member reconstruct or, rather, construct accounting records for JTS1 on the basis of such primary records as existed, and deduced that over $2.6 million had been subscribed by 27 September 2005. Significant amounts had been received by 29 June 2005, but none of this was used to complete the purchase of land. 26 The money received in this way appears on first impression to have given JTS1 access to and disposition of very large sums during the period to 22 December 2005, far in excess of the money expended, then or ever, by JTS1 on building work. On first impression this may seem to put the allegation on which the plaintiff's claim was based that the company was insolvent altogether out of the question. Before reaching a conclusion it is necessary to consider the circumstances in which money was remitted to JTS1, whether those circumstances created debts and whether and when those debts were due and payable. 27 The first and most striking consideration is that notwithstanding that all money received in response to the IM was, altogether clearly on the terms of this unclear document, subscribed for the purpose of obtaining an issue of redeemable preference shares, in no case was any redeemable preference share issued. The only share in JTS1 which ever was issued is the one ordinary share held by Ms Sheen at incorporation. In view of the terms of the constitution, it was not possible to issue redeemable preference shares carrying rights which would be those indicated by the IM. The initial impossibility of issuing shares which conformed to the IM was never overcome. Unless and until preference shares were issued, JTS1 was not able to apply money subscribed in any way without departing at a basic level from the purposes for which the money had been sent to it. In the absence of the issue of redeemable preference shares the money was paid for a consideration which wholly failed, and application of the money in any other way would immediately demonstrate that this was so. 28 The IM does not state when the redeemable preference shares would be issued, but it should be implied that JTS1 agreed that it would issue the shares within a reasonable time, and would take the steps necessary to do so within a reasonable time, including coming to a decision on whether to retain or return money subscribed. The steps required to issue redeemable preference shares, if doing so had been authorised by JTS1's constitution, were quite simple; decision by or on behalf of the Board of Directors to accept a subscription and act on it by allotting shares, and some mechanical and clerical steps associated with issuing the shares; entry in the Share Register and issue of certificates. Unless this process is followed at least to entry in the Share Register there is no share: see Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 427 (Aickin J). This process could not have taken much time, only a short period of a week or so after receiving money subscribed. Whatever was a reasonable time, it was brought to an end when money subscribed was applied in some other way than the IM indicated that such money would be applied; application of money for any purpose other than issue of redeemable preference shares would be a clear indication that there was no intention to treat the money as share capital and to issue shares. 29 Indications in the IM about the application of money were departed from in other ways. Large sums were used otherwise than as mezzanine funding for refurbishment. None of the funding was used towards part of the purchase price, which was wholly paid on settlement of the purchase. For some months none of the funding was paid into JTS1's bank account or used by JTS1 at all. The liquidator's reconstruction of the accounts shows that large parts of these funds went into the accounts of other companies which, whatever the purpose of paying money to those companies may have been, had nothing to do with conforming with what was indicated by the IM. The liquidator's reconstruction led him to calculate that money received from subscribers up to 22 December 2005 was paid directly into bank accounts of other companies as follows: Willow Court Village Pty Ltd $40,000 Willow Court Retirement Village Pty Ltd $102,000 AMBA Constructions Pty Ltd $518,000 Howarth Payne Pty Ltd $183,500 Derwent Valley Real Estate Pty Ltd $240,000 Page Seager, Solicitors of Hobart $94,000 Mortgage and Property Syndication $52,500 (AMBA Constructions Pty Ltd and Howarth Payne Pty Ltd did building works for Willow Court Village Pty Ltd.) The total of those amounts is $1,230,000. As a reconstruction the calculation may have shortcomings but it illustrates what took place and the scale of the misapplications. The reconstruction shows that by 22 December 2005 $2,774,000 had been paid into JTS1's bank account. Apart from the building company, what the companies to which money was so paid have in common is that they were all controlled by one or both of Mr and Mrs Adams. 30 There was no conformity with statements to these effects: the money was to be drawn down in stages based on the progress of the development: up to $1 million was to be raised on the IM and JTS1 would borrow a further $1 million to further fund the refurbishment works: a table which set out how $2 million so raised would be spent was not followed. No applications were rejected as oversubscribed and no funds were returned. Far in excess of $1 million was received and all was retained: no differentiation was made with respect to money in excess of $1 million. The indications at p 134 under the heading "Fundraising" were not fulfilled; they were not followed at all. Subscribers who had been informed that subscriptions would be accepted up to $1 million and that a further $1 million could be borrowed cannot be assumed to have been ready to accept the position in which they subscribed a much smaller proportion of a much larger fund; that is not the arrangement they were told that they would enter into. 31 For some months none of the amounts received were invested in cash management accounts; JTS1 eventually opened a cash management account with Macquarie Bank. Until then JTS1 did not have a bank account. The statement (at p 120) about investing in cash management accounts with a leading bank relates to amounts raised by the issue of preference shares, but there never were any such amounts as no preference shares were ever issued. The reference to authorised investments does not have an ascertainable meaning. 32 A number of share certificates were issued; examples of these appear at several places in the evidence. One (at Vol 1 p 141) speaks of ordinary shares with a face value of $1 in "Tasmania College of Technology". It is possible that this document issued before, not after, circulation of the IM. A number of other share certificates of later dates are in evidence; they show a variety of peculiar expressions and anomalies, but what they all have in common is that they are quite false, as no shares were issued to any person by JTS1 other than the initial share issued to Ms Sheen. 33 It was not possible to issue shares on the basis indicated in the IM. No steps were taken even purportedly to issue shares (as distinct from issuing some false share certificates). The limit on the amount to be raised was not observed. The purposes for which money was to be raised by issue of redeemable preference shares were not complied with but were departed from. 34 Over an extended period and in many instances there was an entire absence of fulfilment of what had been indicated by the IM, and from this I infer that there was no intention to act in accordance with it, and that it was intended to mislead subscribers as to how their money would be dealt with: the IM was intentionally deceptive. 