Do not believe everything you read - Company books not prima facie proof of debt - Insolvency/Bankruptcy

This week's TGIF considers In the matter of ACN 096 281 542 Limited (in Liquidation) (ACN 096 281 542) (formerly Biotempus Limited) [2018] VSC 425, which involved an appeal against the rejection of a proof of debt by the liquidators of a company.

To prove the existence of the alleged debt, the plaintiff relied on, among other things, a note in the company's financial statements.

The Court found the note proved no more than the plaintiff had been nominated as the recipient of money. Without further evidence, and taking into account the full context, it was found the company owed no enforceable debt to the plaintiff.

BACKGROUND

This was an appeal against the rejection of a proof of debt by the liquidators of a company formerly known as Biotempus Limited (Biotempus).

The plaintiff was Transmedia Inc, a company associated with Biotempus' former CEO, Dr Mervyn Jacobson. Transmedia alleged that Biotempus owed it money under an agreement with Biotempus made during Dr Jacobson's term as CEO. The liquidators denied the debt ever existed, and said that if it had, it had been released pursuant to a deed executed by Dr Jacobson.

Transmedia in turn denied the so-called deed of release was effective, and said that if it was effective, it should be set aside for duress or undue influence.

WAS TRANSMEDIA A CREDITOR OF BIOTEMPUS?

The agreement said to give rise to the debt was evidenced (in part) by a letter from Biotempus to Dr Jacobson. According to the letter, Dr Jacobson was to assist Biotempus in raising funds for the company, and Biotempus, for its part, agreed to pay a fee of 6% of the gross funds raised, to Dr Jacobson "or his nominee".

In support of its assertion that it was a creditor of the company, Transmedia relied on a note in the financial accounts of Biotempus. The note, dealing with related party transactions, stated that "consulting fees" were payable to Transmedia. Transmedia submitted this constituted "prima facie" evidence that the consulting fees were owed, relying on s 1305(1) of the Corporations Act 2001 (Cth).

Section 1305(1) provides that a book kept by a body corporate under a requirement of the Act is admissible in evidence and is "prima facie evidence of any matter stated or recorded in the book". But as the Court recognised, this means that the books are prima facie evidence that the transactions were recorded in the books, not prima facie evidence that the transactions existed.

In any event, his Honour concluded that, in the context, Biotempus' accounts proved no more than that Transmedia had been designated as a recipient of funds. As the other evidence indicated that the agreement was in fact between Dr Jacobson and Biotempus, his Honour held that Transmedia was a third party to the contract and could not enforce the debt. Any debt was enforceable by Dr Jacobson.

WAS THE DEED OF RELEASE EFFECTIVE?

The liquidators relied on a "Debt Release Deed", to show that if a debt had existed, it had been released in any event. Dr Jacobson did not deny that he signed the deed (while in prison, following a conviction for market manipulation offences). However he contended the deed was:

not properly executed as a deed;
not enforceable as a contract, for want of consideration; and
void or voidable in any event, because he signed it under duress or undue influence.

The liquidators conceded the document was not executed as a deed, but insisted that it was effective as a contract.

The Court agreed. It found the release had been requested by potential investors considering a recapitalisation of Biotempus, and that the consideration provided by Biotempus was that it would continue to treat with the potential investors and would raise funds by way of cash subscriptions. This enured to the benefit of the company and its shareholders, which included Dr Jacobson. His Honour observed that in any event the issue was not whether or not consideration flowed to Dr Jacobson or Transmedia, but whether it flowed from Biotempus. He held that it did.

The Court rejected Dr Jacobson's argument that, by virtue of the pressure placed on him to sign the document to avoid Biotempus' insolvency, and his inability to obtain legal advice while in prison, the agreement should be set aside for duress or undue influence. The Court found that Dr Jacobson was an educated man and was able to understand the circumstances of the company and the effect of the release document.

COMMENTARY

An appeal against a rejection of a proof of debt is a hearing de novo where the Court must take into account all relevant evidence to determine if the claim proved is a true liability of the company. The claimant bears the onus of overturing the liquidator's decision, meaning that if the Court is unable to conclude either way, the liquidator's decision will stand.

While a company's books may be good evidence of the existence of a debt, this case is a reminder that that evidence is not necessarily conclusive. Courts are entitled to, and will, consider statements in a company's books in their full context.

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