Arnautovic v Nichola

The potential claims (and their merits) 8In his affidavit sworn on 20 December 2013 in support of the application, the liquidator deposed that, in addition to three claims already settled, he had presently under negotiation five further preference claims - against WSI International for $50,112; against Cleaven's Forklifts for $58,357; against Freightquip Australia for $34,694; against Unigas for $957,000; and against Roads and Maritime Services for $231,025. All these were in respect of payments made during the relation-back period of six months prior to the date of commencement of the winding up, which is the period commencing 11 August 2010. As at 20 December 2013, they were said to remain unresolved, and potentially to require a litigated claim. 9The liquidator deposes to having formed the view that the company was insolvent during the relation back period, and probably from at least July 2007. He has identified a number of classic indicia of insolvency, including failure to pay taxation and workers compensation liabilities as and when they fell due from June 2007, negative net assets, 16 default judgments, and consistent breaches of payment arrangements with the Australian Taxation Office after April 2009, and a payment arrangement with QBE Workers Compensation from May 2010. 10The liquidator also set out comprehensive reasons for believing that WSI International, Cleaven's, Freightquip, Unigas and Roads and Maritime Services were on notice of the company's insolvency during the relation-back period, and that no running account defence was available to at least WSI International, Freightquip, and Roads and Maritime Services. 11As I have mentioned, the claims against Cleaven's and WSI International have since been settled. The liquidator's submissions did not refer to the claim against Unigas (which has not been served), and while reference was made to the claim against Freightquip, it too does not appear to have been served. 12The liquidator says that, in addition, there are three potential "related party" claims. The first is against Warehouse Solutions International Pty Ltd, of which Peter Panayi is currently (and has since 1 January 2011 been) the sole director and secretary, for $5,123,322 being payments made by the company to Warehouse Solutions during the relation-back period from 11 August 2010 to 15 February 2011. 13The second is against Peter Panayi, who was a director between 8 October 2002 and 30 November 2005, for $884,693 said to be "preference payment claim and unpaid balance of purchased plant and equipment". The response to the director's questionnaire provided to the liquidator by Mr Terry Panayi disclosed that certain assets of the company were sold to Peter Panayi in or about April 2010 for $697,933. The liquidator says that he has made inquiries but identified no evidence of payment of that amount, and has formed the view that it is likely that the plant and equipment was transferred to Peter Panayi for no proper consideration. Further, review of the company's records indicates to the liquidator that during the relation-back period, a total of $186,700 was paid to Peter Panayi from the company's bank account. 14Peter Panayi disputes the claim for $697,993 for equipment. He says that he is the rightful owner, notwithstanding any book entries to the contrary, and can in due course provide evidence of the source of funds. He also disputes the balance of the claim (being the $186,700) and says that those funds were provided and refunded on a "running account basis" at a time when there was no question of insolvency. 15The third "related party" claim is described as an insolvent trading claim against the estate of Terry Panayi for $1,746,867. The liquidator made demand on the estate on 15 July 2013 for that sum. On 15 August 2013 - in response to a further letter from the liquidator dated 12 August - McKells solicitors informed the liquidator that they did not represent the executrix, that there were no assets in the estate, and that they had not been instructed to apply for probate. 16In addition, the liquidator has identified that MPS Financial Services Pty Ltd received payments totalling $302,200 during the relation-back period, recorded on the company's cheque butts as "MPS - Repay Loan"; however, the payments do not appear to be loan repayments but reflect the company drawing a cheque, cashing it through MPS, and collecting the proceeds from MPS. This apparently occurred routinely on a weekly basis in the sum of approximately $10,000. The liquidator says he is not presently aware where the $302,200 (or possibly as much as $572,248) flowed after it was received back by the company, and anticipates that an examination will clarify this. The liquidator has also identified payments received during the relation-back period from the company by Thomas Panayi ($10,000), Russell Panayi ($6,000) and Christopher Panayi ($3,500), and wishes to examine whether other payments may have been made to them. 17I accept that there is a strongly arguable case of insolvency during the relation-back period. Although some of the potential defendants may have "running account" defences, I also accept that on the presently available material the preference claims are at least reasonably arguable. As the "debt" claim against Peter Panayi is not one under s 588FF, it does not require an extension of time under s 588FF(3) and does not require further consideration on this application. Similarly, the insolvent trading claim against the estate of Terry Panayi is not one under s 588FF and does not require further consideration.