35 I find that the money was subscribed as a result of false statements in the IM as to the purpose for which the money was to be raised. For this reason the persons subscribing were entitled to be repaid; there are several possible interpretations of when this right arose, but it arose when or very soon after the money was received. As there was no intention of applying the money for the purposes stated in the IM an entitlement to be repaid arose immediately when money was received. Alternative views are that an entitlement to be repaid arose when a reasonable time for issue of preference shares passed, or when the money was dealt with in some way other than as indicated in the IM, by applying it to some purpose which had not been indicated, such as paying it into the account of a different company, or dealing with the money in any way without first issuing redeemable preference shares. 36 There are so many shortcomings, misrepresentations and falsehoods associated with procuring payment of money to JTS1 that it is difficult to identify in a completely clear way how rights of repayment arose; but it is clear that either on receipt or within a short time after receipt, each person subscribing money in response to the IM was entitled to repayment; the money was not held by JTS1 to its own use, but to the use of the persons who had sent the money to JTS1. Repayment was no less the entitlement of the persons who paid the money whether or not they knew that they had such an entitlement. For the purpose of assessing JTS1's solvency, the Court should act on the basis that at all times all money received in response to the IM was repayable immediately. 37 For practical purposes JTS1 had no other resources at its disposal. JTS1 had no income. JTS1 was credited with small amounts of interest on its cash management account with Macquarie Bank, but bank fees exceeded those sums. There was no prospect of actually receiving the rent nominally payable under the leases unless and until the building work was completed and the lessees were able to make use of the buildings. In relation to its obligations to subscribers of capital, JTS1 had very little available funds. Significant sums of money were sometimes available in the cash management account, although the amount available there fluctuated greatly and was never sufficient to make any real impression on the obligations to subscribers. JTS1 had the capacity to raise money by refinancing its land purchase, that is, by finding a new mortgagee and borrowing money with which to pay out Mountainview; but this was only acted on when almost three months had elapsed after default in repayment of principal to Mountainview. As events happened an additional $520,000 above what was required for the redemption was raised, but this sum, if it had been available to meet obligations such as those to subscribers who had been misled, could have covered no more than a small part of what was repayable forthwith. 38 Large sums of money were presumably owed to JTS1 by the companies into the accounts of which subscription money was being paid; but this was paid under arrangements which, if they were ever thought out by anybody, were unrecorded, and those companies were not depositories of funds of whom it could be expected that a demand for payment would be readily or promptly complied with. JTS1 did not call in these sums of money during the period from 27 September 2005 when JTS1 was in default of repayment of mortgage principal to Mountainview and was incurring interest at 5% per 30 days: if these sums could have been realised at that time they probably would have been realised. If repayment of the money deposited to the accounts of these companies had been available, the commercial pressures on JTS1 to collect them and use them to repay the Mountainview debt were extremely high. As this did not happen, it should be inferred that it could not happen. 39 It would not be correct to assess whether JTS1 was insolvent on the basis or assumption that JTS1 was entitled to the large sums of money which had been subscribed and had them available to meet obligations. So too for the flow of money which continued to be paid in response to arrangements which had not been carried out, which were not intended to be carried out and the intentions as to which had been misrepresented. Money raised in that way was repayable immediately, and could not assist JTS1's solvency. 40 There are further supports for the claim that JTS1 was insolvent in December 2005. Section 588D(4) of the Corporations Act creates a presumption of insolvency where a company has failed to keep or retain financial records. Section 9 defines "financial records" and s 286(1) prescribes the financial records required. The officer and de facto officer of JTS1, who had a duty to do so, did not furnish the liquidator with any general ledger or cash book and he did not locate any. I infer that JTS1 did not keep them or did not retain them. The liquidator by a staff member constructed some records after liquidation but these are no answer to s 588D(4). Mr Sadri's evidence was to the effect that JTS1 could not take up finance from the Commonwealth Bank because it was unable to produce financial statements including a balance sheet in the time available. JTS1 had no documents which record terms of transactions under which cheques from subscribers were paid into the accounts of other companies, or recording any obligations which those companies undertook. JTS1 had no documents of any kind which recorded or related to payment of $520,000 to Mr Sadri, or to any dealings with Mr Adams such as Mr Sadri's evidence would suggest were contemplated. JTS1 had no record at all to show for allowing $520,000 of its mortgage advance to go to Mr Sadri: a company which expected to stay in business would not run its affairs that way. 41 In as much as JTS1 was insolvent as at 27 September 2005, the presumption exists under s 588E that it continued to be insolvent thereafter. However, it is not necessary for the plaintiffs to rely on s 588E as it appears altogether clearly from other sources that the company was insolvent then and continued to be so on 22 December 2005. 42 Mr Amit Baijal was engaged as a General Manager at the College and Mrs Baijal was employed as Registrar. Mr Baijal was not paid salary for October or November 2005 on time; he was paid a month later, and Mrs Baijal was never paid at all; in 2006 she brought proceedings in the Tasmanian Industrial Commission and secured some result. These were key staff; JTS1 could not function without Mr Baijal. 43 In my finding it is altogether clear that JTS1 was insolvent by 27 September 2005, and probably was well before then, because it was obliged to repay all subscription money and could not do so. The subscribers did not know of this right because they were deceived: but they had the right nonetheless. This finding is reinforced by many circumstances: the deficiency of records and the presumption of insolvency, the need to raise all the balance of purchase money from Mountainview on severe terms although large sums had already been received from subscribers, the continued default for almost three months in repaying Mountainview although the interest rate ran at $75,000 per month, the need to borrow to refinance in December 2005 although millions of dollars had been subscribed, and the inability to meet the conditions of the Commonwealth Bank's loan. Money in the Cash Management Account was usually withdrawn or depleted within a short time. There was great disorder. Not keeping ledgers of debtors and creditors is an indication of lack of interest in the state of payments. 