FEDERAL COURT OF AUSTRALIA

Charben Haulage Pty Limited (In Liquidation) ACN 083 376 701, in the matter of Charben Haulage Pty Limited (In Liquidation) ACN 083 376 701

[2010] FCA 477

IN THE MATTER OF CHARBEN HAULAGE PTY LIMITED (IN LIQUIDATION)

ACN 083 376 701

THE COURT ORDERS THAT:

1.                  Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth), the period within which the plaintiff may make an application under s 588FF(1) of that Act in respect of payments made by Charben Haulage Pty Limited to Mr Jim Janakis, Mrs Victoria Janakis or Tidal Surge Pty Limited between 24 March 2005 and 1 April 2006 be extended up to and including 3 June 2010.

2.                  The proceeding be stood over for directions on Friday, 4 June 2010 at 9.30 am.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE MATTER OF CHARBEN HAULAGE PTY LIMITED (IN LIQUIDATION)

ACN 083 376 701

REASONS FOR JUDGMENT

1                     The plaintiff, Mr Steven Kugel (the Liquidator), is the liquidator of Charben Haulage Pty Limited (the Company).  The Liquidator has applied to the Court for an order extending the time within which he may commence a proceeding with respect to voidable transactions in the winding up of the Company under s 588FF of the Corporations Act 2001 (Cth) (the Act).  For reasons that I gave on 8 September 2009, I declined to make an order extending the time at that stage (see [2009] FCA 1039). 

2                     However, I considered that there was sufficient material before me to justify giving the Liquidator the opportunity of proceeding with the examination of former officers of the Company.  I therefore adjourned the hearing of the application on terms that the Liquidator prosecute any such examination with all due diligence.  Following that adjournment, the Liquidator conducted examinations on 11 December 2009 of Mr Jim Janakis, the former director, and Mrs Victoria Janakis, the former secretary, of the Company.  The Liquidator has now renewed his application for orders extending the time within which to commence proceedings in relation to possible voidable transactions. 

3                     In my reasons of 8 September 2009, I referred to several entities to whom the Company made payments that the Liquidator wished to examine in more detail (at [4]).  However, the Liquidator no longer seeks to pursue his examination in relation to some of the entities.  The Liquidator’s application is now limited to an extension of time to commence proceedings in relation to five categories of payments made by the Company prior to 31 March 2006, to or for the benefit of Mr and Mrs Janakis or Tidal Surge Pty Ltd (Tidal Surge) in its capacity as trustee of the J&V Property Trust (the Prospective Defendants).  Mr and Mrs Janakis are beneficiaries under the J&V Property Trust. 

4                     The impugned payments are as follows:

·                    Payment of the sum of $23,000 to Tidal Surge on 25 March 2005.

·                    Payments of the sums of $12,553.20 and $15,374 made to the Deputy Commissioner of Taxation on 9 June 2005 in respect of the personal liability of Mr and Mrs Janakis.

·                    Five payments aggregating $172,050.93 made between 3 August 2005 and 6 October 2005 in connection with the acquisition by Tidal Surge of two apartments at Mona Vale.

·                    Three payments aggregating $445,715.03 made by the Company in September and October 2005 in connection with the acquisition by Mr and Mrs Janakis of a house at Seaforth.

·                    Other miscellaneous payments aggregating $45,687.37 made after 23 November 2005 for the benefit of Mr and Mrs Janakis or Tidal Surge.

5                     There is no dispute as to the fact of the impugned payments.  Nor is there any dispute that the payments were made for the benefit of Mr and Mrs Janakis or Tidal Surge in its capacity as trustee of the J&V Property Trust.  However, they contend that all of the payments were made by way of reduction of Mr and Mrs Janakis’s loan account with the Company. 

6                     The Liquidator does not accept that the Company was indebted to Mr and Mrs Janakis in an amount exceeding the aggregate of the payments in question.  Further, the Liquidator contends that, even if the payments were made in repayment of advances made by Mr and Mrs Janakis to the Company, they were nonetheless unreasonable director-related transactions of the Company.  Alternatively, the Liquidator says that the payments had the effect of giving an unfair preference by the Company to Mr and Mrs Janakis as creditors. 

7                     It is common ground that, as I said in my reasons of 8 September 2009 (at paragraph [23]), three questions must be considered in determining whether or not to grant an extension of time under s 588FF.  First, there must be an explanation for the delay in bringing proceedings within the three year period that is limited by the provision.  Second, any possible prejudice resulting from the grant of an extension must be taken into account.  Third, the Court must make a preliminary assessment of the merits of any proposed proceeding and determine whether there is a triable issue as to whether the transactions in question are voidable transactions. 