Delay 18Following his appointment pursuant to the winding up order made on 20 April 2011, the liquidator on 2 May 2011 sent an initial standard request for a Report as to Affairs (RATA) and provision of company books and records to Mr Terry Panayi. On the same day, the liquidator's staff attended premises formerly occupied by the company, which now appeared to be used by another company with a similar name AAMAC Transport (NSW) Pty Ltd, where he met Thomas Panayi, who was a director of the company between 25 November 2005 and 2 December 2009. 19On 16 May 2011, Mr Terry Panayi attended the liquidator's office for the s 530A meeting and provided a signed RATA, a completed director's questionnaire and a box of books and records, which included bank statements, cheque butts and financial statements. On 19 May 2011, the liquidator requested Mr Terry Panayi to produce some further books and records, and on 12 August 2011, the liquidator requested further information regarding the company's loans. Mr Terry Panayi responded on 29 August that his accountant was on leave, and would provide the requested information by 21 September 2011. 20The liquidator says that to date he has not received all of the information he has requested, and has formed the view that the company has not kept adequate books and records. On 31 August 2011 he lodged a report with ASIC pursuant to s 533, referring to possible offences and contraventions including the director's failure to deliver or maintain adequate books and records, insolvent trading, voidable transactions and potential phoenix operations. On 2 September 2011, ASIC advised that it had decided not to pursue an investigation into the matters referred to in the s 533 report. 21Meanwhile, on 17 August 2011, the liquidator issued a first report to creditors. A second report to creditors issued on 13 March 2012. 22On 15 May 2012, the liquidator requested the Commonwealth Bank of Australia to provide traces of a number of transactions which the liquidator regarded as questionable. The Bank provided the information requested on 26 June 2012. 23On 4 July 2012, the liquidator made an Assetless Administration Fund application to ASIC, which was declined by ASIC on 7 August 2012. 24A third report to creditors was issued on 8 November 2012. 25Mr Terry Panayi died on 15 February 2013. The liquidator was informed of this on or about 18 April 2013. 26The successful negotiation of three preference claims, commencing in about mid-2012 - against the Australian Taxation Office, the Office of State Revenue, and QBE Workers Compensation (NSW) Limited - resulted in the recovery of a total of $215,000 - $65,000 by October 2012, and the balance in March 2013, as a result of which, after payment of liquidator's remuneration and petitioning creditor's costs, the liquidator by April 2013 held in excess of $85,000. 27On 15 August 2013 - in response to a letter from the liquidator dated 12 August - McKells solicitors informed the liquidator that they did not represent the executrix, that there were no assets in the estate, and that they had not been instructed to apply for probate. 28A fourth report to creditors was issued on 24 September 2013. 29On 12 November 2013 - 17 months after the Bank's response of 26 June 2012 - the liquidator requested the Commonwealth Bank to conduct additional traces in respect of further transactions. As the Bank indicated that this would take two to three months, the liquidator in early December 2013 requested that the traces be expedited. 30On 27 November, in response to a further letter from the liquidator of 26 November 2013 requesting an update with respect to probate, McKells repeated that they had not received instructions to apply for probate. 31Application for the extension was made on 20 December 2013, about six weeks before expiry of the three-year period.

