Supreme Court New South Wales Medium Neutral Citation: Joubert in his capacity as liquidator of Barry Ling Pty Ltd (in liquidation) v Jones [2013] NSWSC 280 Hearing dates: 15 March 2013 Decision date: 02 April 2013 Before: McCallum J Decision: Appeal against verdict for first defendant dismissed; appeal against verdict for second defendant allowed; verdict for second defendant set aside; in lieu thereof verdict entered for plaintiff against second defendant Catchwords: CORPORATIONS - insolvency - appeal by liquidator against decision of Local Court dismissing claim for orders under s 588FF of the Corporations Act - whether Court erred in holding second defendant was not a party to the impugned transaction - where participation in transaction admitted on the pleadings - whether open to find that defence under s 588FG(2) established by second defendant - failure to call second defendant to give evidence - requirements of defence not capable of being met Legislation Cited: Corporations Act 2001 (Cth) Local Court Act 2007 Uniform Civil Procedure Rules 2005 Cases Cited: Cook's Construction Pty Ltd v Brown [2004] NSWCA 105 Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058 Sims v ABC Tissue Products Pty Ltd [2008] NSWSC 192 Category: Principal judgment Parties: Randall Joubert (plaintiff) Allan Jones (first defendant) Jacqueline Jones (second defendant) Representation: Counsel: S Golledge (plaintiff) R D Marshall (defendants) Solicitors: Polczynski Lawyers (plaintiff) Bartier Perry (defendant) File Number(s): 2013/12643 Publication restriction: None Judgment 1This is an appeal from a decision of the Local Court in proceedings brought by the liquidator of an insolvent company arising out of an alleged voidable transaction. The transaction in question was the payment by the insolvent company of the sum of $70,000 in discharge of a debt owed by the principal of the company, Mr Barry Ling, and his wife, Ms Debra Roberts. The defendants are Debra Roberts's parents, Mr Allan Jones and Mrs Jacqueline Jones. 2It was not in dispute at the hearing below that the payment was an uncommercial transaction within the meaning of s 588FB of the Corporations Act 2001 (Cth). Further, it was not disputed by the defendants that the transaction was voidable under s 588FE of the Act and that the liquidator was accordingly entitled to relief under s 588FF of the Act, subject only to the defences raised. The only issue raised for the Court's determination was whether the defendants had established a defence under s 588FG(2) of the Act. 3The learned magistrate held in favour of the defendants. As to Mrs Jones, his Honour held that she had no knowledge of the transaction and that she was not a party to it. As to Mr Jones, his Honour upheld the defence under s 588FG(2). In a separate judgment, his Honour ordered the plaintiff to pay the defendants' costs of the proceedings on the ordinary basis up to the end of 22 June 2012 and thereafter on the indemnity basis, including any reserved costs. 4The liquidator has appealed against both the principal judgment and the order as to costs. The appeal was brought against both Mr and Mrs Jones. However, at the outset of the hearing before me, it was indicated that the liquidator does not now seek to disturb the verdict in favour of Mr Jones. To that extent, the appeal is to be dismissed by consent. It remains to determine the appeal as against Mrs Jones. The critical issue raised by the grounds relating to her is the correctness or availability of the magistrate's conclusion that she was not a party to the impugned transaction. 5An appeal from the Local Court lies as of right to this Court under s 39(1) of the Local Court Act 2007, but only on a question of law. To the extent that a party seeks to appeal on a ground that involves a question of mixed law and fact, leave is required under s 40(1) of the Act. Leave is also required to appeal an order as to costs: s 40(2) of the Act. For the reasons that follow, I am satisfied that the questions on which the present appeal falls to be determined are questions of law and accordingly that leave to appeal is not required. Leave to appeal against the order as to costs should be granted, since that part of the appeal is inextricably linked to the appeal against the principal judgment. Circumstances in which the claim was brought 6The circumstances in which the claim in the Local Court was brought by the liquidator may be summarised briefly. Debra Roberts and Barry Ling operated a newsagency owned by the company, Barry Ling Pty Ltd. In early 2008, Debra approached Mr Jones, saying: "Can you lend us some money? I need $70,000". 