Arnautovic v Qaqour

INTRODUCTION 1 On 6 and 8 July 2022, the defendant applied to set aside orders that had been made by Yates J on 17 June 2022 pursuant to s 486A of the Corporations Act 2001 (Cth), which orders required him to surrender his passport and prevented him from leaving this jurisdiction. 2 On 8 July 2022, I made orders which had the effect of continuing the orders made by Yates J until 19 August 2022. These are my reasons for doing so.

BACKGROUND 3 The plaintiff is the provisional liquidator of Penny World Pty Ltd (receivers and managers appointed). The defendant is the sole director and member of Penny World and Wizly Pty Ltd. 4 On 14 June 2022, Scottish Pacific Business Finance Pty Ltd commenced proceeding NSD444/2022 (Scottish Pacific proceeding) against the present defendant (as first defendant), Wizly (as second defendant), Penny World (as fifth defendant) and others. 5 On 14 and 18 June 2022, Yates J made a series of orders in the Scottish Pacific proceeding including freezing orders against the defendant and Wizly. His Honour set out his reasons for making those orders in Scottish Pacific Business Finance Pty Ltd v Qaqour, in the matter of Penny World Pty Ltd (receivers and managers appointed) [2022] FCA 725 (Scottish Pacific (No 1)). 6 Those reasons record that his Honour was satisfied that, in light of the evidence before him that there was, at the very least, a prima facie case for relief based upon misleading and deceptive conduct. His Honour also noted that the conduct seemed to have been fraudulent (Scottish Pacific (No 1) at [43], [45], [49], [50] and [59]). In broad terms the alleged conduct included the following: (1) Penny World represented to Scottish Pacific that it conducted a business of supplying building materials and had customers of substance; (2) Scottish Pacific and Penny World were parties to a debtor finance facility agreement pursuant to which: (a) Penny World provided to Scottish Pacific invoices issued by Penny World to its customers and assigned to Scottish Pacific the debts due from Penny World's customers to Penny World; (b) Scottish Pacific advanced funds to Penny World on the faith of those invoices and sought payment of the customers' debts directly from the customers; (3) Penny World did not in fact conduct a business supplying building materials (or any business at all) and had provided to Scottish Pacific invoices which appear to have been fabricated; and (4) Scottish Pacific relied upon those invoices to advance funds in an amount exceeding $3 million to Penny World. Those advances were made to Penny World's account held with the Commonwealth Bank of Australia. 7 All of the funds from Penny World's account have apparently been withdrawn. As Yates J explained in Scottish (No 1) at [40]-[41]: 40 [Penny World's] bank statements, in relation to its CBA account, for the period 25 March 2022 to 31 May 2022, show large deposits by [Scottish Pacific] in that period (29 March; 1, 6, 12, 14, 20, 26, and 28 April; and 3, 4, 9, and 13 May) in respect of the advances it had made, in most cases followed by what appears to have been the almost immediate withdrawals of funds in round figures corresponding to the deposited amounts. None of the withdrawals have a clear and obvious relationship with [Penny World's] represented business. 41 Overwhelmingly, the withdrawals appear to have been for personal expenditure (apparently, [the defendant's] personal expenditure), including overseas travel. In this latter regard, the bank statements show what is obviously the purchase of an airline ticket with Emirates, international ATM withdrawal fees, international transaction fees, in-flight service fees, hotel accommodation in Jordan, and expenditure in Dubai, to name just a few entries. The entries include a transfer to RTGS Constructions, which is meant to be one of [Penny World's] customers. The entries also include a transfer to "Omar". This appears to be a reference to the fourth defendant. 8 As part of the orders made by Yates J on 17 June 2022 in the Scottish Pacific proceeding, his Honour appointed the present plaintiff as provisional liquidator of Penny World. His Honour's reasons for doing so are set out in Scottish Pacific (No 1) at [46]-[63]. 9 Later on 17 June 2022, the plaintiff applied, ex parte, for orders pursuant to s 486A of the Corporations Act and Yates J made orders including: 2. Pursuant to s 486A(1)(c) of the Corporations Act 2001 (Cth), the Defendant surrender his passport to the District Registrar of the New South Wales District Registry by 11:00 am on 20 June 2022. 3. Pursuant to s 486A(1)(d) of the Corporations Act 2001 (Cth), up until 11:59 pm on 24 June 2022, the Defendant be prohibited from leaving New South Wales without the prior consent of the Court. 4. Liberty to apply be granted on 24 hours' notice or such shorter period as the Court may permit. 10 Yates J set out his reasons for making orders 2 and 3 in Arnautovic v Qaqour [2022] FCA 726 (Arnautovic (No 1)), which his Honour indicated should be read with Scottish Pacific (No 1). 11 The defendant subsequently surrendered his passport. 12 On 24 June 2022, in the context of a proposed contested application concerning the continuation of order 3, I extended the operation of order 3 until further order of the Court. 13 By interlocutory application filed on 4 July 2022, the defendant sought various orders including orders setting aside orders 2 and 3 and an order for the return of his passport. In the alternative, the defendant sought the consent of the Court to him undertaking a journey to Indonesia between 10 and 17 July 2022.

