[2016] FCA 1023
Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583
[2005] NSWSC 831
Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126
[2003] VSC 123
Bans Pty Ltd v Ling (1995) 16 ACSR 404
Blatch v Archer (1774) 1 Cowp 63
(1774) 98 ER 969
Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450
Source
Original judgment source is linked above.
Catchwords
[2016] FCA 1023
Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583[2005] NSWSC 831
Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126[2003] VSC 123
Bans Pty Ltd v Ling (1995) 16 ACSR 404
Blatch v Archer (1774) 1 Cowp 63(1774) 98 ER 969
Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450[2007] FCA 1216
Dolan v Australian and Overseas Telecommunications Corporation (1993) 42 FCR 206(1993) 114 ALR 231
Edenden v Bignell [2007] NSWSC 1122
Elliott v Australian Securities and Investments Commission (2004) 10 VR 369[2004] VSCA 54
Griffin v Pantzer (as trustee of the bankrupt estate of Griffin) (2004) 137 FCR 209[2004] FCAFC 113
Ho v Powell (2001) 51 NSWLR 572[2001] NSWCA 168
I&L Securities Pty Ltd v HWT Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109[2009] FCA 1415
Re New World Alliance Pty Limited (receiver and manager appointed) (1993) 47 FCR 90(1993) 12 ACSR 299
Refrigerated Express Lines (Australasia) Pty Limited v Australian Meat and Live-Stock Corporation (1979) 42 FLR 204(1979) ATPR 40-137
Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd)) v Boné (2015) 104 ACSR 528(1995) 18 ACSR 1
Trinick (as liquidator of Forfione Family Group Pty Ltd (ACN 009 363 464)(in liq) v Forgione (2015) 106 ACSR 600
[2015] FCA 642
Woodgate v David (2002) 55 NSWLR 222
Judgment (17 paragraphs)
[1]
ione Family Group Pty Ltd (ACN 009 363 464)(in liq) v Forgione (2015) 106 ACSR 600; [2015] FCA 642
Woodgate v David (2002) 55 NSWLR 222; [2002] NSWSC 616
Texts Cited: Fleming's The Law of Torts (10th ed., Lawbook Co., 2011)
Sir William Blackstone, Commentaries on the Laws of England (1753) (Oxford University Press, 2016)
Category: Principal judgment
Parties: Robert Whitton in his capacity as Liquidator of Substance Technologies Pty Ltd (in liquidation) (Applicant)
Andrew Thaler (First Respondent)
Christopher Thaler (Second Respondent)
Representation: Counsel: P Reynolds (Applicant)
Solicitors: Bartier Perry (Applicant)
[2]
The First and Second Respondents were self-represented
File Number(s): 2016/78019
[3]
Judgment
HER HONOUR: This is an application by the liquidator of Substance Technologies Pty Limited (in liquidation) (the company) against the company's directors, Andrew Thaler and his father Christopher Thaler. Without any disrespect and to avoid confusion, I will refer to the directors by their first names. The liquidator seeks an order that the directors pay some $170,000 to the company for debts incurred to the Australian Taxation Office (ATO) and Ausgrid whilst the company was insolvent.
The main issue is whether the company was insolvent when the debts were incurred, either by reason of the presumption of insolvency which arises where a company fails to comply with its obligations to keep financial records, or by reason of other evidence pointing to insolvency. Many other issues were raised, and I will endeavour to address all relevant issues.
[4]
Facts
The company operated a scrap metal yard at Cooma in New South Wales and was engaged in materials recycling, logistics and consulting. Christopher was a director of the company from 8 September 2004 to 3 January 2015. Andrew was operations manager and a truck driver for the company, and took over the business from his father when he became a director on 2 January 2015.