44 There are some small mitigations. The builder was paid, and kept working. There are no classic indications of insolvency such as files of letters of demand, statutory demands, Small Debts summonses and incursions by bailiffs to seize the office furniture. The Liquidator gave evidence in his own expert report, which he was well qualified to give, basing his opinion of insolvency from 27 September 2005 onward on a close and detailed examination of such information as can be deduced from the primary accounting records of JTS1 and the reconstructed records prepared by his staff. He was cross-examined on his opinion, at great length and to little effect: no real shortcomings in his assumptions of fact and his valuation reasoning were exposed. 45 In my finding his conclusion was obviously correct given the misapplications of large funds to other companies, the failure to repay principal to Mountainview, the inability to borrow from the Commonwealth Bank and the long period of default while crippling interest was running: no company which could pay its debts would be in such a state. However, my finding of insolvency is based on even clearer material than the expert report relied on: all money from subscribers was due and payable back to them from the time it was received or soon afterwards. 46 Insolvency is tested according to s 95A of the Corporations Act which provides: (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 47 Section 95A, and s 95 of the Bankruptcy Act 1924 (Cth) in force in earlier times, have been the subject of a remarkable amount of judicial exposition. Section 95 defined insolvency in a significantly different way, by reference to the person being "unable to pay his debts as they become due from his own money". In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224-225, Palmer J stated propositions which were to be drawn from the authorities, in terms which have often been followed in this Court. The propositions relate to a need to consider the company's financial position taken as a whole, the need to have regard to commercial realities, the need to consider whether there is surmountable temporary illiquidity and the appropriateness of paying regard to latitude in time for payment normally allowed by creditors. Palmer J's fifth proposition commenced: "(v) (i) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract …" and went on to state exceptions where it was established, in a concrete way, that the creditor was bound by some agreement or circumstances which extended time. 48 Of course the fifth proposition is just as applicable where the time for payment of a debt is fixed by a legal rule as when it is fixed by contract; when money is had and received to the use of a creditor, the money is payable when the use arises. My primary concern is to give effect to s 95A in accordance with its terms, which clearly relate to ability to pay by the due date, not to the ability to cope with the debtor's commercial situation in such a way as to extricate himself from difficulty. The concept of surmountable temporary illiquidity referred to in Palmer J's third proposition is frequently raised and from time to time relied upon judicially to support a finding against insolvency. I regard it as important to approach questions of illiquidity, whether temporary or endemic, in a way which does not depart from the terms of s 95A(1) and its reference to ability to pay all debts as and when they become due and payable; ability to raise money from assets and pay a debt before the creditor's patience is exhausted is not enough, in my opinion. 49 There have frequently been references to observations of Barwick CJ in Rees v Bank of New South Wales (1964) 111 CLR 210 at 218 and in Sandell v Porter (1966) 115 CLR 666 at 670-671. Barwick CJ spoke in relation to s 95 which referred to a debtor as being "unable to pay his debts as they become due from his own money"; there are no words corresponding to "from his own money" in s 95A. For an exposition of s 95 it was, of course, important to say as Barwick CJ said in Rees at 218: "It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realisable assets." 50 In neither of these cases did Barwick CJ, to my reading, say to the effect that a process of realising assets, however readily realisable, could extend the time when debts become due to which s 95 refers. Assuming, as seems likely, that during the period from 27 September 2005 until 22 December 2005 JTS1 was always in a position where, if it managed its affairs reasonably well, it could refinance and pay out the unpaid mortgage principal to Mountainview does not any the less mean that during the whole of that period JTS1 was indebted for the principal to Mountainview and was not able to pay that indebtedness. 51 On the information available to him, the Liquidator calculated that interest at the rate referred to in the IM of $20,393.44 was payable to investors on 30 June 2005 and that a further $76,588.78 was payable on 30 September 2005. If in some alternate analysis to mine the moneys subscribed were not repayable immediately, and interest was payable as it was represented in the IM that it would be paid, JTS1 did not pay all that interest and plainly was unable to do so. It had a significant sum of money, significant in relation to the interest amounts, in its cash management account at the end of September, but within a few days most of it had been drawn out. By 2 November 2005 the interest payable to investors on these assumptions was $74,689.61 as calculated by the liquidator; $51,687.85 was paid to investors on 2 November 2005. Calculations on this basis show that $118,369.40 was owed due on 31 December 2005. It seems that arrangements were made with a small number of investors for interest at a higher rate than 10%. 52 My conclusion is that JTS1 was insolvent by 27 September 2005 if not earlier, and at all times thereafter. 53 The payment of $520,000 which gives rise to the claim was associated with a mortgage by which JTS1 raised funds with which to redeem the Mountainview mortgage. The lender and mortgagee was RMBL Investments Ltd, which operated from the office of and in association with Messrs Macpherson & Kelley, a law firm of Dandenong, Victoria. Its usual business was making loans secured on real property, commonly called contributory mortgages, where several lenders, not necessarily related in interest, contributed the money lent. 54 The defendant Mr Sadri had a well-established business association with RMBL, and had a loan account with RMBL secured by mortgages of valuable real estate, referred to by RMBL as Loan ID 1004 (Exhibit E CB 2, p 496). Arrangements with RMBL for the loan to JTS1 were initiated by Mr Sadri and he agreed with RMBL on the conditions as between himself and RMBL upon which the advance was to be made (see CB 2, p 578). An internal message within the office of RMBL and Macpherson & Kelley recorded arrangements for a new loan to JTS1, Loan ID 1851. The arrangements were (1) Further advance on Loan ID 1004 in the amount of $2,200,000 with no procuration fee or other fees to be charged. (2) Funds from above loan to be invested into Loan ID 1851 with Roostam Sadri as sole investor in this loan. (3) Loan ID 1858 to proceed at $2,200,000 over properties in New Norfolk, Tasmania – 2% procuration fee to be charged as well as any other fees relevant to Loan ID 1004. (4) Roostam Sadri to guarantee loan. (5) All fees to be charged to JTS1. 