Michael Gregory Jones as Liquidator of SBH Australia Pty Limited (In Liq) & Anor v Joseph Cummins

1. [1]

   HIS HONOUR: The first plaintiff, Mr Michael Jones, was appointed as liquidator of the second plaintiff, SBH Australia Pty Ltd (In Liq) (“SBH”) on 3 October 2014. In these proceedings both Mr Jones and SBH seek to recover from the defendant, Mr Joseph Cummins, a debt of $1,076,817.39 plus interest. At all relevant times Mr Joseph Cummins was a director and shareholder of SBH. The alleged debt is said to be the balance of a loan account of Joseph Cummins with SBH.

2. [2]

   The proper plaintiff is SBH. As liquidator and therefore agent of SBH, Mr Jones can cause SBH to bring the proceeding to recover a debt claimed to be owed to it. It is not arguable that a debt is owed by Joseph Cummins to Mr Jones in his capacity of liquidator of SBH. The joinder of Mr Jones as plaintiff is relevant to questions of costs, but the claim is one between SBH on the one hand and Joseph Cummins on the other.

3. [3]

   Joseph Cummins admits that he had a loan account with SBH, but does not admit the quantum of the debt claimed. At relevant times Joseph Cummins and his son Ivan Cummins were the shareholders and one or both of them were directors of a group of companies. The first such company was Glengrant Civil Pty Ltd (“Glengrant”) that was incorporated on 15 February 1999. Joseph and Ivan Cummins were shareholders and directors of that company. It provided services as an excavator in the construction industry.

4. [4]

   In 2003 Joseph and Ivan Cummins acquired the shares in a company called EcoCivil Pty Ltd (“EcoCivil”) that carried on business in the construction industry. A third company, EcoCivil Australia Pte Ltd was said by Joseph Cummins to have been incorporated in 2004 to tender for works in Singapore. It may never have existed. SBH was incorporated on 21 June 2007. It acquired a franchise to operate as a shoring box hire company. This involved the deployment of trench support technology used in the laying of pipelines.

5. [5]

   On 12 November 2010 EcoCivil entered into a creditor’s voluntary winding-up. Liquidators from a firm known as Worrells Solvency and Forensic Accountants were appointed. Receivers were appointed to SBH on 11 November 2010, but they retired on 21 January 2011. On 25 September 2014 Mr Woodgate of Woodgate & Co was appointed as official liquidator of Glengrant. On 3 October 2014 Mr Jones was appointed as liquidator of SBH. Ivan Cummins had initiated winding-up proceedings of SBH.

6. [6]

   It is admitted on the pleadings that at the time liquidators were appointed to EcoCivil, SBH owed EcoCivil $2,939,000.

7. [7]

   On 9 August 2013 Joseph and Ivan Cummins made an offer to the liquidators of EcoCivil to purchase the debt owed by SBH to EcoCivil for $293,000. This was an offer of ten cents in the dollar. At the same time, as directors of the trustee of a trust called the Cummins Unit Trust, they offered to buy for $28,354 a debt of $283,544 owed by them personally to EcoCivil.

8. [8]

   On 3 September 2013 at a meeting of creditors of EcoCivil resolutions were passed to accept the offers. The largest creditor, the Australian Taxation Office, voted against the proposal, but the chairman announced that he was using a casting vote pursuant to subregulation 5.6.21(4) of the Corporations Regulations by voting in favour.

9. [9]

   By an undated deed called a Deed of Assignment of Debt made between EcoCivil and Ivan Cummins, EcoCivil agreed to assign to Ivan Cummins all of its title and interest in the debt of $2,939,000 owed to EcoCivil by SBH in consideration of a payment of $293,900. The deed provided that settlement was to take place on 30 November 2013. The assignment was conditional on payment.

10. [10]

    On 3 December 2013 Joseph Cummins countersigned a withdrawal authority addressed to the National Australia Bank authorising payment of two sums including the sum of $322,254 from an account of Glengrant with the National Australia Bank to an account of Worrells for EcoCivil. $322,254 is the sum of the two amounts of $293,900 and $28,354 payable for the assignment of the two debts owed to EcoCivil by SBH and by Ivan and Joseph.

11. [11]

    Joseph Cummins deposed that:

12. [12]

    He deposed that he did not know that the deed of assignment existed at the time he signed the NAB transfer (para 105). He also deposed:

13. [13]

    By the letter of 5 June 2015 Mr Woodgate, the liquidator of Glengrant, advised Joseph Cummins that Ivan had executed a deed of assignment of debt on or around 30 November 2013 whereby he purchased the debt owed by SBH to EcoCivil and on the basis that the payment of $322,254 from Glengrant could be characterised as a loan to Ivan, that would result in an adjustment to his loan account, Mr Woodgate attached a copy of the deed. He noted that on 11 June 2015 Joseph Cummins had said that he was aware of and had authorised the payment of $322,254 to the liquidators of EcoCivil, but was not aware of the deed and its provisions.

