The PRM Investments payments claim
208 The plaintiff asserts multiple causes of action against Mr Moss and PRM to recover the total amount of $44,000 paid by Amici to PRM between for July 2016 and 18 May 2017 each in the amount of $4,000. The claims are framed as:
(1) Unreasonable director-related transactions: s 588FDA of the Act;
(2) Uncommercial transactions: s 588FB of the Act;
(3) A breach of fiduciary duty by Mr Moss;
(4) Knowing receipt by PRM of funds paid in breach of fiduciary duty; and
(5) Limited to the period from 30 November 2017 (relation-back day), unfair preferences: s 588FA of the Act.
209 Apart from the pleading of broad conclusions, the plaintiff paid very little attention to the elements required to be established to support these claims in its evidence or submissions. The primary difficulty faced by the plaintiff in relation to claims (1) - (4) is the inherent tension between the plaintiff's primary claim that Mr Moss in fact acted as a director of Amici, and in that capacity was substantially responsible for the financial management and financial control of the business, and the un-particularised assertion which it pleads at paragraph [24] of the statement of claim that Amici in making these payments (and indeed all of the impugned payments): "obtained no benefits, alternatively there was no benefits referable to the respective amounts of the payments" and that in consequence it "suffered a detriment in that it was deprived of the amount of the payments". There is no pleading of any material facts relied upon in support of those contentions beyond several conclusions set out in the form of particulars to the effect that no consultancy services were provided, alternatively no consultancy services to the value of the payments were provided and Amici did not receive any tax invoices from PRM. The plaintiff did not adduce any evidence as to whether Amici derived any benefit by making the consulting payments to PRM save for cross-examination of Mr Moss as to why he considered it appropriate for Amici to continue to pay Mr Moss the same consulting fee that he claimed to have received whilst managing the business of SB Food, an arrangement that counsel expressed difficulty in understanding.
210 In closing submissions I raised with counsel for the plaintiff whether there was any evidence to support the contention that Amici received no benefit from the consulting fees paid to PRM. In answer, counsel submitted:
Similarly, as I addressed your Honour on earlier, it flows entirely from the proposition that Amici was never created for a legitimate commercial [purpose], and that finding will fall over if the commercial purpose finding falls over.
211 I do not accept that the evidence establishes that Amici derived no benefit from the consulting fees paid to PRM. An essential element of the claim pursuant to s 588FDA(1)(c) is that:
(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.
212 Conformably with my finding that Mr Moss was in fact a director of Amici, it follows that Amici did receive a benefit from the consulting arrangement: primarily, management and oversight of its financial operations. The plaintiff made no attempt to adduce any factual or expert evidence in support of the alternative pleading that there were no benefits referable to the respective amounts paid for the consultancy services provided by Mr Moss. At a very minimum, one would have thought that having pleaded that alternative, the plaintiff might have adduced some evidence about whether the services provided by Mr Moss were charged at market rates for corresponding value. Although the absence of any invoice or tax invoice from PRM to Amici is a relevant matter, of itself it does not outweigh the failure by the plaintiff to adduce necessary evidence in support of this claim.
213 For these reasons claim (1) fails.
214 As to claim (2), s 555FB provides:
(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
(2) A transaction may be an uncommercial transaction of a company because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
215 The relevant elements are identical to those in s 588FDA and this claim fails for the same reason.
216 Claim (3) is pleaded as follows. A statement of the uncontroversial fiduciary duties of a director is pleaded at paragraph [16] including to act in the exclusive interests of Amici, to avoid conflicts between the company's interests and any personal interests and not to make profits at the company's expense (implicitly without fully informed consent). At paragraph [21] it is said that Mr Moss directed or procured the making of the PRM consultancy payments. And then at paragraph [37] four broad conclusions are pleaded, without identification of any material facts, namely that Mr Moss breached his fiduciary duty in that he: failed to act in the exclusive interests of Amici, failed to act with absolute and disinterested loyalty to it, failed to avoid conflicts between its interests and his own or those of others and made profits at its expense. The pleading fails to illuminate how it is said that in making the consulting payments, each of these breaches is established.