THE EVIDENCE ON THIS APPLICATION 14 The application before Yates J on 17 June 2022 for orders pursuant to s 486A of the Corporations Act was heard and determined by his Honour ex parte, on the basis of evidence adduced by the plaintiff. The application before me was contested, and evidence was adduced by both the plaintiff and the defendant.

Plaintiff's evidence 15 The plaintiff read the affidavits (and tendered the exhibits thereto) that had been read (and tendered) at the hearing before Yates J on 17 June 2022 (see Arnautovic (No 1) at [2]). 16 The plaintiff also read an affidavit of Mr Otaegui-Campos, an employee of the plaintiff, sworn 6 July 2022. The evidence of Mr Otaegui-Campos includes: (1) Scottish Pacific intends to file an interlocutory process in the Scottish Pacific proceeding seeking leave to issue summonses for the examination of the defendant, and others, shortly; and (2) in view of the issues and concerns raised previously before the Court and the defendant's failure to respond to a Notice pursuant to ss 530A and 530B of the Corporations Act or to complete a Report on Company Activities and Property (ROCAP), the plaintiff remains concerned that the defendant will flee the jurisdiction. The Notice and the ROCAP are discussed in more detail below. 17 The plaintiff also tendered two versions of a document purporting to be financial statements for Penny World for the financial year ended 30 June 2021 which had been produced to the plaintiff by the defendant.

Defendant's evidence 18 The defendant's evidence on this application comprised an affidavit affirmed by him on 1 July 2022; and paragraphs 1 to 10 (only) of an affidavit affirmed by him on 8 July 2022, together with pages 18 to 23 (only) of the exhibit to that affidavit. 19 The evidence of the defendant in his 1 July 2022 affidavit included that the defendant: (1) moved to Australia in 2001 with Ms Nisrin Jebril, married her in that year and became an Australian citizen in 2003; (2) is divorced from Ms Jebril and has been since 2015. He and Ms Jebril have joint custody of their two children, aged 8 and 13; (3) is engaged to be married to a Ms Amiri, whom he met in 2021; (4) lives in Sydney with Ms Amiri, her child and one of his children; (5) sees his other child, who lives with Ms Jebril, every weekend; (6) plans to live with Ms Amiri in their Sydney home until both of his children have finished high school; (7) has travelled to Jordan every few years since he moved to Australia in 2001, including during trips taken in March to April 2018, August to October 2018 and April 2022. He has also taken holidays to China and Malaysia (December 2019 to January 2020) and the United Arab Emirates (April 2022); (8) plans to move his mother who is 66 years old, lives in Jordan by herself, and has some health issues, to Australia. To this end, he has engaged an immigration agent; (9) has three siblings. One lives in Jordan, one in Israel and the other in Sydney. He is very close to the brother who has lived in Sydney since 2013 and they have frequent contact; (10) had an immediate plan to travel to Bali between 10 and 17 July 2022 for a holiday with Ms Amiri, his two children and her child; (11) owns shares in Yield Rich Technologies Limited, a company registered and operating in Hong Kong; and (12) has had the following recent conversations with Ms Jebril: (a) a few months ago: Defendant: [Child] has been difficult. He is refusing to go to bed. Ms Jebril: This is because you keep bringing different girlfriends to stay. Defendant: This is not true. [Ms Amiri] is permanent. We are engaged. Ms Jebril: You [expletive]. I don't believe you. (b) about two to three weeks after that conversation: Ms Jebril: Lets go and live together in the States. Defendant: No. I am in love with [Ms Amiri]. We have a life here and so do the boys. I would never leave [Ms Amiri] and even if I wasn't with [Ms Amiri] I would not uproot the boys. (c) about one month ago: Ms Jebril: Come with me to travel together and live in the United States of America. You maybe have a problem and must leave the country. Defendant: No. I have my partner and I love her and I refuse to leave the country as it is the only place I like to live. … 20 The defendant's second affidavit concerns his response to requests by the plaintiff to provide information concerning Penny World, and is considered at [21]-[28] below, together with the plaintiff's evidence on the same topic.