14. [14]

    In a later report Mr Woodgate recorded that Ivan’s loan account with Glengrant had been debited with the sum of $322,254. He said there had been extensive correspondence between his office and Joseph and Ivan regarding their loan accounts and that Joseph had advised that the sum of $322,254 should be split 50 per cent to his loan account and 50 per cent to Ivan’s loan account instead of being applied in full to Ivan’s loan account. Mr Woodgate recorded that Ivan disputed this and maintained that all of the $322,254 should be applied to his loan account. He said that he had been informed that this matter was the subject of legal proceedings. Mr Woodgate said that “Subject to the consent of the Supreme Court of New South Wales, the loan accounts will be distributed, in specie, to the shareholders.”

15. [15]

    No evidence was adduced as to the outcome of other proceedings or whether there was any distribution to Ivan and Joseph as foreshadowed in Mr Woodgate’s letter.

16. [16]

    Joseph joined Ivan as a cross-defendant to his cross-claim. Joseph pleaded that half of the consideration transferred upon the Glengrant payment on or about 3 December 2013 were Joseph’s director’s drawings. That allegation was not admitted by Ivan. Joseph pleaded that the assignment of the whole of the SBH debt to Ivan solely was in breach of the agreement between Joseph and Ivan. Joseph pleaded that he did not know of or consent to the deed of assignment and did not know of or consent to any variation of the agreement between them whereby Ivan would be assigned the whole of the SBH debt. He pleaded that Ivan held half of the SBH debt on trust for him.

17. [17]

    In his defence to cross-claim Ivan pleaded that Joseph had reneged on the agreed arrangement and had “abrogated his right and opportunity to participate in purchase of the SBH debt”. No particulars of the alleged reneging were given.

18. [18]

    The cross-claim between Joseph and Ivan was settled. They entered into a deed of settlement dated 12 April 2018. The deed defined the “settlement sum” as meaning the sum of $160,000 “inclusive of any costs and any sum that Ivan would or may have received as a distribution from the winding-up of Glengrant Civil Pty Ltd”. The deed defined “Half the SBH Debt” as meaning 50 per cent of the SBH debt, being $1,469,500 ($2,939,000 x 50 per cent). Clauses 2.1 and 2.2 of the deed provided:

19. [19]

    There were mutual releases. The orders to which Ivan agreed he would consent were as follows:

20. [20]

    In accordance with the usual order for heaing the parties provided written submissions before the hearing started. It was unclear from the written submissions of Mr Fermanis, who appeared for the plaintiffs, whether or not the plaintiffs took issue with Joseph Cummins’ contention that half of the SBH debt was held by Ivan on trust for him. That claim was not admitted in the plaintiffs’ defence to cross-claim. Eventually, at the fourth time of asking, Mr Fermanis said that the liquidator did not accept that prior to the commencement of the winding-up of SBH, the debt assigned by EcoCivil to Ivan was held as to a 50 per cent share beneficially by Joseph. However, the liquidator did not adduce any evidence on that question. Although Ivan’s affidavits were included in the Court Book provided to me prior to the hearing, the affidavits were not read on the hearing. I put their contents aside in determining the issues between the plaintiffs and Joseph Cummins.

21. [21]

    There is no evidence to support Ivan’s pleaded contention that Joseph reneged on his agreement with Ivan in relation to the purchase of the SBH debt.

22. [22]

    I was informed that it was common ground that the sum of $160,000 provided for by the settlement deed was paid on Friday, 13 April 2018 and received on Monday 16 April 2018.

23. [23]

    For reasons indicated during the course of the hearing, I said I was not prepared to make a declaration by consent. This was because it was unnecessary to do so to resolve the issues between SBH and Joseph Cummins and I knew that there was evidence that was material to the issue that the liquidator had chosen not to put before the Court. Mr Parish, who appeared for Joseph Cummins, did not ask for the declaration to be made. Mr Lim who appeared for Ivan said that his client consented to the declaration but he did not ask for it.

24. [24]

    Joseph Cummins pleaded by way of defence to the statement of claim that:

25. [25]

    In his cross-claim he pleaded:

26. [26]

    SBH and Mr Jones filed a reply to the defence. In their reply they pleaded:

27. [27]

    They pleaded the same matter in their defence to cross-claim.

28. [28]

    Section 553C of the Corporations Act 2001 (Cth) provides:

29. [29]

    SBH and Mr Jones did not plead that Joseph Cummins was not entitled to a set-off under the section by reason of subs 553C(2). They did not plead that at the time of the assignment Ivan (the assignee of the debt) or Joseph (the alleged beneficial owner of half of the assigned debt) had notice of the fact that SBH was insolvent.

30. [30]

    The evidence that both Ivan and Joseph did have such notice was overwhelming. Mr Parish, who appeared for Joseph Cummins, properly conceded that on the evidence adduced at the hearing Joseph had notice at the time of the assignment that SBH was insolvent. However, that issue had not been raised on the pleadings.

31. [31]

    In his written submissions dated 11 April 2018 (that is, six days before the hearing date) Mr Fermanis said:

32. [32]

    He referred to the decision of the Victorian Court of Appeal in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319 at [21] and [22] where the Court addressed what needs to be established to show that a person has notice of the fact that the company is insolvent.

33. [33]

    In his written submissions in response that were also provided in advance of the hearing, Mr Parish said:

34. [34]

    In his opening submissions Mr Fermanis contended that Joseph Cummins would have to overcome s 553C(2) and submitted that it was not necessary for the plaintiffs to have pleaded s 553C(2) in reply to Joseph Cummins’ defence. The reason advanced by counsel was that s 553C(1) states that it is subject to subs (2) and Joseph Cummins could not invoke subs (1) without also having to address subs (2).

35. [35]

    Mr Fermanis submitted that the plaintiffs could attack Joseph Cummins’ entitlement to rely upon the entirety of the section.

36. [36]

    Rule 14.14(2)(b) of the Uniform Civil Procedure Rules relevantly provides:

37. [37]

    When the terms of the rule were drawn to Mr Fermanis’ attention he accepted that the rule applied and that he needed leave to amend. He sought that leave. There was no evidence in support of the application. Mr Fermanis accepted that if leave to amend were granted “it’s almost inevitable that an adjournment would be required”. The application was opposed. Mr Parish submitted that if the amendment were allowed his client would be prejudiced unless an adjournment were granted as there might be evidence that could be led to establish that SBH was not insolvent at the time of the assignment, notwithstanding what appears from the evidence proposed to be adduced. Mr Parish also submitted that if leave to amend were granted and the proceedings were adjourned with the usual consequence that the plaintiffs pay the costs thrown away by the adjournment, the liquidator should bear the costs without recourse to the assets of SBH.

38. [38]

    The application for leave to amend was withdrawn.

39. [39]

    Therefore the case must be decided on what I consider to be a most unsatisfactory basis. It is not open to the plaintiffs to rely upon s 553C(2), notwithstanding that on the evidence adduced it is clear, and was accepted by Mr Parish, that Joseph Cummins had notice at the time of the assignment of the debt that SBH was insolvent. Moreover, Joseph Cummins’ evidence as to the circumstances said to give rise to Ivan’s holding half of the SBH debt on a constructive trust for him is unchallenged and uncontradicted, notwithstanding that contradictory evidence was available. Joseph Cummins was not cross-examined on this issue. It is not profitable to speculate why the liquidator or his advisers took these forensic decisions.

40. [40]

    Joseph Cummins did not dispute that he owed some amount on his loan account with SBH, but he disputed the amount claimed.

41. [41]

    The issues are:

Quantum of debt owed by Joseph Cummins to SBH

1. [42]

   Mr Jones deposed that on his inspection of the MYOB records of SBH, Joseph Cummins maintained a director’s loan account that operated as a running account in the period from 1 July 2010 to 30 June 2012. He produced financial statements for SBH for the year ended 30 June 2012 that were unsigned by the directors, but compiled by an accountant, Ms Julie Johnston of Johnston Associates Pty Ltd. She signed the compilation report dated 7 March 2014 stating that:

2. [43]

   According to the financial statements as at 30 June 2012, SBH had net assets of $1,622,440. This was represented by total current assets of $2,655,190 and total current liabilities of $1,032,750. Of the total current assets of $2,655,190, $2,611,843 was said to be receivables that included loans to directors, being Joe Cummins ($1,076,817) and Ivan Cummins ($316,252). Mr Jones produced a MYOB account called “Joe Cummins Loan Account” from 9 December 2010 to 23 April 2012 that showed that in that period there had been debits to the loan account totalling $2,859,221.97 and credits totalling $1,863,767.92. The difference is $995,464.05. That record of Joseph Cummins’ loan account stopped at 23 April 2012. Mr Jones produced a document called “General Ledger (Summary)” for the period from 1 July 2012 to 27 February 2015. That stated that the balance of Joseph Cummins’ loan account as at 1 July 2012 was $1,020,600.66, which balance was unchanged.

3. [44]

   The financial statements were prepared by Ms Johnston, but up until 30 April 2012 the books from which the financial statements were prepared were kept by a Ms Jane Burns. An accountant in the employ of the liquidator, a Mr Smith, wrote to Ms Johnston on 28 September 2015 and noted that there were variances between the MYOB file and the financial statements prepared by Ms Johnston in respect of the director loan accounts. In the case of Joseph Cummins’ account, Mr Smith noted that according to the MYOB statement of 30 June 2011 Joseph Cummins’ loan was $1,309,870.64, but according to the financial statement it was $1,376,965. As at 30 June 2012 the loan account according to the MYOB statement was $1,020,600.66, but according to the financial statement it was $1,076,817. He asked for Ms Johnstone’s assistance in confirming details of the variances and copies of any supporting documentation.

4. [45]

   Ms Johnston replied the following day and attached “workings on how the balances were derived”. The attached working, in so far as it related to Joseph Cummins’ loan account was as follows:

5. [46]

   Mr Smith asked for further assistance saying that he was unable to reconcile the balances between the general ledger summary and the account history balance. He also asked whether Ms Johnston still had a copy of the MYOB data file used to prepare the financial statements in her possession, and if so to forward a copy to the office of Jones Partners. In reply, Ms Johnston stated:

6. [47]

   The attached MYOB file for the Joseph Cummins loan account showed numerous debits and credits from 4 July 2011 to 23 April 2012. The debits totalled $783,938.07 and the credits totalled $1,073,208.05. The net activity up to 23 April 2012 was a credit of $289,269.98 giving an ending balance of $1,020,600.66.