217 In any event, resolution of this claim does not turn on a critical analysis of the pleading. Of greater importance is how the plaintiff puts the breach of fiduciary duty in its closing submissions. In written submissions, there is no reference to the breach of fiduciary duty case, not even by way of abandonment. In oral submissions I observed to counsel for the plaintiff that the rolled up fiduciary duty and breach pleadings are not very helpful, and I then invited him to articulate just how the case is put. The following was the exchange:
HIS HONOUR: - - - I don't want to be overly critical, but you can see how, at the pointy end of the case, a rolled-up plea is not very helpful.
MR PETRAS: Yes.
HIS HONOUR: But let's pass over that and let's dissect it. So we have to go back to each of the separate payments that are pleaded commencing at paragraph 17. So there's the PRM payments. There's Paul Moss weekly. There's Sarah Moss weekly, and then there's the rent.
MR PETRAS: Yes.
HIS HONOUR: So breach of fiduciary duty is - how is it put in relation to - let's deal with the last one first - rent?
MR PETRAS: With rent, it's entirely the same analysis as with respect to the uncommercial and - - - HIS HONOUR: So if I'm against you as to your overarching point - - -
MR PETRAS: Yes.
HIS HONOUR: - - - you don't press that?
MR PETRAS: Yes.
HIS HONOUR: So the PRM payments, again, you would say to me, well, no real value, enacted in the interests of PRM rather than the company; that's your case?
MR PETRAS: Yes, yes.
218 In that exchange my reference to the overarching point is to the plaintiff's contention that there was no real commercial purpose that justified the incorporation of Amici. I have found against the plaintiff on that point.
219 In any event, counsel at the very end of the case at least made it clear that the breach of fiduciary duty claim turns on the factual assertion that Amici derived no benefit or no benefit proportionate to the quantum of the consulting fees. On that basis, the breach of fiduciary duty claim fails for the same reasons as the unreasonable director-related transaction and uncommercial transaction claims.
220 Claim (4) as framed in the pleadings contends that PRM received $44,000, being the property of Amici, in circumstances where it knowingly participated in and assisted the breach of fiduciary duty by Mr Moss and thereby knowingly received the money within the meaning of the first limb of Barnes v Addy. Necessarily, this claim fails because the plaintiff has failed to establish that Mr Moss acted in breach of his fiduciary duty to Amici.
221 Claim (5) is different. The relation-back day as pleaded commenced on 30 November 2016. A curious and unexplained aspect of this case is that the plaintiff did not plead reliance upon the extended relation-back day of four years for related party transactions at s 588FE(4) of the Act. As pleaded consulting fees were paid to PRM from 30 November 2016 to 18 May 2017 totalling $20,000. Each payment is said to be a payment to PRM as an unsecured creditor of Amici and which resulted in it receiving: "in respect of an unsecured debt or debts which [Amici] owed to [it], more than [it] would receive from [Amici] in respect of the debt or debts if the preferences were set aside and [PRM] was to prove for the debt in the winding up of [Amici]…within the meaning of s 588FA of the Act".
222 Apart from summarising the effect of this pleading in written closing submissions, once again counsel for the plaintiff failed to focus on the essential elements of the statutory claim, particularly whether the evidence establishes that by reason of the consulting payments (the transaction within the meaning of the statutory provision), the result was that PRM received from Amici "in respect of an unsecured debt" that Amici owed to PRM, more than it would receive if the transaction were set aside and it was required to lodge a proof of debt in the winding up.