In addition to the presumption of insolvency, the liquidator relied upon the company's tax returns and financial statements, together with the company's running account balance with the ATO to establish actual insolvency. Financial information from these sources may be summarised in the following table:
30.6.09 30.6.10 30.6.11 30.6.12 30.6.13
Income $1,126,915 $972,307 $624,761 $351,862 $400,048
Profit / loss -$37,263 -$61,764 $10,597 -$123,152 -$44,452
Taxable income -$160,407 -$58,832 nil -$122,990 -$42,388
Accumulated losses -$162,954 -$221,786 -$208,995 -$331,985 -$374,373
Net assets -$16,436 -$78,200 -$67,604 -$190,755 -$235,207
ATO account balance nil -$46,671.65 -$40,786.93 -$15,304.80 -$13,929.36
[5]
The company's last payment to the ATO was made on 19 June 2013. The company continued to lodge BAS statements but made no payments. The company's last tax return was filed for the year ended 30 June 2013. According to the company's accountant, this was the final contact they had with the company.
The company ceased trading in late 2013. According to Andrew, the company ceased trading in about August 2013 after a contract dispute with Essential Energy. According to Christopher, the company began to wind down and cease trading "later in 2013" as it had not been paid by Power Serve Pty Ltd and Networks NSW, which lead to a "reduction in available funds". Power Serve owed the company over $47,000 but went into administration in June 2014 and into liquidation in July 2014; the company received no dividend from the administrator or liquidator. Networks NSW refused to return some $200,000 of goods which the company had paid for. Christopher considered that the company could likely only recover these unpaid amounts by commencing legal proceedings. According to Christopher, during the period of winding down the company and ceasing to trade, the company paid its former employees, contractors and secured creditors in full. The company lodged its last BAS statement in May 2014 for the period ended 31 December 2013.
In early 2014, however, the company decided to buy scrap metal from Ausgrid, a state owned corporation. From April to December 2014, Ausgrid rendered five invoices to the company for scrap metal totalling $78,463 including GST. These purchases, along with the company's running account balance with the ATO and 5 bank statements gathered by the liquidator, are summarised in the following table (there are no tax returns or financial statements to further populate the table):
30.6.14 30.6.15 30.6.16
ATO account balance -$22,219.34 -$24,216.19 -$26,587.07
Bank balance nil nil
Ausgrid purchases (including GST) -$32,340 -$46,123
[6]
It seems to me that at the time the company agreed to buy the scrap metal from Ausgrid, it was insolvent having regard to the following pieces of evidence:
1. the cash at bank was insufficient to pay the invoices;
2. according to Andrew and Christopher, the company had ceased trading due to problems being paid by substantial customers;
3. the company had not made a profit for some years and had had a deficiency of assets over liabilities for several years; and
4. the company's running account balance with the ATO indicates, overall, that the company was not able to pay its tax debts as and when they fell due.
As already mentioned, on 2 January 2015, Andrew was appointed a director of the company and, the following day, Christopher ceased to be a director. Andrew was thereafter the sole director of the company.
In April 2015, Ausgrid commenced legal proceedings against the company in the Local Court of New South Wales for the unpaid invoices.
On 2 April 2015, the ATO also wrote to the company advising that it intended to take debt collection action in respect of $23,869.96 then owing. On 30 April 2015, an ATO employee made contact with the company and was informed "the business is currently not doing much trade. … they have not lodged as they have not been able to afford to pay tax agent". On 23 May 2015, the ATO issued a garnishee notice to Westpac for the company's indebtedness of $24,216.19 but the garnishee was unsuccessful. The company's bank accounts at that time held no funds.
On 11 November 2015, Ausgrid's proceedings against the company were heard by Magistrate Milledge. Andrew appeared for the company. He accepted:
I have never at any time said that my company does not owe Ausgrid, the business unit, this money for these things that I have taken delivery of.
Andrew submitted, however, that Ausgrid owed the company a far greater sum in respect of other matters. The magistrate entered judgment in favour of Ausgrid in the amount of $78,463 plus interest and costs totalling $85,987.16.
On 27 November 2015, Ausgrid served a statutory demand on the company in respect of the Local Court judgment. The company did not comply with the statutory demand and, on 11 March 2016, Ausgrid filed an Originating Process in this Court to wind up the company. Those proceedings came before Brereton J for directions on 9 May 2016. Andrew appeared for the company. His Honour made the following orders:
1. The proceedings be stayed unless and until Mr Thaler files and serves an affidavit as to his authority in compliance with Uniform Civil Procedure Rules, Rule 7.2(2), such affidavit to be filed and served by 16 May 2016.