7He said, "yes, ok" and gave her two cheques totalling $70,000. The evidence before the magistrate included a letter dated 21 January 2008 in which Ms Roberts and Mr Ling certified that they had "borrowed the amount of $70,000 plus interest from Mr Alan Jones and Mrs Jacqualine [sic] Jones on the date of January 21st, 2008 behalf of [sic] Mona Vale Newsagency". The certificate concludes "we accept liability that this amount must be paid immediately upon the sale of the abovementioned business". It bears signatures attributed to Ms Roberts and Mr Ling and is dated 6 May 2008. 8Separately, there was evidence in the Court below of a loan agreement dated 18 January 2008 purportedly between Mr and Mrs Jones as lender and Barry Ling Pty Ltd (as trustee for the Mona Vale Newsagency Unit Trust) as borrower. That agreement was signed by both Mr and Mrs Jones but was not executed by the company. The magistrate concluded that the agreement apparently had no bearing on the money lent to Ms Roberts and Mr Ling. Nonetheless, that fact that it bears the signature of Mrs Jones suggests at least some knowledge on her part of the family's finances. 9On 19 September 2008 a judgment was entered against Barry Ling Pty Ltd in favour of Young Custodians. Mr Ling became bankrupt shortly thereafter, on 5 December 2008. On 9 December 2008, Barry Ling Pty Ltd entered into an agreement to sell the business of the newsagency. On 6 January 2009, Young Custodians applied for a winding up order against Barry Ling Pty Ltd. On 20 January 2009, the sale of the business was completed. On 24 January 2009, the sum of $70,000 was paid by Barry Ling Pty Ltd into a joint account held by Mr and Mrs Jones. It is common ground that Barry Ling Pty Ltd was insolvent at that time. On 4 March 2009, the winding up order was made and the plaintiff was appointed as liquidator. 10The proceedings in the Local Court were commenced on 5 January 2012. In an amended statement of claim filed on 25 September 2012, the liquidator made the following assertions, to which the defendants pleaded the following responses: (a) in paragraph 10 of the amended statement of claim, the liquidator alleged that, on or around 21 January 2008, the defendants advanced the sum of $70,000 to Deborah Roberts and Barry Ling pursuant to a personal loan to them. By paragraph 6 of the defence, the defendants admitted that they lent $70,000 to Roberts and Ling, subject only to the qualification that they asserted the funds were lent "to Roberts and Ling on behalf of Mona Vale Newsagency, and that Mona Vale Newsagency was the name of the business carried on by the company"; (b) in paragraph 11 of the amended statement of claim, the liquidator alleged that the company paid the defendants the sum of $70,000 on about 24 January 2009. By paragraph 7 of the defence, the defendants did not admit that allegation but admitted receiving $70,000 by electronic funds transfer into their joint account on that date. Thus the only part of paragraph 11 not admitted was the assertion that it was the company that made that payment; (c) by paragraph 13 of the amended statement of claim, the liquidator alleged that, as a result of the payment, the debt of $70,000 owing by Barry Ling and Deborah Roberts to the defendants was discharged in full. By paragraph 9 of the defence, the defendants did not admit that allegation but admitted that the receipt by the defendants of the sum of $70,000 in January 2009 discharged the principal amount of the loan owing to them. 11The pleading identified the payment of $70,000 into the joint account as the relevant "transaction" sought to be impugned: see paragraphs 11 and 14 of the amended statement of claim. 12Nothing in the defence suggested that the loan was made, or the payment received, by Mr Jones alone. Further, the defendants pleaded a positive defence which took as its premise that Mrs Jones was a party to the impugned transaction. The defence invoked s 588FG(2) of the Corporations Act, which provides (emphasis added): (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. 13Had it been sought to contend at the hearing that Mrs Jones was not a party to the receipt of the payment, that section could not properly have been invoked. The appropriate defence would have been the defence under s 588FG(1), which may be raised by "a person other than a party to the transaction". The defence specifically alleged that the defendants "became a party to any proven transaction in good faith": paragraph 21(a) of the defence. As already noted, the liquidator's allegations that it was both Mr and Mrs Jones who lent $70,000; subsequently received payment of $70,000 and did so in discharge of a loan owing to them were all admitted. The only contest raised by the defendants as to the structure of the alleged transaction concerned the identity of the borrower (that is, whether the loan was made to the company or, alternatively, to the two individuals, Ms Roberts and Mr Ling). 