Evidence from the plaintiff and the defendant concerning the plaintiff's requests for information from the defendant 21 The following evidence concerning requests by the plaintiff for information from the defendant is taken from the affidavit of Mr Otaegui-Campos or the defendant's second affidavit. 22 On 20 June 2022, the plaintiff sent a letter by email to the defendant (copied to his solicitors) in the following terms: I was appointed Provisional Liquidator of the Company on Friday, 17 June 2022. Section 530A(1) of the Corporations Act 2001 ("the Act") provides that as soon as practicable after the Court orders that a company be wound up or appoints a provisional liquidator of a company, or a company resolves that it be wound up, each officer (including former officer) of the company must: (a) deliver to the liquidator appointed for the purposes of the winding up, or to the provisional liquidator, as the case may be, all books in the officer's possession that relate to the company; and (b) if the officer knows where other books relating to the company are tell the liquidator where those books are. Section 530B of the Act provides that the Liquidator is entitled to the books and records of the Company. Please find attached a notice pursuant to Sections 530A and 530B of the Act requiring you to produce books and records of the Company to me. In addition, I have enclosed a copy of the Report in Company Activities and Properties ("ROCAP") for your completion pursuant to section 475 of the Act. I have also enclosed details of books and records that may be made available to me. 23 The plaintiff's letter enclosed the Notice, which was in the following terms: Take notice that I was appointed Provisional Liquidator of Penny World Pty Ltd on Friday, 17 June 2022. Pursuant to Section 530A and 530B of the Corporations Act 2001 ("the Act") you are required to deliver to me, within seven (7) days of the date of this notice any books and records of the Company that are in your possession. Pursuant to Section 9 of the Act: Books includes: (a) a register; and (b) any other record of information; and (c) financial reports or financial records, however compiled, recorded or stored; and (d) a document. Financial records includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements. Failure to comply with this notice is an offence of strict liability. 24 The letter also enclosed a ROCAP for completion by the defendant. 25 As at 6 July 2022 (when Mr Otaegui-Campos made his affidavit), the plaintiff had not received any of the books and records of Penny World or a verified copy of Part A of the ROCAP from the defendant; and the defendant had not engaged with the plaintiff or the plaintiff's staff since the plaintiff's appointment on 17 June 2022. 26 On 6 July 2022, the defendant instructed his solicitor to email various financial records of Penny World to the plaintiff in partial compliance with the Notice. 27 On 7 July 2022, the defendant instructed his solicitor to email revised versions of the financial records of Penny World to the plaintiff. 28 On 8 July 2022, with the assistance of his solicitors, the defendant began to complete the ROCAP. The defendant's evidence is that the ROCAP is in progress and will be provided to the plaintiff as soon as possible.