Prejudice 32Delay is presumptively prejudicial: even in the absence of evidence of specific prejudice, there is still presumed to be prejudice through the deterioration in memories, the likelihood of which increases as the length of the delay increases. Thus one does not approach an application for an extension of time by comparing the position of the defendants had proceedings been instituted the day before time expired with their position if an extension were granted [Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541; Re Clarecastle Pty Ltd, [200]-[215]]. 33In this case, the defendants can point to actual prejudice, in the death of Terry Panayi two years after the commencement of the liquidation. He was the sole director of the company. Before his death, he supplied answers to the liquidator's questionnaire on 16 May 2011, in which he identified himself, Peter Panayi, Terry Panayi Jnr and Thomas Panayi, amongst others, as persons who were responsible for the day-to-day operation of the company. Thomas Panayi says that he was not privy to the day-to-day financial running of the company, that he has searched for but not been able to find any additional financial records, and that Terry Panayi was the principal person in charge of the financial affairs of the company. The defendants are deprived of the evidence of the person who is most likely to be able to explain the transactions. 34The liquidator points to the fact that he gave notice of the claims to the potential defendants within the three-year period, to found an argument of absence of prejudice to them. The liquidator made formal demands on some potential defendants in the latter half of 2013, and had first written to them earlier, in some cases as early as 2011. However, all the formal demands were made in the latter half of 2013, after the death of Terry Panayi: the first, second and third defendants did not receive a formal demand until 27 August 2013, and the fifth to eighth defendants not until 18 February 2014, when their solicitor accepted service of the originating process.

Consideration 35There is undoubtedly a significant public interest in the recovery of unfair preferences for the benefit of creditors generally. The total value of the potential claims the liquidator wishes to investigate exceeds $6 million, and recovery of such an amount would make an enormous difference to the creditors who, absent such recoveries, will barely receive any dividend, but if all the claims contemplated were to succeed, would receive close to 100 cents in the dollar. 36However, there is also a clear policy, reflected in s 588FF, that such claims should ordinarily be brought promptly. This is because an attempt to recover a payment received by a creditor involves disturbing and re-opening apparently settled transactions, and a recipient of a payment ought not be at risk of having it set aside years after the event [cf BP Australia Ltd v Brown, [112]], although it is fair to say that this policy is less compelling where the recipient is a related party. 37In this case, almost at the expiry of the three-year period, the liquidator sought an extension, originally for six and now for ten months. The extension is sought, not to enable any specific claims to be brought (although potential claims have been identified), but to enable further investigation of those claims, in particular by way of examinations. No examinations have been applied for, let alone conducted, to date. 38As I have observed, the potential debt claim against Peter Panayi and the insolvent trading claim against the estate are not claims under s 588FF, do not need an extension of time under s 588FF(3), and accordingly do not require further consideration. Only the preference claims need be addressed. 39The liquidator advances three main explanations for his inability to complete his investigations and commence proceedings within the three-year period. First, he contends that the death of Mr Terry Panayi has protracted his investigations. Secondly, the liquidator says that his investigations have been protracted by the absence of comprehensive books and records. Thirdly, the liquidator says that he has been hampered by a lack of co-operation from persons who he has identified as being likely to have knowledge of the company's examinable affairs, including family members of the deceased director. 40However, the liquidator's evidence, carefully reviewed, demonstrates no factual basis for these assertions, and no causative connection between the matters invoked and the delay in instituting proceedings. Mr Terry Panayi attended the s 530A meeting in May 2011, and provided a RATA and a completed directors' questionnaire promptly following the liquidator's initial inquires. No attempt was made to have him examined in the ensuing 20 months before his death. 41Moreover, in his affidavit sworn on 20 December 2013, the liquidator says that his staff have been able to carry out a complete analysis and reconciliation of the cheque books and bank statements, to trace extensive movements of money through the bank account during the relation-back period, to identify and investigate a number of interrelated parties involved in many of the transactions under investigation, and to obtain legal advice on potential claims. As a result, the liquidator had by then identified 22 possible unfair preference claims, successfully negotiated outcomes in three of them, remained in ongoing negotiations over a further five, was investigating three claims totalling $7,754,882 in respect of payments to related parties during the relation back period, and had determined that eleven claims were not worth pursuing. 