8                     As I indicated in my reasons of 8 September 2009, the Liquidator’s explanation for the delay is not entirely satisfactory.  Nevertheless, if I am persuaded as to the other two matters to which I have just referred, I consider that the delay is not such as to disentitle the Liquidator from commencing a proceeding for the benefit of the unsecured creditors of the Company generally. 

9                     No suggestion has been advanced on behalf of the Prospective Defendants that they have suffered any forensic disadvantage or detriment by reason of the delay.  However, that is not the only rationale for the enactment of limitation periods.  Certainly, as time passes, relevant evidence may be lost.  However, it can also be oppressive to a defendant to allow an action to be brought long after the circumstances that gave rise to it have passed.  Further, people should be allowed to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them.  Finally, of course, the public interest requires that there be an end to disputes as soon as possible (see Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 552-3). 

10                  The present application was made only seven days before the expiration of the three year period fixed by the Act.  Thus, the Prospective Defendants were given notice of the possible claims against them within the period contemplated by the Act.  The Prospective Defendants have derived significant benefits from the impugned payments.  It has not been suggested that they have in any way acted to their detriment on the basis that there would be no challenge to the payments. 

11                  Mr Janakis said, in the course of his examination by the Liquidator, that he was accustomed to borrowing funds from various other entities, to whom he incurred a personal liability, and then lending those funds to the Company.  However, it was not until some time after the appointment of the administrator on 31 March 2006 that the books and records of the Company showed Mr and Mrs Janakis as creditors in an amount sufficient to cover the impugned payments.  The Liquidator’s suspicion was aroused by a series of book entries made after that date, whereby a number of debits were made in respect of various creditors of the Company and corresponding credits were made to the loan account of Mr and Mrs Janakis. 

12                  There is evidence before the Court to support the contention that Mr Janakis borrowed monies personally.  However, the difficulty is that, at the time when the impugned payments were made, Mr and Mrs Janakis were not recorded as creditors of the company.  More particularly, on 16 August 2005, Mr Janakis signed a director’s declaration that the Company’s financial statements and notes presented the Company’s financial position fairly as at 30 June 2005.  The present contention of the Prospective Defendants is inconsistent with that declaration.  The material raises some doubt as to whether or not various payments made to the Company by diverse entities, some of which are associated with Mr Janakis and some of which are not, were advances to the Company by those entities or advances to Mr and Mrs Janakis that were then on lent to the Company by them. 

13                  The payments to the Company that are said to give rise to the loan account credit are essentially payments emanating from Mr Edward Hayson and his associated entities, totalling $605,000 and a loan of $370,000 from Citibank, together with various other smaller payments.  The Company’s accounts recognised the Citibank loan as a liability to Mr Janakis personally, although they did not reflect a liability to Mr and Mrs Janakis jointly.  The payments from Mr Hayson’s associates and the other smaller payments were not shown as advances by Mr and Mrs Janakis until after the adjusting book entries made after 31 March 2006. 

14                  The Liquidator contends that, even if one accepts that the payments emanating from Mr Hayson and his associates were properly to be characterised as advances to the Company by Mr and Mrs Janakis, which should have been credited to their loan account, Mr and Mrs Janakis were debtors of the Company and not creditors, at the time when the bulk of the impugned payments were made.  

15                  The bulk of the impugned payments was made between 3 August 2005 and 7 October 2005 to finance the purchase of the properties at Mona Vale and Seaforth.  A reconstruction of the loan account made by Mr Tony Kalegerou on behalf of the Prospective Defendants demonstrates that Mr and Mrs Janakis were indebted to the Company when each of those payments was made. They constituted further advances debited to their loan account.  Thus, the reconstruction demonstrates the following:

16                  The proceeds of the Citibank loan were received by the Company on 28 October 2005, well after each of the payments described above had been made by the Company.  The effect of the receipt of the advance made by Citibank was to convert a loan account debit of $159,509 into a credit of $210,491.  

17                  Even if the impugned payments were properly characterised as debits to a loan account that was in credit, there is also a serious question as to whether or not the impugned payments might have constituted voidable transactions.  The Liquidator points to the Company’s balance sheet as at 30 June 2005 signed by Mr Janakis as suggesting that the Company was insolvent at the time of the impugned payments.  The balance sheet of the Company as at 30 June 2005 discloses the following:

Thus, the balance sheet discloses that the current liabilities of the Company as at 30 June 2005 exceeded its current assets.  That is a possible indication of insolvency.  Further, the fixed assets included an item for capitalised expenditure of $964,171.  That figure included capitalised legal costs of $864,252.  If the item of capitalised legal costs were shown to be worthless, the Company’s total liabilities would have exceeded its total assets at that time, an alternative indication of insolvency. 

18                  The capitalised legal costs are costs that were incurred by the Company in a proceeding in the Federal Court, to which I referred in my reasons of 8 September 2009 (paragraph [11]).  In that proceeding, judgment was entered at first instance in favour of the Company in the sum of $2,147,800.  The sum of $1,400,000 was paid to the Company pursuant to the judgment.  The balance of $747,800 was paid into a trust account, pending the outcome of an appeal to the Full Court.  The appeal was first argued in February 2005 and adjourned to August 2005 for further hearing.  Ultimately, the appeal was upheld on 22 December 2005 and the judgment and verdict were set aside.  An application to the High Court for special leave to appeal was subsequently dismissed.  In the result, the capitalised legal costs were worthless.  Indeed, the Company was ordered to pay the costs of the successful appellants. 

19                  Further, the balance sheet at 30 June 2005 reflected the receipt of the part payment of the verdict of $1.4 million.  No contingent liability was recorded against the possibility that the appeal might be upheld.  Nor was any provision made in respect of the capitalised legal costs. 

20                  The Prospective Defendants, and Mr Janakis in particular, rely on the proposition that they were confident, at the time of the impugned payments, that the appeal to the Full Court would fail.  In the evidence he gave to the Liquidator in the course of the examination, Mr Janakis said that he did not think the Company would lose the case.  He said that he was advised that the Company had a strong case to win and that was his understanding.  He said that he was very confident of winning the appeal.  For that reason, he did not give consideration to the consequences for the Company if the appeal succeeded.  Mr John Vouris, who had been appointed administrator of the Company on 31 March 2006, sought advice from the solicitors who had acted for the Company in the proceeding.  He was informed that those solicitors had believed that it was unlikely that the appeal to the Full Court would succeed.  The solicitors also informed Mr Vouris that they had given similar advice to the Company as to its prospects in the appeal.  There was no evidence from the solicitors themselves as to the advice they gave to the Company. 

21                  It may be that the Company was given strong advice that it would be successful in resisting the appeal to the Full Court and would retain the verdict that it had obtained at first instance.  However, the fact that the hearing of the appeal was adjourned after several days for further hearing might have been some indication that there was some substance in the appeal and that there might be a reasonable prospect of the appeal succeeding.  While Mr Janakis and the J & V Property Trust, under which he is a beneficiary, have had the benefit of real property purchased with the funds that were the subject of the impugned payments, the Company’s other unsecured creditors remain unpaid.  If it be the fact that, assuming the Company was solvent at time of the impugned payments, there was a reasonable prospect that the appeal might succeed, such that the Company would be insolvent, there is at least an issue to be tried as to whether the impugned payments were unreasonable director related transactions.

22                  In any event, on the basis of the balance sheet as at 30 June 2005, the Company was insolvent, even on the assumption that the appeal would be dismissed.  As I have said, its current liabilities exceeded its current assets.  Further, the Company’s profit and loss account for the year ended 30 June 2005 showed a gross loss on rental operations of $52,991.  In addition, overhead expenditure of $27,268 produced a total loss of $80,259.  However, it received a trust distribution from the Javah Trust in the sum of $85,350, giving the Company a net operating profit of $5,091.  Mr Janakis, in the course of his examination, said that he was in charge of the Javah Trust, which has never held any assets and has never conducted any business.  He said that the Javah Trust was the trust for his company, Andove Pty Ltd.  The source of the income of the trust that could be distributed to the Company is thus somewhat obscure.  Indeed, a trial balance sheet of the Company as at 31 December 2005 shows the Javah Trust as a debtor of the Company in the sum of $41,953.47.  The fact that the Company’s trading operations generated a not insignificant loss and that it had only showed a profit for the year ended 30 June 2005 by reason of a distribution from a trust casts some doubt on the question of the Company’s solvency.  There is therefore at least an issue to be tried as to whether the impugned payments had the effect of giving Mr and Mrs Janakis a preference over the other unsecured creditors.  

23                  In all of the circumstances, I consider that there is a triable question as to whether the impugned transactions are voidable transactions within the meaning of the relevant provisions of the Act.  I consider, therefore, that it is appropriate to extend the period within which the Liquidator may commence a proceeding against the Prospective Defendants in respect of the impugned transactions.  Any such proceeding should be commenced within three weeks from today.  If such a proceeding is commenced, it may be appropriate for at least part of the costs of this proceeding to be the parties’ costs in that new proceeding.  If no such proceeding is commenced, the Liquidator should pay the costs of the Prospective Defendants in this proceeding.  I propose to stand the proceeding over for 21 days for the purposes of making an order as to the costs of the proceeding and to hear the parties on the question of costs if they wish to be heard further.

Associate:

Dated:         14 May 2010