CONSIDERATION 29 Section 486A of the Corporations Act provides in so far as is presently relevant: 486A Court may make order to prevent officer or related entity from avoiding liability to company (1) The Court may make one or more of the following: … (c) an order requiring an officer or employee of a company, or a related entity of a company that is a natural person, to surrender to the Court his or her passport and any other specified documents; (d) an order prohibiting an officer or employee of a company, or a related entity of a company that is a natural person, from leaving this jurisdiction, or Australia, without the Court's consent. (2) The Court may only make an order under subsection (1) if: (a) the company is being wound up in insolvency or by the Court, or an application has been made for the company to be so wound up; and (b) the Court is satisfied that there is at least a prima facie case that the officer, employee or related entity is or will become liable: (i) to pay money to the company, whether in respect of a debt, by way of damages or compensation or otherwise; or (ii) to account for property of the company; and (c) the Court is also satisfied that there is substantial evidence that the officer, employee or related entity: (i) has concealed or removed money or other property, has tried to do so, or intends to do so; or (ii) has tried to leave this jurisdiction or Australia, or intends to do so; in order to avoid that liability or its consequences; and (d) the Court thinks it necessary or desirable to make the order in order to protect the company's rights against the officer, employee or related entity. (2A) An order under subsection (1) may only be made on the application of: (a) a liquidator or provisional liquidator of the company; or (b) ASIC. (3) On hearing an application for an order under subsection (1), the Court must have regard to any relevant application under section 1323. … (6) On the application of a person who applied for, or is affected by, an order under this section, the Court may make a further order discharging or varying the first-mentioned order. (7) An order under subsection (1) may be expressed to operate for a specified period or until it is discharged by a further order. ...

The s 486A criteria 30 The criteria which must be addressed on this application are: (1) the question of standing (s 486(2A)); (2) satisfaction of s 486(2)(a); (3) satisfaction of s 486(2)(b); (4) satisfaction of s 486(2)(c); and (5) satisfaction of s 486(2)(d). 31 If any of (1) to (5) is determined favourably to the defendant, then there is no basis for the maintenance of orders 2 and 3 and they should be discharged. 32 Understandably, the defendant did not address or challenge that the plaintiff had standing or that the requirement in s 486A(2)(a) - that "the company is being wound up in insolvency or by the Court, or an application has been made for the company to be so wound up" - was satisfied. Both of these criteria are clearly established. Instead, the defendant sought to set aside the extant orders on the basis that, when all of the evidence (including the evidence of the defendant which was not before Yates J on the ex parte application) is considered, the Court would not be satisfied that the criteria in s 486A(2)(b), (c) and (d) are met. Each criterion is considered in turn below.