2. The defendant company file and serve its evidence in opposition to the originating process by 20 June 2016, including any evidence in support of an application for leave under Corporations Act s459S to dispute the plaintiff's debt and any interlocutory process seeking such leave.
3. The proceedings be adjourned to 27 June 2016 at 9.45 in the Corporations Judge Motions List.
[7]
Do the Debts Exist?
The directors dispute that debts to the ATO and Ausgrid still exist. I take this to be a submission that the criteria which must be satisfied before a liquidator can seek to recover compensation for loss resulting from insolvent trading have not been met, in particular, section 588M(1)(b) requires:
the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency …
As I understand the directors' argument so far as the ATO is concerned, it is said that there is no loss or damage because the ATO has since written off the debt. Although, on 8 July 2016, the ATO lodged a proof of debt with the liquidator, on 10 April 2017 the ATO made an entry in the running account described as "non-pursuit amount", reducing the balance of the account to nil.
The fact that a creditor makes an accounting entry to reflect the prospects of recovering a debt from an insolvent company does not detract from the fact that the creditor has suffered loss or damage in relation to the debt because of the company's insolvency. Indeed, it rather confirms that loss or damage has been sustained and is being recognised as such by the creditor in adjusting the value of its receivables. Nor does writing off a debt extinguish a creditor's legal entitlement to pursue that debt, although in this case the ATO is precluded from doing so by the appointment of a liquidator to the company. If a bad debt proves to be recoverable, in whole or in part, then the creditor remains entitled to payment and to adjust its accounts to reverse the write-off and recognise the income. This is consistent with accounting standards and, may I say, common sense: AASB 9: Financial Instruments (2014). Unsurprisingly, the ATO has detailed policies governing how its staff write-off and re-raise written-off tax debts: Practice Statement Law Administration 2011/17 Debt relief, waiver and write-off (online, as amended on 14 February 2019); Commonwealth Ombudsman, Australian Taxation Office Re-Raising Written-Off Tax Debts (Report No. 4 of 2009, March 2009).
As I understand the directors' argument so far as Ausgrid is concerned, the directors say that Ausgrid has been dissolved and its debts have thereby been totally extinguished: Sir William Blackstone, Commentaries on the Laws of England (1753) (Oxford University Press, 2016) at Book 1, Chapter 18, Part IV (at 472-3 of the 1765 ed.). This submission arises from the following event. On 1 December 2016, as part of the NSW Government's sale of its electricity assets, the Treasurer made an order under clause 6(1) of Schedule 7 of the Electricity Network Assets (Authorised Transactions) Act 2015 (NSW), that the electricity network state owned corporation (SOC) known as Ausgrid be converted into a corporation constituted as a Ministerial Holding Corporation with the name Alpha Distribution Ministerial Holding Corporation: NSW Government Gazette No 103 of 1 December 2016, page 3367.
[8]
Insolvent trading
The liquidator is entitled to recover from the directors, as a debt due to the company, an amount equal to the loss or damage occasioned by insolvent trading: section 588M(1), (2). In this case, this depends upon whether the directors have contravened section 588G, which relevantly provides:
(1) This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as he case may be …
(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a) the person is aware at that time that there are such grounds for so suspecting; or
(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.
Whilst earlier authorities suggested that an obligation to pay a tax was not "incurred" by the taxpayer, more recent authorities indicate that taxes are debts incurred by the taxpayer for the purposes of this section: Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123; affirmed Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; [2004] VSCA 54.
Christopher and Andrew were directors during different timeframes. In Christopher's case, he was a director when the company first fell behind with its tax payments and incurred the debt to Ausgrid. In Andrew's case, he was a director when the company's debt to the ATO and Ausgrid increased due to penalties, interest and costs orders. The requirement of section 588G(1)(a) is met. The next question is whether the company was insolvent when the debts were incurred.
[9]
Presumption of Insolvency
The liquidator relies upon the presumption of insolvency arising under section 588E(4), which provides:
… if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
Section 286 sets out a company's obligation to keep financial records:
(1) A company … must keep written financial records that:
(a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited. …
(2) The financial records must be retained for 7 years after the transactions covered by the records are completed.