42The potential preference claims had been the subject of formal, detailed solicitors' letters of demand between 27 August 2013 and 28 October 2013, and most also of earlier correspondence; some were the subject of ongoing negotiation. From the liquidator's affidavit, and in particular from the terms of his letters of demand, it is apparent that, before 20 December 2013, he was in possession of sufficient information to identify and formulate the preference claims. He was also, from at least March 2013, in funds to prosecute them. The liquidators' evidence does not explain why those claims could not have been commenced by February 2014. 43The liquidator contends that it is preferable to obtain, by examination, the maximum practicable amount of information prior to commencing any action, in order to reduce the risk of wasted resources; that he wishes to establish by examination when the company became insolvent; and that there remains a possibility that other as yet unknown claims may emerge from the examinations that he proposes to undertake. The liquidator says that he believes that Peter Panayi is a person who has knowledge of the Company's examinable affairs, that he wishes to have him and nine others examined, that he believes that Peter Panayi's evidence in the examination and documents produced will provide highly probative evidence on important questions in the proceedings, and that he does not wish to commence proceedings against Peter Panayi until those examinations are conducted. 44No detail or particulars or grounds for these beliefs are advanced. There is no identification of the issues which it is thought that the examination of Mr Peter Panayi (or for that matter any other examinee) may inform. As to solvency, the material already available to the liquidator enabled him to conclude, by at least late 2013, that there were strong indications that the company was insolvent as early as 2007. While he says that he cannot establish with certainty precisely when it became insolvent, and that he wishes to resolve the question of solvency by examination of persons involved in the running of the company, the preference claims concern a relation-back period of six months, and the evidence of insolvency already available to the liquidator is such that it is fanciful to suggest that he needs to conduct examinations to ascertain whether the company was insolvent during the relation-back period. 45Insofar as lack of funding is relied on as an explanation for not instituting proceedings, or examinations, earlier, the liquidator obtained funds in late 2012 and early 2013 from negotiated settlements in respect of voidable transactions. While the initial receipts were applied to remuneration, there have been funds in the liquidation sufficient to conduct examinations or institute proceedings since at least March 2013 46Liquidators are given the facility, not available to ordinary litigants, of conducting examinations. To date, the liquidator has taken no steps to invoke that power, notwithstanding that he has been in funds from at least March 2013. There is no difficulty with conducting examinations after proceedings have been commenced; the court has repeatedly held that there is no abuse of process in a liquidator using an examination to gain evidence for a pending proceeding. While, when time permits, it may be desirable to use the facility of examination to identify and refine claims and gain admissible evidence, the mere desire to conduct examinations for that purpose is not a sufficient reason to delay commencing proceedings, in the face of an impending time bar, where there is already sufficient material on which to do so, and sufficient funds available. In circumstances where no effort has been made to conduct examinations within time, when there was no obstacle to doing so, and when in any event the liquidator had sufficient material to identify and frame the claims, the desire to conduct an examination does not justify an extension of time for commencing proceedings. Nor does the possibility that examinations might reveal further claims, when nothing has been done within the three-year period to commence examinations.

Conclusion 47The potential debt claim against Peter Panayi, and the insolvent trading claim against the estate of Terry Panayi, are not claims under s 588FF, and do not need an extension of time under s 588FF(3). Only the preference claims require consideration. The potential preference claims appear to be at least reasonably arguable. However, there does not appear to be any good reason why they could not have been commenced by February 2014: the liquidator had sufficient information to identify and formulate the claims, strong indicia of insolvency during the relation-back period, and was in funds. The desire to conduct examinations is insufficient reason for delaying commencing proceedings, in the face of an impending time bar, where there was already sufficient information on which to do so, and sufficient funds available. The delay has resulted not only in the presumptive prejudice associated with delay, but actual prejudice through the loss of a material witness by the death of Mr Terry Panayi. While I bear in mind the policy considerations in favour of facilitating the recovery of preferences, the combination of absence of satisfactory explanation for why the proposed proceedings could not be commenced within the three-year period, coupled with the actual prejudice arising from the death of Mr Terry Panayi, require that the application for an extension be declined. 48The Court orders that the originating process be dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 June 2014