14Mrs Jones did not give evidence at the hearing. 15Mr Jones swore an affidavit which established that Debra Roberts approached him for the loan and approached him at the time of repayment of the loan in order to obtain the details of the joint account. His affidavit was silent as to whether he discussed the loan or the payment with Mrs Jones at any stage. 16Mr Jones was cross-examined at a separate hearing before the hearing of the balance of the claim, evidently owing to concerns as to his ill health. His evidence in cross-examination did not take the issue of Mrs Jones's knowledge of the loan or the payment any further. Grounds of appeal 17The liquidator relies upon five grounds of appeal against Mrs Jones. However Mr Golledge, who appeared for the liquidator, acknowledged that the appeal essentially raises two points, namely, whether the magistrate erred in finding that Mrs Jones was not a party to the impugned transaction (grounds 10 and 13) and whether it was open to the magistrate to find that Mrs Jones had discharged her onus to establish the defence under s 588FG(2) of the Corporations Act (grounds 11, 12 and 14). Alleged error in finding that Mrs Jones was not a party to the impugned transaction 18Grounds 10 and 13 are: 10 The magistrate erred as a matter of law, alternatively, as a matter of mixed fact and law, in finding that the second defendant was not a party to the impugned transaction in circumstances where he had already found, as a matter of fact: (a) that the second plaintiff had paid $70,000 to the second defendant and to the first defendant, jointly; and (b) that that payment had had the effect of discharging a debt owed to the second defendant and the first defendant, jointly. 13 The magistrate erred as a matter of law in finding that the second defendant was not a party to the transaction when that matter had not been raised by the second defendant on the pleadings or in argument during the trial as a ground for refusing the relief sought by the plaintiffs against her. 19The magistrate made the following findings: (a) in January 2008, Mr Jones made a loan payment from the joint account of Mr and Mrs Jones to his daughter (paragraph 12 of the judgment); (b) the payment of $70,000 by Barry Ling Pty Ltd to Mr and Mrs Jones was made on 24 January 2009, from the proceeds of the sale of the newsagency (paragraph 14 of the judgment); (c) the payment discharged the debt owed by Ms Roberts and Mr Ling to Mr and Mrs Jones (paragraph 15 of the judgment). 20The magistrate held that the liquidator had established an entitlement to an order pursuant to s 588FF, subject to the defence pleaded pursuant to s 588FG(2) (paragraph 18 of the judgment). Although not expressly articulated in the judgment, it implicitly flowed from his Honour's findings set out above that the entitlement to such an order was established as against both Mr and Mrs Jones. 21However, at [20] of the judgment, his Honour said: First, although the money was paid from the joint account of Mr and Mrs Jones, the evidence is that Mr Jones alone decided to be a party to the transaction, and he alone gave effect to the decision he made. Mrs Jones has not given evidence, however, because of the evidence of Mr Jones, I am satisfied on the balance of probabilities that Mrs Jones had no knowledge of the transaction, and was not a party to the transaction. 22With great respect to his Honour, in the absence of any evidence from Mrs Jones, I do not think it was open to find that she had no knowledge of the transaction. Mr Jones's evidence was silent on that issue and could not, in any event, have proved the state of knowledge of his wife. Even if his evidence had established that he never discussed the loan or it repayment with his wife (which it did not), it is not inherently unlikely that Mrs Jones learned of the loan from another source. 23Further, in my respectful opinion, his Honour erred in finding that Mrs Jones was not a party to the impugned transaction. As already noted, the relevant transaction was the payment of $70,000 into the account jointly held by Mr and Mrs Jones. 24The evidence certainly established that it was Mr Jones who dealt with Ms Roberts, both in agreeing to make the loan and in facilitating its repayment by provision of the details of the joint account, but that is not determinative as to the parties to the loan. That Mr Jones had his wife's express or implied authority to enter the loan agreement on her behalf is necessarily comprehended within the admissions made by Mrs Jones on the pleadings. 