55 That is to say, the $2,200,000 to be advanced to JTS1 was in effect provided by Mr Sadri's drawing the same amount on his loan from RMBL. Mr Sadri was the only contributor. The relationship between RMBL and Mr Sadri was to some degree unusual in that he was the sole contributor to the mortgage and he gave his own guarantee to RMBL. RMBL was in effect protected by security it had already taken from Mr Sadri. The arrangements could be thought of as the provision of credit by Mr Sadri to JTS1, with money drawn by Mr Sadri from RMBL; but the legal relationships were much more complex than this simplified economic effect. It is an unusual aspect of the transaction that Mr Sadri was a guarantor of JTS1's liability. In his relationship with RMBL however it is not surprising that RMBL required this. 56 These arrangements were carried out and put into effect at settlement on 22 December 2005. The mortgage documents were very complex, involving discharge of the Mountainview loan, security taken by RMBL over JTS1's properties, guarantees and securities from Ms Sheen, Mr Adams, Ms Cavanough and Mr Sadri and securities supporting the guarantees. RMBL did not obtain a valuation but knew of the valuation which had been shown to Mr Sadri. This was a second valuation by R L Jones & Associate, which valued JTS1's land at $6.9 million as at 28 September 2005. 57 Applications to RMBL for finance were signed first by Ms Cavanough and a later application was signed by Ms Sheen. Arrangements for completion of the loan were made in considerable haste and with some difficulty. The Letter of Offer was dated 21 December 2005 and it bears an acceptance dated 22 December, the date of completion. The persons who executed the many documents were at different places; Mr Sadri was in Adelaide, while completion was to take place in Hobart. Arrangements were made for some securities to be furnished after settlement. RMBL required that Mr Jones' valuation be redirected to RMBL. The loan was for a period of three years. 58 Among the documents available and relied on at settlement was a direction by all four guarantors, for themselves and on behalf of JTS1, to RMBL and its lawyers dated 22 December 2005 directing disbursement of the balance of the loan; the directions included providing a cheque to Mountainview for $1,534,505 and providing a cheque or banking details for Mr Sadri for $520,000. 59 Settlement took place in Hobart and a number of law firms were involved including Hobart agents for Macpherson & Kelley. Macpherson & Kelley gave RMBL a settlement statement for Loan ID 1851 (CB 2, p 576) stating the disposition of the funds advanced including an item "to balance to Roostam Sadri $520,000". Under these the sum of $520,000 seems to have been available to Mr Sadri when settlement took place. In his Defence and in his evidence Mr Sadri admitted that he received $520,000 on settlement. However that sum remained among money held by RMBL to the credit of JTS1 as Client No.1851 until on or about 27 April 2006 when $520,000 was transferred to a bank account of Mr Sadri by telegraphic transfer and several other relatively small parts of the advance were paid out (CB 2, p 667). 60 The written direction by the guarantors for payment of $520,000 to Mr Sadri, signed by Ms Sheen among others, is the only document of or attributable to JTS1 which records participation of JTS1 in the arrangement for that part of the loan to be paid to Mr Sadri. It contains no detail or indication of the reason for directing this part of the advance to Mr Sadri, and no reference to any dealings between Mr Sadri and Mr Adams; nor is there any reference to dealings between JTS1 and Mr Adams. There is no record in evidence of any arrangement between JTS1 and Mr Adams confirming or otherwise relating to a view of the transaction in which Mr Adams became indebted to JTS1 for $520,000; or showing that Mr Adams had any significant part in the arrangements for payment of the $520,000 except that he was a co-signer of the authority, appropriately as he was a guarantor. There is no record or evidence of any communication or arrangement between Mr Sadri and Mr Adams himself bearing on this payment. 61 The account and indeed the only account of the transactions and events which led to $520,000 of the advance by RMBL to JTS1 being retained at the time of the mortgage advance and paid to Mr Sadri is given by Mr Sadri in his evidence. In response to a letter of demand before action solicitors on his behalf gave a different explanation, to the effect that the payment was a repayment to Mr Sadri of a loan which he had made to JTS1. In the Defence as first filed there was a similar contention but this was removed when the Defence was amended well before trial. There was no attempt to establish that there ever was such a loan or repayment. 62 Mr Adams had no apparent standing in the affairs of JTS1. His wife Ms Cavanough had control over the affairs of JTS1 although she was not an officer of JTS1. There is no indication in any of JTS1's records of any reason or purpose for which money raised on the company's credit would be used or applied in any sense for the benefit however indirect of Mr Adams; that he was the director's brother-in-law is no indication at all that a payment for his benefit was made for purposes of the company. Nothing in the company's records establishes the view of the transaction which Mr Sadri's evidence would suggest; that is, that JTS1 made an advance of $520,000 to Mr Adams and Mr Adams used this to repay a debt which he owed to Mr Sadri. This perhaps is a superfluous observation in relation to JTS1 which had very few records at all, but it is significant that it cannot be established by any discernible record, either against or in favour of JTS1 or against or in favour of Mr Adams that there was any arrangement for Mr Adams to borrow money from JTS1, or for Mr Adams to use money so borrowed or any money to repay his debt to Mr Sadri. 63 As I have already noted, the circumstances in which $520,000 of the RMBL mortgage advance came to be directed to Mr Sadri appear solely from Mr Sadri's own evidence. Mr Sadri's evidence is to the following effect. He met Ms Cavanough about 1987 when they both worked for Norths Stockbrokers. They had occasional contact with each other thereafter. She married Mr Harold Adams, and Mr Sadri first met Mr Adams when Ms Cavanough contacted him in 2002 about a proposal to develop a site at New Norfolk, Tasmania. Ms Adams gave Mr Sadri information about potential developments of the site first as a retirement village complex, and from 2002 what was under consideration became a private education facility for international students. 64 In June 2003 Ms Cavanough and Mr Adams spoke to Mr Sadri on the telephone and asked to meet him to discuss their financial situation. Soon afterwards they met at a hotel in Adelaide, and Ms Cavanough asked Mr Sadri, as a big favour, to lend money for Mr Adams' business in which he operated a commercial fishing vessel and urgently needed to replace the engine, but had to import it from Holland. She said that their capital was tied up in real estate acquisitions and asked for a loan of $780,000. Mr Sadri agreed to make a loan and required repayment, which was to be by monthly instalments of $150,000. Mr Adams and Mr Sadri joined in preparing a document dated 25 June 2003 which recorded the transaction. Mr Sadri sent $650,000 by telegraphic transfer to a bank account nominated by Mr Adams; that was the bank account of AMBA Investments. 65 Mr Adams did not make loan repayments at the agreed rate, but by November 2005 he had reduced the debt to $520,000. Mr Sadri agreed to an extension when Mr Adams explained something of his business position, and asked to be informed of progress. 66 In 2005 Mr Sadri came to know of the purchase of the land at New Norfolk for $1.4 million; he was informed by Ms Cavanough that the company was unable to obtain the loan on normal commercial terms to complete the purchase. Ms Cavanough and Mr Adams referred to Mountainview as a loan shark. Mr Sadri regarded the rates charged by Mountainview as shockingly high. 67 In October or early November 2005, when Mr Sadri had not heard from Ms Cavanough for a long time, he received a telephone call from her in which she told him that the property at New Norfolk was now to be developed as a technical college for overseas students, that they had obtained all necessary Government approvals in principle but had struck a snag with finance, and she asked if he could help them out. She gave him a lengthy explanation of the proposal for a college and development as a college. She told him that they owed their lender about $1.5 million, that she had a valuation from R L Jones and that she had a loan offer of $4.8 million from the Commonwealth Bank of Australia "…but we do not have enough time to get it". 68 Mr Sadri arranged to go to Tasmania and look at the project. In Tasmania Ms Cavanough gave him copies of a number of documents including the valuation by R L Jones & Associates of 28 September 2005, documents relating to official approvals for the college and the leases, and a loan refinance summary for a loan to JTS1 for $4 million. Mr Sadri was shown the Commonwealth Bank's requirements for the loan, with an explanation given by Mr Baijal, and he regarded them as the usual financial statements and the usual bank procedures; essentially, a requirement for the financials of a company, the balance sheet and lists of assets and liabilities. He was told that the prime difficulty was that Ms Cavanough and JTS1 did not have enough time to put all the financials in place and to put the case to the Bank to raise the money, and therefore they needed interim finance. 69 Mr Sadri was told in early November that Ms Cavanough and JTS1 did not have enough time to take up the CBA loan. A broker was working and it seems continued to work on the project of securing Commonwealth Bank finance; Mr Sadri met this person in Melbourne on one occasion, and the broker showed Mr Sadri papers on Commonwealth Bank letterhead offering the loan and stating conditions. When the Commonwealth Bank loan did not eventuate, about the beginning of December, Mr Sadri was approached by Ms Cavanough or perhaps by Mr Baijal, to obtain finance from some other source. 70 Mr Sadri did not ask, and was not told, that the rent referred to in the leases was not being paid. However, he seems to have understood that rent under leases would begin to be paid on the commencement of the College, which he expected would be in March 2006. 71 Significant observations by Mr Sadri on the documents included that the valuation was $6,960,000, that the combined rent from the leases was $550,000 per year and that the project was in the process of development and that money would not be available in the short term to repay principal and interest. Mr Sadri made enquiries, learned at least in outline the terms of the Mountainview loan, learned that JTS1 was unable to take up the Commonwealth Bank of Australia loan offer, inspected the property, walked around the site and found nothing untoward, reviewed the documents, read the lease and understood that there would be no money from the leases until the College commenced; he saw the valuation and was influenced by its figure of $6.9 million. 72 What Mr Sadri observed did not indicate to him that JTS1 was having any trouble meeting current obligations. The builders were continuing the work, which is a fairly clear indication that they were being paid. It seemed to Mr Sadri that the company would need finance to complete its project, but that is a different subject to insolvency. 73 Mr Sadri then took up obtaining an advance from RMBL Investments, with which he had dealt before, to refinance the Mountainview loan. He spoke to Mr Colin Madden, one of the principals of RMBL Investments, and told him that Ms Cavanough and Mr Adams were looking to borrow $4 million to refinance the existing debt and obtain working capital. He told Mr Madden, at the first conversation on 2 December 2005: "Barbara Cavanough's husband Harold still owes me $520,000 from an earlier loan. If we go ahead with this I want my $520,000 repaid." 74 Mr Sadri told Mr Madden of the valuation and Mr Sadri said: "I don't think we would lend the full $4 million. However, we can look at lending $2.5 million including the $520,000 as a loan to Harold so that he can repay me." Mr Madden asked to see the documentation. 75 On 7 December Mr Sadri spoke with Ms Tsiounis of RMBL by telephone and gave her some information about the project. She reviewed the material sent to Mr Madden. Ms Tsiounis asked "Are they still looking for $4 million or something less". Mr Sadri said: "I think we should lend sufficient money to pay out Mountainview their $1.5 million plus the $520,000 for Harold to repay me". 76 There was some further discussion in which Ms Tsiounis referred to the need for securities and guarantees and said "We will need your guarantee and if there are any problems we would want you to take a transfer of the mortgage and repay the loan." 77 Mr Sadri spoke with Ms Cavanough and Mr Adams about 15 December. He spoke in terms which were appropriate for a loan by himself or a loan in which he had an interest. He referred to RMBL and said that: "they have indicated that if they are to provide the finance they will require my personal guarantee and that if you default I will be required to take over the loan. If I am to assume all of the risk, I have a requirement." And went on when asked to say: "There is still $520,000 under that loan I gave to Harold back in 2003. That loan has to be repaid. I will not arrange the funds or guarantee the loan unless the company borrows enough money to lend to Harold to enable him to repay his personal loan." 78 After some discussion in terms which seem to indicate that Ms Cavanough agreed, she asked Mr Sadri to arrange for paperwork from RMBL. 79 The documents were completed, including a loan application appropriate for a loan to JTS1, and an application by Mr Sadri to RMBL appropriate for the loan to be made by RMBL with money invested by himself. RMBL made a loan offer by letter to JTS1 dated 21 December 2005; the amount of the loan was to be $2.2 million, the interest rate was to be 8.5% per annum or 12.5% per annum in default; the term was to be three years. This was of course far better than the terms of the Mountainview loan. The documents relating to the loan, which were numerous, were completed in short order and the loan advance was settled by solicitors in Hobart on 22 December 2005. The arrangements for the loan included the direction to pay which I referred to earlier, a loan agreement between RMBL and JTS1 to which the guarantors were parties, a debenture creating a floating charge over JTS1's property in favour of RMBL, a registered mortgage over JTS1's real property and a guarantee and indemnity document granted by the guarantors. As required by RMBL, Mr Sadri acknowledged, as a condition of the loan, that he was required to take over the mortgage in the event of default and that he was the sole investor in the loan. 80 The plaintiffs' counsel did not concede at the hearing that at the time of these events Mr Adams in truth did owe $520,000 to Mr Sadri in the circumstances described in Mr Sadri's evidence. However I accept that in fact such a debt existed; indeed there was no substantial reason in the evidence for not accepting Mr Sadri's evidence about this. 81 As I observed earlier, the only trace of involvement of Mr Adams in the arrangement is his signature on the direction for payment out of the advance, which included a direction that $520,000 of the advance to JTS1 be paid to Mr Sadri. It was appropriate, and indeed a most natural precaution, that all the guarantors including Mr Sadri should join in this direction. There was no substantial evidence and no basis for finding that Mr Adams agreed to borrow $520,000 from JTS1 or that JTS1 agreed to lend Mr Adams that sum or that Mr Adams joined in an arrangement under which $520,000 which was to be lent to him was to be paid to Mr Sadri on the basis that it was a payment by or on account of Mr Adams and that it was paid to discharge his debt to Mr Sadri. The evidence goes no further than establishing that Mr Sadri wanted the transactions to be to that effect and told Ms Cavanough that that was what he wanted and that what she did appeared to conform with his requirements. 