"Financial records" includes (section 9):
(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.
The purpose of these provisions was explained by Siopis J in Trinick (as liquidator of Forfione Family Group Pty Ltd (ACN 009 363 464)(in liq) v Forgione (2015) 106 ACSR 600; [2015] FCA 642 at [209]:
… to assist a liquidator in bringing recovery actions (including recovery actions against former directors for insolvent trading) when it is necessary to prove insolvency and the company's financial records are not available.
As Black J observed in In the matter of Swan Services Pty Limited (in Liquidation) [2016] NSWSC 1724 at [127]:
In order to establish the presumption of insolvency for a particular period, the position must be separately and distinctly proved for that period; and it must be proved either that no documents within the description of "financial records" were kept in that period or that the documents which were kept were "deficient as to content", because they did not correctly record and explain the company's transactions and financial position and performance (for example, because they did not accurately record the matters purportedly recorded) or would not enable true and fair financial reports to be prepared and audited: Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611; Re SSET Constructions Pty Ltd (in liq) - Sims v Khattar [2010] NSWSC 102; Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512 at [24].
[10]
Privilege against self-incrimination and section 530A
The directors did not seek to rely on section 588E(6), which provides that the presumption does not arise where the financial records have been destroyed, concealed or removed by someone else. Rather, Andrew submitted that the company has the financial records in a storage unit in Cooma but chose not to provide them to the liquidator by reason of the privilege against self-incrimination and his inalienable common law rights, relying upon Deane J's exposition on the privilege against self-incrimination in Refrigerated Express Lines (Australasia) Pty Limited v Australian Meat and Live-Stock Corporation (1979) 42 FLR 204 at 206-208; (1979) ATPR 40-137, followed in Re New World Alliance Pty Limited (receiver and manager appointed) (1993) 47 FCR 90; (1993) 12 ACSR 299 at ACSR 303-304 per Sheppard J.
Perhaps inconsistently, the directors submitted that they did not produce the books and records to the liquidator because the liquidator did not offer to pay their expenses of doing so, but nor did they ask the liquidator to pay their expenses. Nor did Andrew seek to invoke the privilege in his dealings with the liquidator. Andrew's one and only response to the liquidator's repeated requests for documents made no reference to the privilege.
Further, I note that provisions in the Bankruptcy Act 1966 (Cth) similar to section 530A of the Corporations Act were considered by the Full Court of the Federal Court of Australia to abrogate the privilege against self-incrimination: Griffin v Pantzer (as trustee of the bankrupt estate of Griffin) (2004) 137 FCR 209; [2004] FCAFC 113, per Allsop J (with whom Ryan and Heerey JJ agreed) at [175]-[177]. In particular, at [177]:
Giving the fullest recognition to the strength of the expressions of view by the High Court as to the fundamental and deeply rooted nature of the privilege, it appears to me to be plain and unmistakable that the obligation to hand over books and records provided for by s 77(1)(a) is fundamental to the trustee carrying out his or her necessary task in the interests of the creditors, the public and indeed the bankrupt himself or herself, and that the administration of bankruptcy would be frustrated in a case such as the present if books and records could be held back by the bankrupt because of the claim of privilege. This compels me to the conclusion that the privilege has been abrogated in respect of the obligation in s 77(1)(a).
[11]
Privilege against self-incrimination and section 588E(4)
It was not clear whether the directors sought to invoke a privilege against self-incrimination in the hearing before me, but I will assume that it was invoked by Andrew's submission in the following terms:
That's not to say that I know there are incriminating things within the documents but it's just that I would suspect there could well be.
Perhaps inconsistently with invoking such a privilege, the directors did tender four records being:
(a) an email dated 7 September 2004 from a former director giving instructions for the incorporation of the company;
(b) a letter from the company's accountant dated 25 May 2009 enclosing a Business Activity Statement for the period ended 31 March 2009 and a payment slip for $8,520, together with a cashflow statement from July 2008 to March 2009;
(c) a deposit slip dated 18 July 2013 recording payment of an Ausgrid invoice in the amount of $12,210; and
(d) an extract from a pay book recording payment of wages to a labourer from July 2013 to February 2014.
