TGIF 13 October 2023 - Liquidator’s default judgment dismissed to avoid risk of inconsistent findings

In the matter of Bleecker Property Group Pty Ltd (In Liquidation) [2023] NSWSC 1071, appears to be the first published case that considers the question of whether an order can be made under section 588FF(1)(a) of the Corporations Act 2001 (Cth) by way of default judgment against one defendant where there are multiple defendants in the proceedings.

Key takeaways

• To grant a default judgment against a defendant, in order to clawback a voidable transaction, a court must be satisfied that the transactions are voidable (including that the relevant company was insolvent at the time).
  
  
• If such default judgment is sought against one of multiple defendants, there is a risk that this judgment will be inconsistent with the finding in the ultimate proceedings, including where the company is found to be solvent at the relevant time. Such a risk could bring the administration of justice into disrepute because the default judgment would have been entered against the defendant on a premise which a court may have subsequently found, in the same proceedings, to be incorrect.
  
  
• The case also serves as an important reminder to structure the pleadings in a way that clearly sets out all required elements and material facts of which a court would need to be satisfied in any allegation concerning voidable transactions, as against each of the defendants. This is particularly important where the plaintiff is considering applying for default judgment following a defendant’s failure to file its defence.

Background

On 22 September 2020, each of the plaintiff companies – Bleecker Property Group, Greenacre Garden Development, N&K Gazal and Bleecker Development – were wound up voluntarily by its members.

In the main proceedings, their liquidator and the plaintiff companies allege that certain payments made by Bleecker Property and NKG to the defendants throughout February 2018 to September 2020 are voidable transactions pursuant to section 588FE of the Corporations Act 2001 (Cth). The plaintiffs further allege that some of those payments were made in breach of duties owed by the alleged directors and shadow directors.

Bleecker Property and its liquidator (Bleecker) argued that the company failed to keep accurate financial records (contrary to section 286 of the Corporations Act), and did not allow true and fair financial statements to be prepared and audited for the company. As such, they contended that Bleecker Property should be presumed to have been insolvent for the purposes of its voidable transaction claim under section 588FE(4) of the Corporations Act.

Justice Williams also referred to a criminal investigation that was ongoing, concurrent with the main proceedings. As such, orders had previously been made dispensing with the pleading requirements for certain individual defendants, to the extent that they would undermine those defendants’ privilege against self-incrimination.

Out of the three corporate respondents, two had filed defences in the main proceedings and as such, Bleecker ultimately sought default judgment against the remaining respondent, NG Property, for the payment of $2,562,000 plus interest and costs. The amount claimed was the total amount of the payments that NG Property allegedly received from Bleecker Property, which the plaintiffs allege are voidable transactions and ought to be repaid pursuant to 588FF(1)(a) of the Corporations Act.

Bleecker alleged that the payments were uncommercial transactions (s 588FB), unfair preferences (section 588DA) and/or unreasonable director-related transactions (section 588FDA).

Bleecker submitted that the Court should be satisfied that the payments were voidable transactions (and enter default judgment) because of the allegations relating to those payments pleaded its statement of claim; deemed admissions arising from the fact of NG Property’s failure to file a defence; and the liquidator’s sworn affidavit.

Decision

The application for default judgment against NG Property was dismissed.

First, in considering whether the NG Property payments were voidable transactions, Williams J held:

• It was open to the Court to arrive at the requisite state of satisfaction on the basis of admissions including admissions that are taken to be made by a defendant’s failure to file a defence.
  
  
• As Bleecker’s counsel accepted, it did not plead the necessary elements to satisfy the Court that the payments to NG Property were unfair preferences or unreasonable director-related transactions, in that:
  
  
  • it did not plead that the payments were made in respect of an unsecured debt owed by Bleecker Property to NG Property; and
    
    
  • it did not plead that the payment was made to a director, relative or other party pursuant to section 588FDA(1)(b).
    
    
  As such, NG Property’s failure to file a defence did not give rise to an admission that the NG Property payments were unfair preferences and/or unreasonable director-related transactions and therefore voidable. Further, the liquidator’s sworn affidavit did not include any evidence directed to the unpleaded elements

• It was unnecessary for the Court to determine whether NG Property’s failure to file its defence was an admission to Bleecker’s uncommercial transaction claim, in circumstances where it did not plead the material facts to support this claim, and merely recited the statutory criteria.

Second, in considering the presumption of insolvency and risk of inconsistency, Williams J held:

• For the Court to arrive at the requisite state of satisfaction for the making of default judgment against NG Property, it would need to be satisfied that Bleecker Property was insolvent at the time the payments were made to NG Property, by reason of its failure to keep accurate financial records. Such a presumption would be made in the absence of a contested hearing on these points.
  
  
• There was a risk that, after presuming Bleecker Property was insolvent at the relevant time, the Court may make inconsistent findings in the contested application. This would risk bringing the administration of justice into disrepute because the default judgment would be based on a finding that the Court subsequently found to be incorrect.
  
  
• These risks would not be removed or avoided if the Court simply caveated its decision on the basis that it had made following NG Property’s failure to file a defence (and the deemed admissions that followed).
  
  
• In any event, it was contrary to the overriding purpose of the Court’s discretionary power to grant default judgments, for facilitating the just, quick and cheap resolution of the real issues in the proceedings.

Comment

As her Honour noted, this case appears to be the first published case that considers the question of whether an order can be made under section 588FF(1)(a) of the Corporations Act by way of default judgment against one defendant where there are multiple defendants in the proceedings.

While Williams J found that the necessary elements or material facts had not been pleaded against the relevant defendant in any event, her Honour made it clear that there is a risk of inconsistent findings if default judgment is granted, which would presume the relevant company was insolvent at the time the alleged voidable transactions were made.

The case also serves as an important reminder to structure the pleadings in a way that clearly sets out all required elements and material facts that a court would need to be satisfied of in any allegation concerning voidable transactions, as against each of the defendants. This is particularly important where the plaintiff is considering applying for default judgment following a defendant’s failure to file its defence.