82 In my finding Mr Sadri understood and believed that the transaction was bringing about what he wished it to bring about, that is, repayment to him of Mr Adams' debt to him with money obtained by JTS1 from RMBL, lent by JTS1 to Mr Adams and then paid on by Mr Adams to Mr Sadri in repayment of Mr Adams' debt. In my finding Mr Sadri in truth sincerely believed that that was what was taking place. I do not find however that he had reasonable ground for that belief; he made the assumption, in the great strength of his economic position relative to Ms Cavanough and Mr Adams, that they and all others concerned would act in accordance with his wishes and concepts. This was not a reasonable assumption, but it was one which I accept he genuinely made. His state of mind accorded with it. He said in his affidavit (at paragraph 48): "It is my belief that the effect of the transactions on 22 December 2005 was that: (a) the Company borrowed the sum of $2.2 million from RMBL and became indebted to it to repay $2.2 million; (b) the Company agreed to pay the sum of $520,000 to Harold Adams and at his direction the sum of $520,000 was paid to Roostam Sadri; (c) after the sum of $520,000 was paid by the Company to Harold Adams, Harold Adams became indebted to the Company in the sum of $520,000; and (d) the debt due by Harold Adams to Roostam Sadri in the sum of $520,000 was repaid in full." I accept that in fact he believed these things. 83 To address whether the transaction was an uncommercial transaction within the meaning of s 588FB it is necessary to have some definition of the transaction under consideration. The plaintiffs' pleadings define the transaction narrowly so as to relate only to the payment of $520,000. I regard this as an unduly narrow view. In defining the relevant transaction it is necessary to consider the transaction in some sense to which the considerations (a), (b), (c) and (d) in s 588FB(1) could relate. An unduly narrow definition could exclude benefits and detriments which on a fair view ought to be taken into consideration. In my view the relevant transaction the uncommercial character of which is to be addressed is the loan transaction between JTS1 and RMBL, initiated by Mr Sadri's approach to RMBL on 2 December and concluded with the settlement on 22 December 2005, with all the arrangements incidental to the loan; guarantees, securities, and, in Mr Sadri's concept, the arrangement for JTS1 to lend money to Mr Adams and for Mr Adams to repay Mr Sadri. 84 After then the transaction was over and the event had ended. Workings out of the relationships and obligations thus created in later months and years, with which much evidence dealt, are not part of the transaction and are not relevant for addressing whether it was uncommercial in character. Those later events need to be referred to only briefly. In the early months of 2006 Mr Sadri paid several sums of interest to RMBL, conforming with his guarantee. Later, when there had been defaults and JTS1 had gone into liquidation, RMBL attempted to realise on the security and conducted an auction, which did not result in a sale. RMBL then required Mr Sadri to pay out the debt under his guarantee, and Mr Sadri did so and took an assignment of the securities, particularly of the mortgage of the real property. Later he assigned the mortgage to a company which he controlled. It became altogether clear that far less than the secured debt and other mortgage obligations could be obtained by selling the property. The assignee company foreclosed on the mortgage and came to own the land free of JTS1's equity of redemption. In the long run Mr Sadri incurred a large loss. This chain of events is not in my finding part of the transaction to be considered for the application of s 588FB. 85 There undoubtedly were benefits for JTS1 in entering into the transaction. JTS1, notwithstanding that well over $4 million had been sent to it by subscribers who wished to obtain preference shares, was, in circumstances which cannot be understood, quite unable to pay the mortgage principal or even a significant part from its own resources, and was incurring interest in the order of 60% per annum while in default. For reasons which are also mysterious but existed in fact, JTS1 was not in a position to proceed further with and satisfy the conditions on which the Commonwealth Bank of Australia was apparently ready to lend it something in the order of $4 million if satisfied of matters which, for a well conducted company which had the resources that it appeared to have, should not have been difficult. This part of JTS1's difficulty was in effect solved by Mr Sadri's intermediation with RMBL to obtain a loan of $2.2 million at relatively moderate interest rates, appropriate for a well-considered commercial transaction, unlike the interest charged by Mountainview. The RMBL loan markedly improved this part of JTS1's confused affairs. The people in charge of JTS1's affairs had been unable to bring about any such result, notwithstanding default to Mountainview since September 27, and notwithstanding that the need for refinancing the Mountainview loan had been evident long before that. There were then significant benefits to JTS1 from entering into the transaction. The RMBL loan differed from the Mountainview loan in that RMBL did not require charges over Willow Court Retirement Village as Mountainview had done. This however was not an advantage to JTS1, which had no interest in Willow Court Retirement Village. 86 However there were also very significant detriments. At one point in submissions the defendant's counsel sought to make an analogy between the payment of $520,000 and commission or procuration fee for obtaining finance. It is important to keep in view that Mr Sadri charged no commission for obtaining finance and the payment was of an entirely different character. There is no evidence and it could not rationally be possible that a commission or procuration fee of $520,000 was appropriate for obtaining a loan which in effect was only about three times that amount. Advantages in terms of the extension of the term of the loan and the relative moderation of the interest charges would be entirely blotted out if the payment were to be regarded as a procuration fee. It can only be appraised as what it was, a requirement by Mr Sadri, as a condition of his involvement and of making available the moneys which were made available, that JTS1 should provide $520,000 out of the advance and treat it as if it had been lent to Mr Adams and Mr Adams had disposed of the money lent to him by paying it on to Mr Sadri. Mr Sadri's experience in dealing with Mr Adams over several years showed that it was not practically possible to get Mr Adams to comply with arrangements for repayment of the loan, that the terms of repayment which he had signed were not complied with, and that there were poor prospects that he would be in a position to pay $520,000 to JTS1. 87 It was said (but has not been proved) that the commercial fishing vessel which was the subject of the original loan had been impounded by the Government of New Zealand. Whatever disaster happened there, Mr Adams was no longer engaged in business with the commercial fishing vessel and no longer had it at his disposal. Putting $520,000 into a loan to Mr Adams was a proven failure as Mr Sadri's evidence demonstrated, and lending the money to Mr Adams was much the same as paying out $520,000 without prospect of recovery. 