s 486A(2)(b) - "the Court is satisfied that there is at least a prima facie case that the officer, … is or will become liable: (i) to pay money to the company, whether in respect of a debt, by way of damages or compensation or otherwise; or (ii) to account for property of the company" 33 I have considered the affidavit evidence read by the plaintiff on this application and which was also before Yates J on the application before his Honour. Having done so, I am satisfied that there is a prima facie case that the defendant is or will become liable to pay money to Penny World for the reasons set out by his Honour. I am strengthened in that conclusion by the fact that the defendant read two affidavits, in whole or in part, on this application but did not seek to refute the evidence read by the plaintiff. This enables an inference to be drawn that the defendant's evidence on this point would not have assisted his case: see Motor Auction Pty Ltd v John Joyce Wholesale Cars Pty Ltd (1997) 138 FLR 118 at 126 (Santow J). In these circumstances, I respectfully adopt the summary of the evidence provided by Yates J in Arnautovic (No 1) at [8]-[10]: 8. The evidence before the Court was that [Penny World], under the control of the defendant, had been used as the vehicle for what appeared to be fraudulent conduct involving the obtaining of large sums of money from Scottish Pacific Business Finance Pty Ltd (ScotPac) under a debtor finance facility into which the company had entered. The evidence was that [Penny World] had obtained these sums from ScotPac in reliance on invoices that now appear to have been fabricated by [Penny World]. The evidence showed that ScotPac paid these funds into [Penny World's] bank account with the Commonwealth Bank of Australia (CBA). The defendant is the sole signatory on that account. Amounts in round figures, corresponding to the deposited amounts, were, in most cases, almost immediately withdrawn and transferred to an account maintained by Wizly Pty Ltd (Wizly) with the CBA. The defendant is sole director, secretary, and shareholder of Wizly. [Penny World's] bank account with the CBA has a nil balance. It is not known whether, and if so what, funds sourced from the advances made by ScotPac, remain in Wizly's account. [Penny World] is presently indebted to ScotPac for $3,120,489.85. 9. As explained in Scottish Pacific v Qaqour, a perusal of [Penny World's] bank statements for its CBA account showed that withdrawals from the account appear to be related to personal expenditure (apparently, the defendant's personal expenditure), including overseas travel. In this latter regard, the bank statements show what is obviously the purchase of an airline ticket with Emirates, international ATM withdrawal fees, international transaction fees, in-flight service fees, hotel accommodation in Jordan, and expenditure in Dubai, to name just a few entries. 10. The evidence indicated that the defendant was not only using the money advanced to [Penny World] by ScotPac as his own money, but that these funds had provided him with the facility and means to travel overseas. 34 A more detailed description of that evidence is set out in Scottish Pacific (No 1) at [18]-[42]. 35 The defendant's counsel made several submissions as to why I should not be satisfied that there is at least a prima facie case. 36 The first submission was that there is at present no case articulated by the plaintiff against the defendant, whether by letter of demand or a pleading. I accept that there is no letter of demand or pleading which sets out a prima facie case that the defendant is or will become liable to pay money to Penny World, however I do not accept that the expression of such a case by way of demand or pleading is required. It is not an express requirement of s 486A(2)(b), and I see no basis for implying such a requirement. This is particularly so when, as in the present case, applications under s 486A are likely to be made on an urgent basis. The existence or otherwise of a prima facie case falls to be assessed on the basis of the affidavit evidence before the Court. 37 The second submission was that the prima facie case found by Yates J related to contraventions of ss 181(1) and 182(1) of the Corporations Act; those provisions required the defendant to act in the best interests of the shareholder(s) of Penny World; and as the defendant was the sole shareholder of Penny World he was the only shareholder whose interests needed to be considered. I do not accept this submission for the following reasons: (1) ss 181(1) and 182(1) are not limited to requiring a director to act in the best interests of the company of which he or she is a director. Section 181(1) also requires that the director exercise their powers and discharge their duties for a proper purpose; and s 182(1) does not invoke the concept of acting in the best interests of the corporation and is focussed upon improper use by a director of their position as director to gain an advantage for themselves or someone else, or to cause detriment to the corporation; (2) the prima facie case put to Yates J and accepted by his Honour was not restricted to contraventions of ss 181(1) and 182(1). In Arnautovic (No 1) at [16], his Honour stated: 16. With reference to the requirements of s 486A(2)(b) of the Corporations Act, the plaintiff submitted that there was at least a prima facie case that the defendant is or will become liable to pay money to the company or to account for property of the company. The plaintiff submitted that there was a prima facie breach by the defendant of his fiduciary and statutory duties including, in particular, the duty under s 181(1) of the Corporations Act that the defendant exercise his powers and discharge his duties in good faith in the best interests of the company and for a proper purpose, and his duty under s 182(1) not to improperly use his position to gain an advantage for himself or someone else, or cause detriment to the corporation. The plaintiff submitted that: it was not in the company's best interests that the defendant caused the company to procure money from ScotPac by fraud leaving it with a large debt which, it seems, it has no means to repay; and it was not in the company's best interests that the defendant apparently obtained and used that money for his own purposes. (emphasis added); (3)the fiduciary duties owed by the defendant to Penny World as its director are not as limited as a duty to act in the best interests of Penny World; and (4 )the submission conflates the interests of Penny World and the defendant. Those interests do not coincide simply because the defendant is the only shareholder of Penny World and it is necessary to consider the position of Penny World as a distinct and separate legal entity. 38 The third submission, which is related to the second, is that the withdrawals of funds from Penny World could be regarded as akin to operations in closely held companies where directors use the funds of the company, for example in lieu of salaries, and those funds are reconciled at the end of the financial year and properly accounted for. This submission fails for want of evidence. The defendant, who as noted above, made two affidavits for the purposes of this application, did not address this topic. This submission also conflates the distinct and separate interests of Penny World and the defendant.