25In any event, as already noted, the relevant transaction is the payment by the insolvent company of $70,000 into Mr and Mrs Jones's joint account. Even if that payment was made to discharge a debt owed to Mr Jones alone, the fact that the account was a joint account meant that Mrs Jones was a recipient of the payment, whether or not she was a party to the loan. In my view, the inescapable legal conclusion is that Mrs Jones was a party to the payment. 26Ground 13 raises a discrete point as to whether it was open to the magistrate to make the finding that Mrs Jones was not a party to the transaction when that had not been raised on the pleadings or in argument. 27Mr Marshall, who appeared for Mr and Mrs Jones, submitted that the liquidator ought not to have been taken by surprise in that respect, relying on four passages of the transcript of the hearing. It is necessary to consider each in turn. 28First, in his opening address to the magistrate, Mr Marshall said (page 26 of exhibit A): In 2008 the daughter, Deborah, sought a loan from my client, and the loan was for a year; the loan was repaid. It turns out what my client thought was a personal loan may have in fact been a loan of the company, and that's a matter for the court on the objective view of the evidence. 29I do not accept that those opening remarks ought to have put the liquidator's counsel on notice of any contest as to the identity of the lenders. The remarks were concerned only with the issue, properly raised on the pleadings, of the identity of the borrower. 30The second was a submission made by Mr Marshall in closing (on a later day) at page 72 of exhibit A: In terms of the wording of the section, this is a case where the person who had the conduct of the transaction, Mr Jones, was a party to the transaction in good faith. It could never be said it wasn't in good faith. At the time he became a party to the transaction he would have no reasonable grounds for suspecting the company was insolvent at that time or become insolvent as a result of receiving a payment. So that was a subjective test. 31Mr Marshall relied on the fact that Mr Golledge responded to those remarks in the third passage relied upon, as follows (at page 82 of exhibit A): It appeared to be, your Honour, from what my friend said in his submissions that he was addressing you or the case on the 588FG was that either Mr Jones was the only party to the relevant transaction and so the only relevant consideration was his state of mind or more elliptically, perhaps, that if they were both parties to the transaction, he could speak on her behalf. The first question is the matter of fact. 32The magistrate responded to Mr Golledge as follows: Isn't it the evidence that he [Mr Jones] made the loan? He was the one who had a conversation with his daughter and agreed to make the loan. 33Mr Golledge proceeded to remind the magistrate of the letter dated 6 May 2008 in which Ms Roberts and Mr Ling had acknowledged a loan on behalf of both Mr and Mrs Jones. He also reminded the magistrate that the impugned transaction was not the making of the loan but the payment of $70,000 into the joint account. 34Finally (at page 87 of exhibit A) Mr Marshall said, in submissions in reply: It would not surprise me, your Honour, if your Honour decided that in fact the loan was made by Mr Jones singular and it was to Debra. She said, "us," so one could infer that it's Debra and her husband. It may be that's the result. It is confusing because four months later we do have the document on Mona Vale Newsagency letterhead that speaks in plural terms, but also on behalf of Mona Vale Newsagency business. I mean I don't know if we can use that for anything. It's probably void for uncertainly, really, because it's totally unclear. That's an alternate argument. I have to say, your Honour, and it has been the subject of discourse today, but I feel duty bound to point out that in the defence, I think in para 6 and 7, I think we may make an admission that there was a loan by both Mr and Mrs Jones, however, the Court, in my submission, I don't think I can be prevented from putting it given that it's been a matter and subject to submissions and no further evidence could have been brought to assist on either side to cause determination of who exactly the loan was between. It's a matter for the Court. 35Mr Golledge did not object to those remarks or seek leave to be heard further. 