88 Although there were beneficial aspects for JTS1 of entering into the transaction, paying out $520,000 was a severely detrimental aspect. On the other hand the benefit to Mr Sadri from entering into the transaction can fairly be equated with $520,000, a significant matter under paragraph (c) of s 588FB(1). He collected $520,000 which could not be collected from Mr Adams. 89 Other relevant matters include the whole skein of facts referred to in this judgment, and particularly the commercial predicament of the company, in which it was not in a position to incur large obligations or to acquire assets of dubious value, in view of the large skein of obligations which was gathering over it. It had no history of success and prosperity in which it could indulge in taking a chance on Mr Adams. 90 In my finding it could not be expected that a reasonable person in the circumstances of JTS1 would have entered into a transaction in which it paid out $520,000 of good money and received back an obligation by Mr Adams to pay that same sum, after he had failed to pay it to Mr Sadri for several years. It was nothing to do with JTS1's business to see Mr Adams out of his difficulty, and even less to do with JTS1's business to see Mr Sadri out of his difficulty with Mr Adams. A reasonable person in JTS1's position would not have used resources, still less borrowed money to make resources available, to assist the director's brother-in-law when it had large business in hand and many obligations and an urgent need to complete preparation of its real property for the conduct of a college for international students in Tasmania, the completion of which was its only hope of achieving significant income. Getting Mr Adams or Mr Sadri out of a pickle arising from putting an engine in a commercial fishing vessel a few years earlier had nothing whatever to do with JTS1's business. 91 My finding is that a reasonable person in JTS1's circumstances would not have entered into the transaction and accommodated Mr Sadri's wish to be repaid $520,000 by Mr Adams in doing so. The transaction plainly was an uncommercial transaction as defined. Mr Sadri incurred significant obligations to RMBL; he was the contributor and provided the funds, he guaranteed the loan, he agreed to take an assignment if there was a default (and eventually he did) and he repaid the loan as guarantor. These represent his economic function as the lender standing behind RMBL. It was never made clear to me why he acted through RMBL, but plainly he had the economic function of being the lender, and in the light of this his guarantee obligations and burdens are not significant detriments to him. As lender he would reasonably have required payment of interest, perhaps at a higher rate than was paid; but he could not reasonably have required that $520,000 be paid to him, whether or not he also gave up an obligation in that amount which he had been unable to collect for several years. 92 In addressing Mr Sadri's defence under s 588FG(2) I do not regard him as being in any difficulty with respect to the matter in subs (2)(b) which relates to reasonable grounds to suspect that the company was or would become insolvent, or (c) which relates to providing valuable consideration. 93 The information and documents furnished to Mr Sadri by Ms Cavanough gave what would, to a reasonable person, be an indication that JTS1 was in a reasonably sound position, although in need of capital to complete its development and move into a position where it would earn income. In particular Mr Sadri was shown the Jones September valuation which indicated that the company's property was of very high value, in relation to the loan transaction which took place and security for it. There were some adverse indications in that JTS1 was not in a position to comply with conditions imposed by the Commonwealth Bank of Australia within the time available. Mr Sadri did not inspect or have anybody make an inspection of the company's books of account or determine its cash trading position; it should not be found that he had grounds to suspect insolvency for this reason. 94 Mr Jones' valuation of September 2005 is a strange document. When its internal reasoning is analysed it is not possible to understand how the valuation opinion is produced; the reasoning appears to bring into consideration facts and expectations which would have a bearing on the projected value at the time of completion of development, but do not support opinion of value as at the time of the valuation. While its reasoning is confused, in my understanding the valuation opinion at $6.9 million can only be arrived at by assuming that all the projected improvements had been completed. Not all the language in the valuation supports this conclusion, but I think that it must be taken that some such assumption was made. A check valuation brought under consideration the rent provided for by the leases which had been entered into; this consideration would only be relevant when the time arrived when the rent could be collected, and it plainly had not arrived at the time of which the valuation speaks. 95 A lender with the advantage of insight into valuation reasoning would not have regarded it as reliable. However, a person who did not have that advantage could reasonably accept it on its face value as supporting a large secured loan to JTS1; certainly as supporting the loan of $2.2 million which in fact was made. 96 The issue which requires attention is the question of good faith referred to in s 588FG(2)(a). 97 I have regard to the following observations of Nicholas J in Cussen v Sultan (2009) NSWSC 1114 at [36]-[38] "36 Consistently, in my opinion, in cases concerning an uncommercial transaction, "good faith" should be understood to relate to the uncommercial nature, or possible uncommercial nature, of the transaction, and knowledge thereof. A failure to make enquiries, in some cases, may well be of considerable significance when determining this element of the defence ( Cussen as liquidator of Akai Pty Ltd (in liq) v Commissioner of Taxation [2004] NSWCA 383; (2004) 51 ACSR 530, par 123). 37 What is required to satisfy the onus will vary with the circumstances of the case. There is no set criteria. However, in my opinion, usually a defendant would need to have an understanding of the substance of the transaction sufficient to show that he became a party to it with an honest and proper motive or purpose. Adopting the words of Mansfield J in Smith (p 322) the defendant must demonstrate that in becoming a party to the transaction he acted without an expectation that the transaction was uncommercial. In my opinion, for the defendant to benefit from s 588FG(2)(a) it is necessary to prove that the motive and intention in becoming a party to the transaction was founded on a genuine belief, or knowledge, that the transaction was of an ordinary business kind or was not uncommercial. 38 Such belief or knowledge may well depend upon information obtained by making enquiries to ascertain the character of the transaction prior to becoming a party to it. However, evidence which shows only that the defendant, at the time of becoming a party, was aware that the transaction was, or possibly was, outside normal commercial experience would indicate a motive to profit from, or to take advantage of, an uncommercial transaction at the company's expense. Put another way, the defendant must show that the purpose or motive was not to receive a return or to obtain a bargain of such magnitude that it could not be explained by normal commercial practice (cf: Capital Finance Australia Ltd par 73). Thus the defendant would need to prove the probability that in becoming a party to an impugned transaction it was not his purpose to exploit its inherent uncommerciality." 98 In my view the uncommercial nature of the transaction, and of the requirement as a condition of the loan that $520,000 be made available to Mr Sadri on the footing that the company lent it to Mr Adams, were altogether clear to any reasonable person in the position of Mr Sadri. It was nothing to do with JTS1's business to furnish money to Mr Adams or for his benefit, or to solve Mr Sadri's difficulties in collecting money from Mr Adams. Mr Adams had no standing. He was not a shareholder, he was not an officer. He was the sole shareholder's brother-in-law; and that did not make his affairs any concern whatever of JTS1. It must have been obvious to Mr Sadri as a reasonable person that the obligation which he thought of as being incurred by Mr Adams to the company would do the company no particular good at all but would significantly increase its liabilities without furnishing any correspondingly valuable asset. It was simply nothing to do with the affairs of a company which was developing land for a college in New Norfolk, Tasmania to help out either Mr Sadri or Mr Adams in respect of this transaction arising out of a commercial fishing venture some years earlier. Treating $520,000 in this way was altogether out of scale with solving the company's need to refinance its obligations to Mountainview. 99 At the core of the issue of good faith under (a) is the following passage in the cross-examination of Mr Sadri at T202, 203. "Q. What I put to you is you didn't care who repaid you the 520,000, as long as it came back to you as part of this transaction, do you agree with that? A. Well, I – it is Harold that was supposed to repay me, yes. Q. It was Harold that owed you the money, but you didn't care who paid it back, because you didn't make a distinction in your mind between Mr Adams and the companies which Mr Adams and Mrs Adams were involved with and who were asking you for the money? A. Yes, they operated them as a single entity, yes, that's correct. Q. So you didn't think that Mr Adams had separate financial affairs, or that it was him that needed to repay you. You just wanted your $520,000 back, didn't you? A. Yes, but it was one entity with one family and one entity and that's what was the case. Q. And so what I also put to you is, have a look at the conversation in paragraph 42 of your affidavit. You see the conversation that you have deposed to – I beg your pardon, do you see the words that you depose to having said beginning 'There is still 520,000 owing'? A. Yes. Q. What I put to you is that you never made the distinction at that time between the company repaying you 520,000 and Harold repaying the 520,000. Do you agree with that? A. Yes, there was no difference the way they operated. Q. But what I'm putting to you is you say you did not say that the company should borrow enough money to lend to Harold to enable him to repay his personal loan, did you? A. Yes, that was the internal accounting problem, like the funds I provided we sent to MABA, which was a company, not Harold account. Q. Precisely. So it was a matter of no moment to you what entity paid you back, as long a someone associated with the Adams/Cavanough family paid the money that Harold had borrowed from you? A. As far as I'm concerned Harold borrowed and Harold returned. Q. You know well, don't you, that the money that was used to repay you was advanced to the company, not to Harold? A. But that was Harold and Barbara's company. Q. Well, it would have been perfectly open to you to lend $520,000 to Harold which he could have paid you back from out of that money, couldn't he? A. He was guarantor of that loan." 100 This passage means that in Mr Sadri's mind the interest including the commercial position of the company did not matter because Mr Sadri regarded Ms Cavanough, Mr Adams and the company as a single entity, Ms Cavanough and Mr Adams operated the company as a single entity and "…. it was one entity with one family and one entity…". Involved in this was an understanding that the company's interests were not being served, or regarded at all, by the arrangements to use money borrowed by it to repay Mr Adams' debt to Mr Sadri. This is a clear demonstration that Mr Sadri did not think the company's interests were a matter of concern at all, although they obviously were not being served by the arrangements; in the context of the test in (a), this is a demonstration of the absence of good faith. 101 It would have been grossly obvious to any reasonable person in Mr Sadri's position that this aspect of the transaction was none of JTS1's business, but was an improper exercise of its powers; it needed neither to borrow nor to lend $520,000 of the money which it obtained from RMBL. Mr Sadri did not negotiate or initiate any discussion; he stated this aspect of the transaction as a requirement, and he proceeded when Ms Cavanough fell in with it. Far from being a good faith transaction, it was, to the understanding of any reasonable person in Mr Sadri's position, misuse of a company's resources and powers, a misapplication of its money in an unreasonable and unjustifiable departure from the pursuit of its business objectives. Mr Sadri plainly did not become a party to the transaction in good faith within the meaning of s 588FG(2)(a). 102 It was contended by the defendant's counsel that the remedy sought by the plaintiffs, that is, payment of $520,000 and related relief, was not appropriate. Counsel said "Any remedy under s 588FF must equate to the benefit 'lost' by the company and 'gained' by Mr Sadri. It is impossible to identify any such 'benefit' that Mr Sadri should be ordered to disgorge. The claim for the sum of $520,000 reflects the liquidator's narrow view of the transaction.' 103 I do not accept this submission; I regard it as clear that the respect in which the transaction was uncommercial directly produced payment of $520,000 to Mr Sadri which he would not otherwise have received, and that this clearly points to the appropriate remedy. It was also contended that the sum of $520,000 was never available to the company or its general body of creditors. I do not regard this as a significant observation and it is altogether clear that the company's obligations were $520,000 greater than they would have been if the transaction had not been uncommercial in this respect. 104 The defendant's counsel contended that payments of interest under the guarantee should be brought into account; counsel spoke of these as a set-off but they are plainly not a set-off because of the lack of close relation with the obligation to be created by an order under s 588FG. In my opinion they have no part in determination of the appropriate remedy. 105 My conclusion is that the plaintiffs are entitled to the remedy which they seek. 106 For these reasons I am of the opinion that the plaintiffs should succeed and I should act under s 588FF(1)(a) and give judgment for the plaintiffs for $520,000, which will have the effect of an order in the terms of subparagraph (1)(a). I will also order that the defendant pay to the plaintiffs interest at the rate usually allowed on judgment debts from the commencement of these proceedings until the present. 107 The Statement of Claim also refers to other grounds of the claim: money had and received by the defendant to the use of the company, money lent and unfair preference within s 588FA. These claims were not supported by the evidence and there was no substantial reliance on them. 108 The orders are: Give judgment for the plaintiffs for $520,000 together with $221,919.80 interest, a total of $741,919.80 and with costs. ********** 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.