223 Ms Mastos emphasises in her closing submissions that the plaintiff has failed to adduce any evidence as to whether the consulting fee payments were made in respect of an unsecured debt owed, from time to time, by Amici to PRM. It is elementary that the recipient of the impugned payment must be a creditor when the transaction is entered into: Mann v Sangria Pty Ltd (2001) 38 ACSR 307; [2001] NSWSC 172 at [32], Bryson J. There is no statutory definition of creditor in the Act. Justice Gordon in Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 182 at [122] observed:
The Second Deed, in its terms, imposed an obligation on LSE to make certain payments to Capital Finance on specific dates: see [102] and [103] above. It specified a liquidated sum in money as presently due and owing on a particular date - by LSE to the Capital Companies. "Creditor" is not defined in the Corporations Act. Its meaning is flexible and varies according to its context: see, by way of example, Environmental & Earth Sciences Pty Ltd v Vouris (2006) 152 FCR 510 at [40]- [41] and Dimos v Willetts (2000) 2 VR 170 at [106]- [108]. In the present context, it can be taken to include persons who had existing rights in relation to monetary claims against LSE and who would be entitled to prove in a winding up of LSE under s 553 of the Corporations Act. The relevant date for ascertaining which persons or entities were creditors who might prove in the winding up was the date the administration commenced: Re Crawford House Press Pty Ltd (1995) 17 ACSR 295 at 298 and Environmental & Earth Sciences at [41].
224 There was no agreement in writing for the provision of the consultancy services by PRM to Amici. I have found that Mr Moss unilaterally implemented the arrangement at a time when he was acting as a de facto director of Amici. PRM provided no invoices for the fee. No questions were put to Mr Moss designed to expose any particular terms of the arrangement. A simple question might have been one to the effect: Mr Moss, were the consultancy fees payable in advance or in arrears? However, despite the plaintiff's failure to interrogate this issue, I am satisfied that the payments were made in arrears. Accepting the evidence of Mr Moss, as contrary to his interests, the consulting fee agreement was entered into shortly after Amici was incorporated and at or about the time that it commenced to manufacture pizza product. The agreed fee was $4,000 per month. The first payment was made on 4 July 2016. Thereafter two more payments were made in July, on the 18th and the 20th, a payment was made in August, no payment was made September, payments were made in October and November but not in December 2016, two payments were made in January 2017, and one in each of February, April and May 2017.
225 The inference that is open, and which I draw, is that two of the payments in July 2016 are likely to have been for services provided in May and June and the subsequent irregular pattern of payments in 2016 satisfies me that each payment was made to discharge a pre-existing liability. Thus on each occasion, Amici and PRM were in a debtor/creditor relationship when each transaction, being each payment, was entered into. I am satisfied therefore that the first element of s 588FA has been established by the plaintiff. I pause to observe that there is no pleading of and no mention was made of the commercial transactions exemption at s 588FA(3) of the Act.
226 The second requires that, for each transaction, in result PRM must have received from Amici payment in respect of an unsecured debt which is more than it would receive if each transaction was set aside and PRM lodged a proof of debt in the liquidation. No attention was paid by Mr Petras or Ms Mastos to the question whether the hypothetical transaction analysis is to be undertaken at the time of each transaction said to be a preference (Airservices Australia v Ferrier (1996) 185 CLR 483 at 501) or as at the date of the winding up. The decision of the Full Court in Federal Commissioner of Taxation v Kassem (2012) 205 FCR 156; [2012] FCAFC 124 at [80]-[84] holds that the comparison is between the amount received by the creditor from the impugned transaction and what would probably be received in the actual winding up.
227 The plaintiff did not adduce any evidence from the liquidator as to the likely dividend to unsecured creditors or in particular to PRM in the winding up. When I raised this with Mr Petras in closing submissions he answered: "The solvency report indicates there are no dividend creditors [sic]." The Insolvency Report does not mention a likely dividend to unsecured creditors and nor does it address potential recovery proceedings, likely liquidation costs or recovery scenarios. When I pressed Mr Petras further to identify evidence which establishes the pleaded dividend conclusion, he could not.
228 There is no report to creditors which calculates or estimates a likely dividend, if any, to unsecured creditors. There is no expert report from the liquidator or any forensic accountant which expresses an opinion on this issue. No submission was put to me as to what evidence might be considered to find this fact, even by inference.