36I do not think any of those exchanges was sufficient to put Mr Golledge on notice of any departure from the defendants' case (as pleaded and conducted up to that point) that Mrs Jones admitted receiving the payment of the $70,000 into the joint account in discharge of a debt owed to her and Mr Jones and that the single issue on which the relief sought by the liquidator was contested was the alleged existence of a defence under s 588FG(2). The remarks made by Mr Marshall in reply raised a false issue which, unfortunately, appears to have distracted the magistrate from the issue properly brought forward for his determination. I am satisfied that his Honour was led into error in holding that Mrs Jones was not a party to the transaction. She was plainly a party to the payment into the joint account. The case had not been conducted on any different basis up to the point of submissions in reply. 37I am further satisfied that, in determining the claim against Mrs Jones on that basis, his Honour allowed the defendants to depart from the pleaded case in a way that deprived the liquidator of procedural fairness. It follows that grounds 10 and 13 are made out. Whether it was open to find that Mrs Jones had discharged her onus to prove the defence 38Grounds 11, 12 and 14 are: 11 Having found that the impugned transaction was uncommercial and that the plaintiffs were therefore entitled to orders under s 588FF subject only to the defence pleaded under s 588FG(2), the magistrate erred as a matter of law, alternatively, as a matter of mixed fact and law, in refusing to grant the plaintiffs relief against the second defendant when the second defendant had led no evidence capable of discharging the onus of proof cast on her by s 588FG(2) of the Corporations Act and, in particular, had given no evidence of her own state of knowledge as to the second plaintiff's financial position at the time of the receipt by her of the $70,000 payment. 12 The magistrate erred as a matter of law, alternatively as a matter of mixed fact and law, in finding that evidence given by the first defendant was capable of establishing, and did establish, that the second defendant had discharged the onus case on her by s 588FG(2) of the Corporations Act. 14 The finding by the magistrate that the second defendant had discharged the onus of proof borne by her under s 588FG(2) of the Corporations Act was not reasonably open in light of the evidence led at the trial and the failure of the second defendant herself to give evidence. 39Grounds 12 and 14 assume that the magistrate made a finding that Mrs Jones had discharged the onus cast on her by s 588FG(2) of the Corporations Act. It is not clear to me that his Honour did so find. Having held that Mrs Jones was not a party to the transaction, his Honour proceeded to consider the defence as raised by Mr Jones. The finding that Mrs Jones was not a party to the transaction obviated the need to consider the defence as raised by Mrs Jones. 40His Honour did, however, address the position of Mrs Jones when considering one of the elements of the defence, namely, whether a reasonable person in the circumstances would have had reasonable grounds for suspecting that the company was insolvent or would become insolvent (the remarks in question are directed to Mrs Jones's subjective knowledge, but appear under the heading relating to the objective element of the defence). His Honour said (at [29] of the judgment): Although Mrs Jones had worked in the newsagency, it appears from the transcript that she had not done so since 2005. She would not have known about the financial situation of the newsagency in 2008 from her work in the newsagency at the earlier time. 41That finding alone could not sustain the defence. In any event, whether or not his Honour intended to express a positive finding that Mrs Jones had satisfied the onus of proving the defence, it was not open to make any such finding where Mrs Jones had not given evidence in the proceedings. Section 588FG(2) requires the person seeking to establish the defence to prove that he or she had no reasonable grounds for suspecting that the company was insolvent at the time of the transaction or would become insolvent (s 588FG(2)(b)(i), generally referred to as the subjective test) and that a reasonable person in the person's circumstances would have had no such grounds for so suspecting (s 588FG2(b)(ii), generally referred to as the objective test). 42In the present case, there was simply no evidence to satisfy the subjective test so far as Mrs Jones was concerned. It is not necessary, as in a case concerned with the knowledge of a company, to consider what inference should be drawn from the failure to call a particular witness without valid reason: cf Cook's Construction Pty Ltd v Brown [2004] NSWCA 105 at [31] to [34] per Young CJ; at [42] per Hodgson JA; Santow JA agreeing with both at [44]. In the present case, the defendant was an individual. The only person who could prove that Mrs Jones had no reasonable grounds for suspecting that the company was insolvent was Mrs Jones. Without evidence from her, there was no basis for drawing an inference to that effect and the subjective element of the defence was not proved: Dean-Willcocks v Commissioner of Taxation [2004] NSWSC 1058 at [71]-[72] per Young CJ in Eq; applied in Sims v ABC Tissue Products Pty Ltd [2008] NSWSC 192 at [34] per Hammerschlag J 43Accordingly, in my view, it was not, or would not have been, open to the magistrate to find that Mrs Jones had satisfied the requirements of s 588FG(2). It follows that grounds 11, 12 and 14 are made out. Conclusion 44Mr Marshall submitted that, in the event that the Court were minded to accede to the liquidator's contentions, the second defendant should have leave to amend her defence (so as to bring it in line with the submission that the loan was made by Mr Jones alone) and that the proceedings should be remitted to the Local Court to determine the issues raised by the amended defence. Mr Marshall provided a form of proposed amendment which would deny that Mrs Jones advanced the loan; deny that the repayment of the loan discharged a debt owing to her and raise the defence under s 588FG(1) (available where the person was not a party to the impugned transaction) rather than under 588FG(2) (available to a party to the impugned transaction). 45Alternatively, Mr Marshall submitted that the proceedings should be remitted to the Local Court to allow the amendment application to be made. The proposed amendment did not seek to amend paragraph 7 of the defence in which Mrs Jones admitted receipt of the $70,000 into the joint account. 46It would not be appropriate for me to allow the amendment, since it entails the withdrawal of admissions. A party may not withdraw any admission or other matter that operates for the benefit of another party except with the consent of the other party or by leave of the Court: rule 12.6(2) of the Uniform Civil Procedure Rules 2005. There is no evidence or other material before me to establish the circumstances or instructions on the strength of which the admissions were originally made or why leave should be granted to withdraw them. In the absence of any evidence or explanation on that issue, it would not be a proper exercise of my discretion to grant the leave implicitly sought. 47Further, I do not see any utility in remitting the proceedings to the Local Court. Even if the application to amend were allowed in that Court (after hearing the parties as to whether leave should be granted to withdraw the admissions), the amendment as formulated would not extend to denying receipt of the payment of $70,000 into the joint account. That payment by the company was the relevant "transaction" within the meaning of that term as defined in s 9 of the Corporations Act. Even if Mrs Jones was not a party to the loan, in my view she was plainly a party to the payment. She had, if she was to resist the liquidator's claim, to establish the requirements of s 588FG(2). 48Further, even if my analysis of that issue is wrong, the defence under s 588FG(1) was not made out on the evidence. Mrs Jones would have to have proved either that she received no benefit because of the transaction or the same requirement as exists under s 588FG(2) to prove that she had no reasonable grounds for suspecting that the company was insolvent. On any analysis, the failure to call her as a witness was fatal to any defence. For the reasons already explained, absent her giving evidence, it was not open to the magistrate to find that she had established the subjective element of either defence. 49Accordingly, in my view, the appropriate relief is to set aside the verdict and the costs order in favour of Mrs Jones and in lieu thereof to order that there be a verdict against Mrs Jones in favour of the liquidator. 50I will hear the parties as to the costs of the proceedings below and in this Court. 51The orders are: (1)That the appeal against the verdict in favour of the first defendant be dismissed; (2)That the appeal against the verdict in favour of the second defendant be allowed; (3)That the verdict against the second defendant be set aside and in lieu thereof that there be a verdict for the plaintiff against the second defendant. 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. Decision last updated: 03 April 2013