7. [48]

   The following may be noted about these explanations. First, the amount of the debt shown in the financial statement for the year ended 30 June 2012 is derived from the MYOB files recording debits and credits up to 23 April 2012, subject to two adjustments identified in Ms Johnston’s working set out at [45] above plus an unexplained variance of $190.

8. [49]

   Secondly, the debt was reduced by the figure of $10,877.63 to reflect a payment of final wages to Ms Burns made by Joseph Cummins that is not reflected in the MYOB account.

9. [50]

   Thirdly, the loan debt was increased by $66,904.36 on the basis that originally that amount was taken as a dividend and so classified, but then moved to the loan account because there were not enough imputation credits (presumably, not enough imputation credits that Joseph Cummins could use to set off against the tax payable on the dividend). In final submissions Mr Fermanis said that the explanation provided by an accountant instructing him, presumably from the office of Jones Partners, was that:

10. [51]

    This is entirely consistent with Ms Johnston’s explanation. However, financial statements should provide a true and fair view of what the company’s financial affairs were, not a view of how an accountant or the directors might like them to have been. A shareholder is entitled to a dividend if it is declared. A dividend once declared creates a debt owed by the company to the shareholder. If the declared dividend were taken, it was income in the hands of Joseph Cummins that he would have been required to declare in his income tax return. Ms Johnston did not say that the dividend had not been declared. She said it had been taken. The dividend could not properly be reclassified after the event (apparently years after the event) as a drawing on the loan account. This adjustment made by Ms Johnston to the balance showed on the loan account should be reversed.

11. [52]

    Mr Parish submitted that a credit should be allowed for payments made out of Joseph Cummins’ personal bank account on 30 April 2012. There were six such payments. Three payments were described as “Sbh Wages” in sums of $306.30, $1,201.54 and $9,369.79. Those figures add up to $10,877.63 which was the credit allowed in Ms Johnston’s workings in which the payments were described as payment of wages for Ms Burns. Of the three other sums, only one can be identified as being a payment made to SBH or on its behalf. That is a payment of $3,116. Joseph Cummins should be allowed a further credit for that sum. The $190 variance apparently existing between two sets of MYOB accounts has not been explained. The liquidator has not proved the higher figure. The result is that the debt established from the financial records of SBH is that recorded in the MYOB loan account ledger as at 23 April 2012, being $1,020,600.68 less $10,877.63 and less $3,116, a total of $1,006,607.05.

12. [53]

    Joseph Cummins contended that further credits should be allowed. He said that between 2004 and 2009 he mortgaged a property he owned and paid the money raised into “the group of companies” for the money to be distributed wherever there was a current need. He said that a payment of $351,414.98 made by SBH to clear the balance owing on his mortgage that was treated as a debit to the loan account should not have been so recorded, but should have been recorded as a repayment of a loan or loans that he had made to the group of companies. He said that three further amounts of $2,565.69 made by SBH in January, February and March 2011 were debited to his loan account but should not have been as they were repayments of a loan that he had made to the group of companies.

13. [54]

    There was no evidence that payments made by Joseph Cummins to other group companies were paid on behalf of SBH so as to give SBH any claim against another group company or to reduce any liability SBH had to another group company. Payments by Joseph Cummins of debts owed by other group companies would not reduce his debt to SBH. It would reduce any debt he owed to the other group company on whose behalf a payment was made or create a debt owed by that company to him. There was no evidence that any payment made by Joseph Cummins prior to 23 April 2012 on behalf of SBH was not properly recorded in the company’s records of the loan account. Ms Burns gave evidence as to how the loan account was kept and I accept that it was properly kept. Her evidence to the effect that the loan account was properly kept was not shaken.

14. [55]

    Under s 1305 of the Corporations Act a book kept by SBH under a requirement of that Act is prima facie evidence of matters stated or recorded in the book. The MYOB loan account was a book kept by SBH in order to comply with the requirements of s 286 that a company keep written financial records that correctly record and explain its transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited. It was common ground that the books were prima facie evidence of the debt owed by Joseph Cummins. Except to the extent indicated earlier in these reasons, the prima facie effect of the records has not been displaced.

15. [56]

    The plaintiffs claim interest on the debt only from 28 October 2015. It was not disputed that the debt was repayable on demand. On 20 October 2015 Holman Webb, lawyers for the plaintiffs, demanded payment of a sum of $1,076,817.39 within seven days. Interest is only claimed from the expiry of that period. A cause of action for recovery of a present debt payable on demand arises on the making of the advance (Young v Queensland Trustees Limited (1956) 99 CLR 560 at 566; Ogilvie v Adams [1981] VR 1041). Nonetheless, interest is not sought from the dates on which the cause of action for the recovery of the debt arose but from the expiry of the period for compliance with the demand.

Beneficial ownership of the assigned debt

1. [57]

   It is not in dispute that Joseph Cummins is presently beneficially entitled to 50 per cent of the assigned debt. For Joseph Cummins to be entitled to rely upon the statutory set-off under s 553C, he must establish that as at the commencement of the winding-up of SBH he had an interest in the debt owed by SBH to EcoCivil that was assigned to Ivan Cummins. It may be noted that Ivan did not become the legal owner of the debt prior to the commencement of the winding-up of SBH. No notice under s 12 of the Conveyancing Act 1919 (NSW) was given by Ivan to SBH. The directors of SBH were Ivan and Joseph and Joseph was unaware of the assignment to Ivan until June 2015. But the assignment to Ivan, being for valuable consideration that was paid, would be effective in equity to give Ivan a beneficial interest in the debt, being an interest amounting to equitable ownership, except to the extent that Ivan held his beneficial interest on trust for Joseph.

2. [58]

   The question of whether Joseph had a beneficial interest in the debt owed by SBH to EcoCivil that entitles him to rely upon an automatic set-off under s 553C(1) is to be determined as at the commencement of the winding-up of SBH (Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85, 98-99 Mason J; Derham on the Law of Set-off (4th ed, 2010, Oxford University Press at [6.53]). That was the day on which the winding-up order was made (Corporations Act, s 513A(e)), namely 3 October 2014.

3. [59]

   For the reasons which follow I conclude that as at that date Ivan held half of the SBH debt on a constructive trust for Joseph that gave Joseph a beneficial interest in half the debt. The extent of that beneficial interest was commensurate with the equitable relief which would then have been available to Joseph. The equitable relief then available to Joseph would have been conditional upon his paying either directly, or by way of adjustment to his loan account with Glengrant if that were possible, his share of the consideration payable for the purchase of the debt. Whilst he had a beneficial interest in half of the debt, that interest did not amount to equitable ownership (Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639, 655 (Mason P).

4. [60]

   Joseph Cummins has acquired equitable ownership of half of the debt by the terms of the settlement deed and payment of the consideration provided for by that deed. But that is too late for the purposes of a set-off under s 553C. Whether a beneficial interest falling short of equitable ownership, but which may mature into equitable ownership, is sufficient to establish a mutual credit, mutual debt or other mutual dealing within the meaning of s 553C(1) is dealt with below.

5. [61]

   It was a Mr Scott Jackman who had the idea that Ivan and Joseph should buy from EcoCivil the debt owed to EcoCivil by SBH. He was retained in about the end of 2010 or the start of 2011. At that time Joseph’s relationship with Ivan had broken down and they were not speaking. Joseph accused Ivan of misappropriating moneys from the group companies. They met Mr Jackman separately. By the time Mr Jackman was engaged Glengrant’s business and assets had been sold. According to Joseph Cummins, this left Glengrant with a surplus of about $2.7 million. Joseph understood Mr Jackman to be acting on behalf of both him and Ivan. He assumed that if he gave Mr Jackman instructions and Mr Jackman did not tell him that Ivan disagreed, then Mr Jackman would have received instructions from Ivan to pursue the same course.

6. [62]

   Mr Jackman operated a business under the name Solutions Financial Consultants. On 4 February 2013 he wrote to Mr Malanos, the liquidator of EcoCivil. He referred to correspondence and an advice to creditors sent by Worrells dated 18 December 2012. Those documents are not in evidence. In response to them Mr Jackman said that based upon EcoCivil’s MYOB accounts dated 3 December 2012 EcoCivil owed SBH $339,482.25, whereas Worrells had stated in its correspondence of 30 November 2012 that SBH owed EcoCivil $857,496.96. The variance was said to be the provision of funding by SBH to EcoCivil between July 2010 and 11 November 2010 and additional hire charges raised by SBH to EcoCivil for the period August to October 2010. Between February and July 2013 the position taken by Mr Jackman changed.

7. [63]

   On 31 July 2013 Mr Jackman advised Joseph Cummins that :

8. [64]

   On that basis Mr Jackman summarised what he said was the financial position of Glengrant and SBH according to the financial account:

9. [65]

   Mr Jackman proposed that an offer be made to buy related-party debts from Worrells for ten cents in the dollar. He said:

10. [66]

    On 5 August 2013 Mr Jackman wrote to Joseph Cummins. Amongst other things, he said that:

11. [67]

    By letter dated 9 August 2013 from Solutions Financial Consultants but in the names of Joe and Ivan Cummins, they offered to purchase the debt of $2,939,000 from the liquidator of EcoCivil for $293,900. (The letter described SBH as the creditor rather than the debtor. That was plainly a mistake.)

12. [68]

    The meeting of creditors of EcoCivil was convened to be held on 2 September 2013. On 15 August 2013 Ms Burns, who was then working for Ivan, sent an email to Ms Johnston stating that Worrells was seeking reports on whether SBH had any assets so that they could advise the creditors. Ms Burns had possession of Ivan’s laptop that included MYOB accounts for SBH. She wrote to Ms Johnston stating that the MYOB file that Scott (that is, Mr Jackman) had was the one that Ms Burns sent to him when she left on 30 April 2012 and it showed that there were still assets in the file. Ms Johnston replied the next day attaching unsigned 2011 financial statements for SBH as requested and observing that “the financials are showing that the only asset held is a computer.” The financials attached were not in evidence. Curiously, SBH’s financial statements for the year ended 30 June 2012, which include comparable figures for the year ended 30 June 2011, which were compiled by Ms Johnston and dated 7 March 2014, did not include a debt of $2,939,000 owed by SBH to EcoCivil.

13. [69]

    On 20 August 2013 Mr Jackman sent an email to Ms Johnston and to Ms Burns with copies to Joe and Ivan. He wrote:

14. [70]

    I have set out this correspondence in detail as it throws an interesting light on how the insolvency laws are applied in practice.

15. [71]

    The potential flaw in Mr Jackman’s proposal was that if Ivan and Joseph had notice that SBH was insolvent at the time of the assignment, they would not be entitled to set off the assigned debt against debts they owed SBH by reason of s 553C(2) (Southern Cross Construction Limited (in liq) v Southern Cross Club Limited [1973] 1 NZLR 708 at 713; Derham on the Law of Set-off at [6.99]). In the events that have happened this objection was not pleaded as an answer to Joseph’s claim to a set-off.

16. [72]

    On 2 September 2013 the meeting of creditors resolved “that the debt owed to the company by SBH Australia Pty Ltd in the sum of $2,939,235 be compromised and the offer to settle the amount in the sum of $293,900 be accepted”. The resolution was passed on Mr Malanos’ exercising a casting vote. It was opposed by the largest creditor, the Australian Taxation Office.

17. [73]

    Joseph and Ivan did not communicate with each other directly. But they both agreed to Mr Jackman’s proposal that together they purchase what was ultimately accepted to be a debt owed by SBH to EcoCivil. The agreement between Joseph and Ivan to take an equal assignment of the debt said to have been owed by SBH to EcoCivil can be inferred (Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [71]-[81]). As noted above, the existence of that debt was admitted by the plaintiffs in their defence to cross-claim.

18. [74]

    In the absence of any evidence of any excuse for Ivan to purchase the debt wholly in his own name, it must be inferred that not only was there a tacit agreement between Joseph and Ivan that both men would take the assignment of the debt, it should also be inferred that Ivan understood that when Joseph signed the authority for the transfer of the purchase price of the debt from Glengrant to EcoCivil he did so in the expectation that he would be entitled to 50 per cent of the debt. I can draw that inference more readily because the plaintiffs, who might have been expected to call Ivan, did not do so.

19. [75]

    I do not infer that at the time the assignment was taken Ivan and Joseph had a common intention that Joseph would acquire a 50 per cent beneficial interest in the assigned debt. The fact that the deed of assignment that pre-dated the transfer of funds named only Ivan as the assignee of the debt indicates that Ivan intended that he alone would have a beneficial interest in the debt. However, the absence of a common intention does not preclude the imposition of a constructive trust, or more accurately, the recognition that the circumstances give rise to a constructive trust (Secretary, Department of Social Security v Agnew (2000) 96 FCR 357 at 363; [2000] FCA 59 at [12]). The ultimate basis for the recognition of a constructive trust is that it would be unconscionable for the holder of the legal title to the property in question (or in this case, the equitable owner of the property in question) to assert that he holds it free of any beneficial interest in the claimant. Although “unconscionability” is the underlying basis upon which equity will intervene, it is not a sufficient description of the principles upon which equity does so (Muschinski v Dodds (1985) 160 CLR 583 at 615-616).

20. [76]

    One recognised class of case in which equity will intervene is where the parties have agreed that the claimant should have an interest in the property acquired by the other and has acted to his or her detriment on the basis of that agreement (Grant v Edwards [1986] Ch 638; Green v Green (1989) 17 NSWLR 343; Maharaj v Chand [1986] AC 898 at 907; Lloyds Bank plc v Rosset [1991] 1 AC 107 at 129). Another basis is that expounded by Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428, namely:

21. [77]

    Here, Ivan knew that Joseph assumed that he was, or expected that he would be, entitled to half of the benefit of the assigned debt. He knew that Joseph could suffer detriment by conducting his affairs on that assumption or expectation. Yet, Ivan remained silent. I infer that he believed, in accordance with Mr Jackman’s advice, that he and Joseph would not be liable to repay their loan accounts with SBH if they took an assignment of the debt. That is, I infer that Ivan’s understanding was that Joseph would have an answer to a claim for recovery of the debt owed on his loan account with SBH if he took an assignment of half of the SBH debt. I accept Mr Parish’s submission that Joseph did two things to his detriment, namely agreeing to the payment of money out of Glengrant that he thought was to be used to purchase for his benefit almost $1.5 million of the debt and, secondly, that he took no other steps to ensure that the debt was effectively transferred to him because he thought that the debt had been effectively transferred.

22. [78]

    These grounds are sufficient to give rise to a constructive trust that bound Ivan to hold his interest in the assigned debt for the benefit of Joseph as to a one-half share.

23. [79]

    The trust arose in December 2013 when the acts and omissions that constituted detrimental reliance occurred (Secretary, Department of Social Security v Agnew at [18]-[19]; Parsons v McBain (2001) 109 FCR 120; [2001] FCA 376 at [9]-[13]). In Parsons v McBain the Full Court of the Federal Court noted that the equitable interest arising under a constructive trust may be defeated, or may be made to defer to later claims, by conduct which would “operate and enure to forfeit and to take away the pre-existing equitable title” (Shropshire Union Railways & Canal Company v The Queen (1875) LR 7 HL 496 at 506). No evidence of such conduct was adduced. It is unnecessary to speculate what the position would have been if, for example, Joseph had agreed to a distribution of Glengrant’s assets on the basis that only Ivan’s loan account would be debited with the payment made by Glengrant for the assignment of the debt. It appears from the report of the liquidator of Glengrant referred to at [14] above that that was a scenario the liquidator contemplated might occur. If it did occur the liquidator could be expected to have adduced evidence of it. He did not.

24. [80]

    It follows that at the commencement of the winding-up of SBH Joseph Cummins had an equitable interest in the assigned debt. It does not follow that that interest was an interest in the nature of equitable ownership. As Brennan J said in Waltons Stores (Interstate) Ltd v Maher (at 419), the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct. Prima facie that will require the party estopped (Ivan) being precluded from denying the assumption adopted by the other party (Joseph) and being required to give effect to that assumption (Giumelli v Giumelli (1999) 196 CLR 101; [1999] HCA 10). But equity would only do so on terms that Joseph pay half the consideration for the assignment either directly or by an equal debiting of his loan account with Glengrant. That Joseph had insisted to Mr Jackman that there be an ultimate accounting for both Ivan’s and his debits and credits with all of the group companies as if they were a single entity is not inconsistent with this, nor inconsistent with the recognition of a constructive trust. Mr Fermanis did not contend otherwise.

25. [81]

    The position of Joseph is analogous to that of a purchaser under a contract capable of specific performance who has not yet paid the purchase price. Although it has been said that the vendor under such a contract holds the property on trust for the purchaser, the interest of the purchaser is not the interest of an equitable owner. Rather, the purchaser’s equitable interest is commensurate with the extent to which equitable remedies are available to protect his or her contractual rights (Legione v Hateley (1983) 152 CLR 406 at 446; KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1984) 155 CLR 288 at 300; Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 191–192; Stern v McArthur (1988) 165 CLR 489 at 522–523; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252–3).

Mutual set-off under s 553C(1)

1. [82]

   The issue is whether Joseph’s equitable interest, as I have described it, in the assigned debt is automatically set off under s 553C(1) against the debt owed by him on his loan account with SBH as a mutual credit or mutual debt within the meaning of s 553C.

2. [83]

   Mr Fermanis submitted that this was not the only question. He contended that notwithstanding that the plaintiffs had not pleaded s 553C(2) it was open to the plaintiffs to rely upon the fact that according to the evidence adduced in the case, at the time of the assignment, Joseph had notice that SBH was insolvent at the time of the assignment. In Gye v McIntyre (1991) 171 CLR 609; [1991] HCA 60 the High Court said (at 618-619):

3. [84]

   Mr Fermanis submitted that in the passage underlined above the High Court was saying that irrespective of s 553C(2), if after notice of an act of bankruptcy a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness, then the debt and credit are not genuinely mutual as a matter of substance, and therefore subs (1) of s 86 of the Bankruptcy Act 1966 (Cth) (the equivalent of subs (1) of s 553C of the Corporations Act) is not satisfied.

4. [85]

   Mr Parish submitted that in the passage quoted above the High Court was describing the effect of the whole of s 86 including subs (2) and it is by virtue of subs (2) of s 86 and subs (2) of s 553C of the Corporations Act that a debtor of a bankrupt or insolvent company cannot successfully reduce or extinguish his liability to the bankrupt or company by buying up debts of the bankrupt or the company at a discount after having notice of, in the case of a company, insolvency.

5. [86]

   I agree with Mr Parish’s submission. If it were otherwise, there would be no need for subs (2) of s 553C or s 86. Section 553C and s 86 have a long history. The progenitor of what became subs (2) of s 86 and subs (2) of s 553C was first contained in the UK Bankruptcy Act of 1806 (46 George III C135). Prior to that enactment, the statute of (1732) 5 Geo II, c30) provided:

6. [87]

   The preamble to the 1806 Act stated:

7. [88]

   The 1806 Act provided that:

8. [89]

   Section 3 of the 1806 Bankruptcy Act was the progenitor of what is now subs (2) of s 553C of the Corporations Act. In Derham on the Law of Set-off at [6.39] the learned author described the effect of the 1806 Act as follows:

9. [90]

   The 1806 amendment was introduced because the earlier statute providing for a set-off where there had been mutual credits and mutual debts between the bankrupt and the person with whom the bankrupt was dealing was insufficient to deal with the case where the person giving credit to the bankrupt had notice, or did not have notice, of a prior act of bankruptcy or of insolvency.

10. [91]

    If, as Mr Fermanis submitted, questions of notice were subsumed in the notion of mutual credit and mutual debit, there would have been no need for legislative change.

11. [92]

    Mr Fermanis submitted that Joseph Cummins could not take the benefit of subs (1) of s 553C which is expressed to be subject to subs (2) and then ignore subs (2). But this depended upon what was put in issue. In this case, that depends upon the pleadings. When he sought leave to amend Mr Fermanis accepted (as he was bound to do) that the rules required that the plaintiffs plead s 553C(2) if it were to be relied upon in answer to Joseph Cummins’ defence.

12. [93]

    In his written submissions Mr Fermanis’ only point in relation to s 553C was that:

13. [94]

    In other words the plaintiffs contended that there could not be mutuality between a debtor of the company whose debt the company could enforce at law and the same person who had only an equitable interest in the debt owed by the company. That argument is untenable. In Gye v McIntyre the High Court said (at 623):

14. [95]

    As Mr Parish submitted, Gye v McIntyre holds that the focus of mutuality in credits, debits or dealings of the parties is the parties’ equitable or beneficial interests and not the legal interest.

15. [96]

    In Hiley v People’s Prudential Assurance Co Limited (1938) 60 CLR 468 Dixon J said (at 497):

16. [97]

    In Hiley, Dixon J referred to a set-off of debts by a beneficial owner of the debt where the debt is held by the creditor of the company in liquidation as bare trustee for “C” who owes a debt to the company. This is not a case of a bare trust. Dixon J did not say that it was only where debts were held on a bare trust that the beneficial owner of a debt could rely on the statutory set-off.

17. [98]

    The High Court in Gye v McIntyre spoke more widely of the focus being on the party’s equitable or beneficial interest. I was not referred to any case which has considered whether an equitable interest falling short of equitable ownership would be sufficient to give rise to a mutual set-off under s 553C(1). But in Gye v McIntyre the High Court said (at 623):

18. [99]

    The first requirement of mutuality stated in Gye v McIntyre quoted at [94] above is that the credits, the debts, the claims or the other dealings be between the same persons. That does not mean that an assignee of a debt owed by the company in liquidation cannot rely on the statutory set-off because the debt was contracted between the company and his assignor (Forster v Wilson (1843) 12 M & W 204; 152 ER 1165 at 204-205; 1167, 1171; Mathieson’s Trustee v Burrup, Mathieson & Co [1927] 1 Ch 562; Hiley at 497).

19. [100]

    To achieve the legislative purpose of substantial justice to the parties, provisions such as s 553C should be given the widest possible scope so as to reflect Parliament’s intention (Gye v McIntyre at 619; Day & Dent Constructions v North Australian Properties Pty Ltd at 108).

20. [101]

    In Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd, Mason J, who gave the leading judgment, said (at 104):

21. [102]

    Therefore, if a contingent debt is established (through an equitable interest or otherwise), which may mature into a pecuniary demand (even if maturity is dependent upon a future event or the prospect of a future event), the debt may be capable of set-off (Hiley, Dixon J at 497; JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd (2007) 64 ACSR 633 [18]-[19]). This principle has been “endorsed by high, and for the most part, consistent authority” (Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112 at [52]-[68]).

22. [103]

    Joseph Cummins’ equitable interest in the assigned debt would mature into equitable ownership of half the debt on his providing the consideration to Ivan that he was required to provide. He did provide that consideration, but only shortly before the hearing. But as at the commencement of the liquidation of SBH he had an equitable interest in the debt that would mature into equitable ownership of the debt on his providing that consideration to Ivan. In my view his equitable interest in the debt was analogous to that of a contingent creditor.

23. [104]

    The plaintiffs pleaded and submitted that the debts would not be set off against each other in equity. This may be so. The issue does not arise. Joseph did not rely on equitable set-off.

24. [105]

    For these reasons I conclude that Joseph is entitled to the set-off that he claims and that the plaintiffs’ claim must be dismissed. As the set-off arose automatically and does not depend on the making of an order, the cross-claim can be dismissed.

25. [106]

    It will be apparent from these reasons that I reach this conclusion with considerable disquiet. It may be that if the plaintiffs had pleaded reliance on s 553C(2) other evidence might have been called by Joseph to establish that SBH was not insolvent at the time the assignment was taken, although how that might be consistently with the existence of the admitted debt of which Ivan took the assignment is not apparent. But the case must be decided on the issues as they were pleaded and the plaintiffs elected not to plead s 553C(2). They also did not challenge or contradict Joseph’s evidence that I have found established that Ivan held half of the assigned debt on trust for Joseph, although there was evidence available to challenge that conclusion. What the result would have been had that evidence been adduced is unknown.

26. [107]

    For these reasons I make the following orders:

    1. (1)

       Give judgment for the defendant on the plaintiffs’ statement of claim.

    2. (2)

       Order that the plaintiffs pay the defendant’s costs.

    3. (3)

       Order that the cross-claim be dismissed.

    4. (4)

       Order as between the cross-claimant and the first and second cross-defendants the costs of the cross-claim be costs in the proceedings between the plaintiffs and the defendant.

    5. (5)

       No order as to costs as between the cross-claimant and the third cross-defendant.