229 The Insolvency Report discloses that to 4 February 2021, Mr Poulter estimated the total assets, comprising debtors at $7,000, priority creditors at $34,919, secured creditors at $149,775 and unsecured creditors at $427,788. Overall, the net deficiency was estimated to be $605,482. These estimates did not address the liquidator's fees and charges. An attachment to the report is a schedule of creditors, which is undated, in the total sum of $585,896.02. No evidence was adduced by the plaintiff about potential recovery proceedings that may result in a surplus in the winding up: Re Pacific Steelfixing Pty Ltd [2021] NSWSC 655 at [93]-[97], per Williams J.
230 In this proceeding, when commenced, the total amount sought to be recovered exceeded $926,000. The schedule of creditors includes the demonstrably false claim made on behalf of Mrs Gigliotti, a claim by SB Food for "supplies" for $34,200 and another supply claim by TCK for $1,500. There is no evidence from Mr Poulter as to whether creditor proofs of debt have been called for or assessed. There is no evidence as to how SB Food or TCK could have valid claims for the provision of supplies to Amici. The ATO lodged a claim with the liquidator on 13 June 2017 for $159,817.12, attached a dividend expectation advice and requested that the document be completed and returned within 30 days. There is no evidence that it was. The profit and loss statement for Amici to March 2017, as prepared by its external accountant, records a payment of management fees of $133,716 and there is no reference to consulting fees. No explanation was provided as to who received this money, even assuming that some of it was paid to PRM as consulting fees.
231 There is some evidence from Mr Poulter that was adduced in cross-examination to the effect he did not investigate potential recovery proceedings against Mr Gigliotti or TCK. No evidence was given by him about other potential recovery proceedings that would likely affect a likely dividend to creditors. When questioned as to whether Mr Gigliotti was treated differently to Mr Moss as the focus of recovery proceedings, Mr Poulter agreed, for the reason that he concluded that Mr Moss was the primary beneficiary of, what he considered to be, the artificial and uncommercial arrangement which had as its centrepiece the incorporation of Amici for the purpose of manufacturing the product. I have rejected that premise. The likely dividend to unsecured creditors turns not only on this proceeding but also other potential recovery proceedings which emerge in the documentary evidence, but which have not been mentioned by the plaintiff. Most notably, large payments were made to SB Food within the relation-back period, including after Amici ceased to manufacture product.
232 Mr Poulter also stated under cross-examination that he entered into the Assignment with the plaintiff because the winding up "was unfunded and I had no other sources of funding available to me to provide for the costs of public examinations and any litigation that might be necessary." No evidence was adduced as to those actual or likely costs.
233 The plaintiff did not adduce evidence as to the actual or likely priority payments, including the costs of the winding up, that have priority status pursuant to s 556 of the Act, in the event that recovery is effected in whole or in part by this proceeding, or any other proceeding that may thereafter be commenced by a liquidator with funds. No attempt was made to explain how the Assignment affects the hypothetical dividend calculation where the entitlement of the liquidator is limited to 50% of any Resolution Sum, after deduction of the public examination and liquidation costs. It is not easy to understand why that calculation is affected to the detriment of the defendants by a commercial decision taken by the liquidator to assign the causes of action upon the terms of the Assignment. The failure of the plaintiff to address the likely dividend question under a range of assumptions in order to address the hypothetical calculation that is required by s 588FA(1)(b) has deprived the defendants of the opportunity to interrogate this issue which is unfair and prejudicial.
234 The plaintiff carries the onus of proof of each of the elements at s 588FA(1)(b) of the Act. I am not satisfied that the onus is discharged where the plaintiff has failed to plead the material facts that it relies on, did not address this issue in the evidence and failed to put any submission as to how this claim is made out. It is not open to me in those circumstances to arrogate to myself the role of forensic accountant or to engage in speculation based on the difference between the net deficiency of assets and the potential dividend that might ultimately be declared. Proceeding in that way is also unfair and prejudicial to Mr Moss.
235 For these reasons this claim fails.