s 486A(2)(c) - "the Court is also satisfied that there is substantial evidence that the officer, …: (i) has concealed or removed money or other property, has tried to do so, or intends to do so; or (ii) has tried to leave this jurisdiction or Australia, or intends to do so; in order to avoid that liability or its consequences" 39 Section 486A(2)(c) has two, alternative, limbs. For each limb, the Court must be satisfied that the requisite action has been undertaken, or the requisite intention formed, by the defendant in order to avoid the liability the subject of s 486(2)(b), or the consequences of such liability. 40 The first limb requires satisfaction that there is substantial evidence that the defendant has concealed or removed money or other property, has tried to do so, or intends to do so. 41 I am satisfied that there is substantial evidence that the defendant has concealed or removed money in order to avoid liability or the consequences of such liability, for the following reasons: (1) as Yates J found in Arnautovic (No 1) at [17], [22] and [23], by taking Penny World's funds and depositing them into Wizly's account, the defendant was removing Penny World's money and concealing it in an attempt to avoid the consequences of his liability to account to Penny World for that money; (2) despite going into evidence on other topics relevant to this application, the defendant did not address the movement of the funds, with the result that an inference is available that his evidence on this topic would not have assisted him; and (3) as noted above, the defendant's submission that the movement of funds might be viewed as an ordinary incident of the activities of closely held companies fails for want of evidence. 42 The second limb requires satisfaction that there is substantial evidence that the defendant has tried to leave this jurisdiction or Australia, or intends to do so in order to avoid the liability or its consequences. The defendant's evidence establishes that it is likely that the defendant will travel out of the jurisdiction for one or more of a number of reasons. In other words, the issue between the parties on this limb is not whether he was likely to travel but whether such travel would be for the purpose of avoiding liability or its consequences (and thus whether he would be likely to return). In view of my finding above that the first limb is satisfied it is not necessary to resolve this issue.

s 486A(2)(d) - "the Court thinks it is necessary or desirable to make the order in order to protect the company's rights against the officer …" 43 Section 486A(2)(d) requires that the Court form the view that it is necessary or desirable to make the order in order to protect Penny World's rights against the defendant. The expression "company's rights against the officer" is capable of referring to rights that a company has by way of a cause of action against the relevant officer, as well as other rights, for example the statutory rights of a company through its provisional liquidator or liquidator to obtain information from the officer. In view of the obvious purpose of s 486A being to protect the interests of a corporation via one or more of the available orders and the standing afforded to provisional liquidators and liquidators, a broad interpretation is appropriate. 44 As to the former category of rights, as noted above, I am satisfied that Penny World has a prima facie case against the defendant for, broadly speaking, the removal of the company's funds. 45 I am not persuaded that the existence of such a prima facie case, of itself, means that the making of a s 486A order is necessary or desirable, particularly as there is a freezing order in place over the assets of the defendant. However, when considered together with the rights to obtain information from the defendant it is at least desirable that the extant orders continue. 46 As set out at [22]-[28] above, the plaintiff has served the Notice under ss 530A and 530B and has required the defendant to complete a ROCAP as he is entitled to do under s 475 of the Corporations Act, but the defendant did not comply with these requirements. Further, the two purported sets of financial statements for Penny World for the financial year ended 30 June 2021 provided by the defendant to the plaintiff on 6 and 7 July 2022 record markedly different figures and in particular "Loans to Directors" of $1,277,569 in one version and $9,053,994 in the other. In view of the gravity of the prima facie case; the likelihood that the defendant, as the sole director of Penny World, will be the obvious (and perhaps only) source for much of the information sought by the plaintiff; the failure of the defendant to comply with the Notice or to provide the ROCAP; and the evidence that the defendant is likely to leave the jurisdiction, it is at least desirable that the orders continue.

Exercise of the discretion 47 As each criterion for the exercise of the discretion has been satisfied, the discretion in s 486A(1) has been enlivened. 48 It is appropriate that the extant orders continue. This is for the reasons set out above with respect to each of s 486A(2)(b), (c) and (d). However, it is not appropriate that the order restricting the plaintiff from leaving Australia be open-ended. For example, it may be that a point is reached where the defendant has provided sufficient information to the plaintiff to render it no longer desirable that the orders continue to operate. In these circumstances, order 3 should be varied such that it operates for a further six weeks. Upon the expiry of that time, any application for an extension may be considered in light of the circumstances then prevailing. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman.