Liquidator Seeks Recovery of Transferred Properties

In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2 (2 February 2022)

The husband and wife established the Company, which acquired four properties with a view to property development.  The Company was sued for building defects for $3 million.  However, the couple agreed to partial property settlement in respect of the properties owned by the company only.  The Court in adjudicating this case, assessed whether later transfer of properties by the company was a “transaction”. 

Facts:

In 2001, the husband and wife established the Company, which acquired four properties with a view to property development. 

Alan Hayes, liquidator of ZH International Pty Ltd (the Company), seeks to recover four properties transferred by the Company to its directors and shareholders, Hui (John) Zhang (the husband) and Ngoc Hon Ly (the wife). 

The Company’s net equity in the properties was then some $2.16 million. 

The properties were transferred as part of a property settlement under the Family Law Act, effected by consent orders made by a Registrar in the Local Court at Fairfield exercising jurisdiction under section 39(2) of that Act (2014 Consent Orders). 

The bulk of the funds were provided by bank loans to the Company, secured by registered mortgages over the properties.  

The Company obtained a builder’s licence and embarked upon building projects.  By 2014, the Company had been experiencing cashflow problems for some time: the Company’s bank account was overdrawn, cheques were being dishonoured and bills paid by ‘round sums’ or, perhaps, using the couple’s funds.  The Company faced building defects claims exceeding $3 million.

The couple had separated three years’ earlier but the husband had resisted his wife’s entreaties for a property settlement.

The husband now relented to agree on a partial property settlement, but only in respect of the four properties owned by the Company.

The couple estimated that the Company’s net equity in the four properties was $2.33 million.  

The husband considered that the Company owed him over $1 million for funds expended to complete the building projects.  In May 2014, an Application for Consent Orders was filed, which contained no information on the financial position of the Company beyond the estimated value of the four properties and the amount owing on the associated loans. 

The couple did not disclose the significant claims made against the Company for building defects nor did the couple disclose that the Company was then insolvent or facing serious and well-defined claims.  The 2014 Consent Orders were made by a Registrar in the Local Court at Fairfield. 

The Company then transferred two properties to the husband and two properties to the wife. 

The Shareholder’s Loan Account was apparently ‘repaid’ (albeit no accounts were prepared at the time to record either the loan balance or its repayment). 

For any protective effect conferred by the 2014 Consent Orders, the transfer of the Company’s property and the repayment of the Shareholder’s Loan Account were voidable transactions, with the primary focus being to defeat the Company’s creditors.  The husband continued to use the Company’s building licence, although established new companies.  

As the legal proceedings against the Company were determined, a judgment creditor issued a statutory demand which went unanswered; the Company was wound up.  Mr Hayes now seeks to retrieve the Company’s assets from the couple, so that the Company’s creditors may be paid.

Issues:

I. Whether or not Family Court orders constituted “transaction of the company”.

II. Whether or not later transfer of properties by the company is a “transaction”.

III. Whether or not relief sought is inconsistent with Family Court orders. 

IV. Whether or not the Court should exercise discretion to make order.

Applicable law:

Corporations Act 2001 (Cth) Part 5.7B - prevents depletion of the assets of a company by certain transactions (generally, at an undervalue) in a specified timeframe before a winding up
Civil Procedure Act 2005 (NSW) - pursuant to which the Registrar in Equity is authorised, in default of compliance with Orders 1, 2 and 4, and on application of the plaintiffs, to execute the Transfers in favour of the Company.
Family Law Act 1975 (Cth) section 90AE(3)(c) - provides that should the couple seek property orders from the Family Court which bind a third party, then the third party must be accorded procedural fairness in relation to the making of such orders.
Family Law Rules 2004 (Cth) - provides that where the third party is a company and the proposed orders involve transferring the company’s assets, then the company “must be included as a party to the case”.

Ansell Ltd v Davies [2008] SASC 203; (2008) 219 FLR 329 - held that section 588FF(1) confers a discretion, as opposed to merely identifying the source of the court’s jurisdiction.
Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 53 ACSR 752 - where whilst the husband relied on the draft 2014 and 2015 financial statements as showing repayment of the Shareholder’s Loan Account of $1.238 million, these statements were prepared after Mr Hayes was appointed and were only drafts and thus of limited probative value.
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 - where "reason to suspect that they may be drafts, there are obvious issues of probative value". 
Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; 184 ALR 616; [2001] HCA 66 - where the relief sought by Mr Hayes was “complimentary” or “cumulative”; he accepted that, to the extent that the orders sought captured relief already granted, the plaintiffs were not entitled to double recovery.
BCI Finances Pty Ltd (In Liq) v Binetter [2018] FCAFC 189; (2018) 132 ACSR 1 - provides that where there is a paucity of evidence, the Court may draw inferences.
Bovis Lend Lease v Wily [2003] NSWSC 467 - where whilst the plaintiffs did not suggest that the proofs of debt were, of themselves, proof of the debts, other material was said to be in evidence that substantiated the claims.
Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 - provides that the failure to bring before the tribunal some circumstance, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. 
Cantrell v North (2020) FLC 93-976; [2020] FamCAFC 175 - the Full Family Court reiterated, “The Court should not readily be the vehicle by which the legitimate rights of third party creditors should be defeated or delayed”.
Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185 - observed that the term “transaction” is a word of wide connotation.
Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 - provides that the purpose of section 588FF was “to ensure that a creditor did not receive a benefit over and above that received by other creditors”.
Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 - pursuant to which the Court considered that the Company was insolvent in May 2014 to September 2014, not only having regard to its immediate lack of funds but looking forward to assess the Company’s “reasonably immediate future”.
Combis v Jensen (No 2) (2009) 181 FCR 178; [2009] FCA 1383 - where different judicial approaches to whether to transfer bankruptcy-related proceedings to the Family Court are summarised.
Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250 - relied upon in holding that there is no suggestion that Mr Marando was retained to advise the couple on their obligations as directors or gave advice on that subject.
DJG Equities Pty Ltd [2014] NSWSC 36 - held that the description of an "uncommercial transaction" in s 588FB(1) of the Corporations Act is directed primary attention to a balancing of benefit and detriment of a transaction of a company.
Edwards v Attorney-General (NSW) (2004) 60 NSWLR 667; [2004] NSWCA 272 - provides that contingent and prospective liabilities are taken into account in assessing solvency.
Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512 - provides that a failure to lodge such returns does not necessarily mean that financial records were not kept.
Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555 - provides that a “transaction” can be made up a series of inter-related dealings and may involve third parties.
In the marriage of Foda (1997) 21 Fam LR 653 - provides that should the couple seek a property settlement under section 79 of the Family Law Act, including in relation to a company wholly owned by a party or the parties to the marriage, then it is customary to treat the net assets of the company as being the property of the couple, after deducting the moneys owing to the company’s creditors and the costs of external administration.
In the matter of Emanuel (No 14) Pty Ltd (in liq) [1997] FCA 667; (1997) 24 ACSR 292 - provides that the “transaction” referred to in section 588FA(1) is the totality of dealings through which a company effects a change in its rights, liabilities or property, irrespective of whether one or more of the dealings in the sequence involves a third party and not the company. 
In the matter of Evolvebuilt Pty Ltd [2017] NSWSC 901 - provides that an unfair preference involves a transaction to which the company and the creditor are both parties (s 588FA(1)(a)); whereby the creditor receives from the company more than it would receive if the transaction were set aside and the creditor proved for the debt in the winding up (s 588FA(1)(b).
In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274 - noted that although the onus of proof is on the liquidator, it will commonly be the case that proof is not a straightforward exercise. 
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 - provides that an adverse inference may be drawn in respect of the absence of documentary evidence to support a party’s case, where the party might be expected to be in possession of documents to corroborate their account.
Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 - provides that the term transaction may include a series of events in a course of dealings initiated by a debtor intended to extinguish a debt.
Kazar v Kargarian [2010] FCA 1381; (2010) 81 ACSR 158 - provides that section 588FDA(2) makes it plain that the test in section 588FDA is to be applied to the relevant transaction taking into account the circumstances which existed when the transaction was entered into.
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 - provides that the directors must exercise their powers for the benefit of the company as a whole.

M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282 - provides that the burden of proof in establishing insolvency falls squarely on the liquidator.

New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638 - where the fact that the properties have since increased in value “fairly represents” a benefit received by them “because of” the making of the transfers to them of the properties; that benefit should be re-allocated to the Company.
Ng v Van Der Velde [2011] FCAFC 35 - where it was held that where the Company was not a party to the Family Court proceedings nor executed the 2014 Consent Orders, the orders were not made pursuant to section 90AE(2) of the Family Law Act and the provisions of section 90AC were not engaged, which may otherwise give such an order primacy over other Commonwealth legislation.
Official Trustee in Bankruptcy v Higgins (Family Court of Australia, Moore J, 2 September 2002, unrep) - explained that section 79 of the Family Law Act requires the Court to exercise a discretion before making the orders, “Although the orders were consent orders they were not simply a matter of course or a mere administrative action but they involved the approval of the Court.

R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428; [1949] HCA 53 - provides that as shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company’s constitution, such as dividends while the company is trading or a distribution of assets upon winding up.
Slaven v Menegazzo [2009] ACTSC 94 - relied upon in holding that the transaction was unreasonable given the Company’s financial condition at the time, where the Company was "in uncertain financial and commercial circumstances in which questions as to its continuing solvency could arise in the short to medium term". 
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 - where Palmer J observed that the law should recognised that a wife’s failure to appreciate the reality of her responsibilities as a director due to deferral to her husband may be a ‘good reason’ for failing to participate in the management of the company, this being a question of fact and evidence in each case.
Super Vision Resources Ltd BVI Registered No 1810534 v AC Holdings Co Pty Ltd [2020] NSWCA 319 - the Court of Appeal observed (without deciding) that, where the recipient has paid consideration for the property that is ordered to be transferred, it may be that, in an appropriate case, the consideration may need to be returned or the recipient may be confined to prove in bankruptcy for the consideration.
Swan Services Pty Limited (in liq) [2016] NSWSC 1724 - observed that in order to establish the presumption of insolvency for a particular period, the position must be separately and distinctly proved for that period; and it must be proved either that no documents within the description of "financial records" were kept in that period or that the documents which were kept were "deficient as to content".
Trajkovski v Simpson [2019] NSWCA 52 - provides that an order made under section 79 of the Family Law Act to transfer property has an immediate dispositive effect, even if the terms of the order require transfers at later dates. 
Trinick v Forgione (2015) 239 FCR 285; [2015] FCA 642 - explained that to assist a liquidator in bringing recovery actions (including recovery actions against former directors for insolvent trading) when it is necessary to prove insolvency and the company's financial records are not available.

Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (in liq) [2006] NSWSC 1132; (2006) 205 FLR 186 - where the company’s income stream (commissions) were paid to another entity, which was found to be insolvent, uncommercial transactions and unreasonable director-related transactions.

Van Reesema v Flavel (1992) 7 ACSR 225 - where apart from a handful of documents produced shortly before or during the hearing, neither the husband or wife produced any invoices, receipts, documents of "prime entry" such as the cash book and journal, ledgers, working papers or supporting source documents needed to "explain" the methods used to prepare the draft financial statements and any adjustments made in them.
Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7 - where it has been said that when a company is insolvent or nearing insolvency that duty includes taking into account the interests of creditors.

Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 - provides that  the spousal directors are not entitled to deal with the company’s assets as if those assets are their own.
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1; (2012) 89 ACSR 1 - where a “clear purpose” of Part 5.7B of the Corporations Actis “to assist liquidators to obtain orders to rectify the effect of transactions that prevent fair distribution of the assets of an insolvent company to creditors”.
Zaravinos v Houvardas [2004] NSWCA 421; (2004) 32 Fam LR 490 - where the Company was not a party whose interests could be affected by the 2014 Consent Orders and the orders were in a form which did not affect its rights.

Analysis:

The 2014 Consent Orders, as made by the Family Court, did not oblige the Company to do anything but were directed to the parties to the marriage. The 2014 Consent Orders did not create an equitable interest in the Company’s properties in favour of the husband and wife as the orders did not create any obligation on the Company to transfer the properties. The orders simply obliged the spouses to transfer to the other ‘all [their] rights, title and interest’ in the Company’s properties, where the spouse, in fact, had no right, title and interest in those properties. The 2014 Consent Orders did not touch upon the Shareholder’s Loan Account which, according to the orders, remained the property of the spouses.

Orders under section 588FF of the Corporations Act requiring the husband and wife to transfer the properties back to the Company and ‘undoing’ any repayment of the Shareholder’s Loan Account are not inconsistent with the 2014 Consent Orders. 

The 2014 Consent Orders, properly constructed, did not effect a “transaction” of the Company.  The later transfers of the properties by the Company to the husband and wife were the relevant “transactions” as was the (much) later accounting treatment of repayment of the Shareholder’s Loan Account and advancing the excess equity to the directors and shareholders as a “Trade and other Receivables” in the sum of $991,961.42.  Whilst a couple may be directors and shareholders in a family company, the couple do not own the company’s assets.  

As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company’s constitution.  Determining with exactitude precisely what happened with the Company and the four properties is not possible given the lack of documents.  This is not for want of trying on Mr Hayes’ part, who make requests for information to the husband, wife, daughter, Mr Marando, current and former accountants, banks and others.  There were no building contracts “so it’s really hard to determine in fact what the company did and what it didn’t do. There’s just no records of any significance.”  

The husband said that the deposits on the four properties were paid from the couple’s savings. The wife said the deposit and costs of the purchase were paid from the couple's joint savings, using “my own money", while the balance of the purchase price was borrowed in the name of the Company by a mortgage secured against the couple’s other properties. Whilst it does appear that, for some of the properties at least, some of the monies to acquire the properties came from the couple, none of the mortgages registered on the properties suggest that the finance was also secured over the couple’s other properties.

The couple did contribute some funds to the acquisition of the four properties, although less than asserted and probably largely reimbursed by bank finance raised against the properties. 

Conclusion:

The defendants were ordered to transfer four properties under section 588FF(1)(b), Corporations Act 2001 (Cth).  Further orders were made to quantify any benefit conferred by the defendants on the company.