These records were, in part, irrelevant, as they predated the asserted period of insolvency but, to the extent relevant, suggest that some records survive, but very few.
The privilege against self-incrimination has not been considered in the context of section 286 or section 588E. I am reluctant to enter into any detailed consideration of the availability of the privilege in the absence of useful submissions from the parties, and will simply assume that the privilege against self-incrimination is available and has been invoked. But whilst the directors may thereby refrain from tendering "financial records", this does not have the result of positively proving that the company in fact maintained financial records which met the description in section 9 and the company's obligations in section 286. The Court is simply left to decide the question on the evidence which is before it. The liquidator has adduced evidence in support of the conclusion for which he contends. As I understand the directors' position, they have refrained from adducing evidence that the company maintained such records because those records may incriminate them.
The liquidator submitted that the Court should infer that the financial records do not exist as it was within the power of the directors to produce them and that such documents would not have assisted them: Blatch v Archer (1774) 1 Cowp 63 at 65; (1774) 98 ER 969 at 970; Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [16]-[17] per Hodgson JA (Beazley JA agreeing); Jones v Dunkel (1959) 101 CLR 298. However, where a party relies upon a privilege against self-incrimination, it is not appropriate to draw an adverse inference as a consequence of invoking the privilege. As Spender J explained in Dolan v Australian and Overseas Telecommunications Corporation (1993) 42 FCR 206 at 215-6; (1993) 114 ALR 231 at 241-2:
In my opinion, since the privilege is able to be relied on if the answer might tend to incriminate, it is impermissible to draw any adverse inference, because the drawing of an adverse inference necessarily assumes that the answer would incriminate. …
[If] a person could legitimately ask "why claim the privilege, if there is nothing to hide?" … [a] refusal to answer, based on privilege, would for all evidentiary purposes be the equal to an unqualified admission of the truth of the question.
But if there is other evidence from which the court may draw an inference, the court may be able to draw that inference on the balance of probabilities in the absence of contrary evidence from the person claiming the privilege; what the court cannot do is gain extra assistance in drawing that inference from Jones v Dunkel: Standard Chartered Bank of Australia Ltd v Antico (1993) 36 NSWLR 87 at 94 per Hodgson J.
[12]
Actual Insolvency
Whilst the liquidator relies upon the presumption of insolvency, the liquidator submits in the alternative, that the company was clearly insolvent from about November 2009. The company's indebtedness to the ATO began in November 2009 when the company lodged a BAS statement declaring that it owed some $44,000 but did not pay that amount. Rather, from April 2010, the company made a series of small payments towards its tax obligations. Thereafter, the company continued to lodge BAS statements but, generally, to make only small payments towards the self-declared amounts. The liquidator says this indicates that the company was insolvent by November 2009 as it was unable to pay its debts as and when they fell due.
The liquidator submitted that several of the indicia of insolvency described by Mandie J in Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123 at [386] were demonstrated in this case being continuing losses, overdue taxes, creditors unpaid outside trading terms, payments to creditors of rounded amounts not reconcilable to specific invoices, and the inability to produce timely and accurate financial information to indicate trading performance and financial position and to make reliable forecasts. Amongst other things, the liquidator pointed to the company's inability to pay its tax debts when due over a prolonged period, and the company's communications with the ATO advising that the company had not been able to afford to pay a tax agent.
The directors denied that the company was insolvent. Christopher said the company could have paid the entire balance of the ATO running account by borrowing funds from himself and his wife. However, I note that the company continued to owe monies to the ATO from November 2009 for the next seven years until the company went into liquidation without obtaining such a loan.
The directors contended that the company had assets from 2009 on in the form of accumulated tax losses. But accumulated tax losses are simply a potential tax deduction contingent upon the company making a profit. Accumulated tax losses are not an asset that can be sold by the company to pay its debts as and when they fall due. Indeed, the Income Tax Assessment Act 1997 (Cth) contains very detailed provisions limiting the rights of a taxpayer to transfer accumulated losses to anyone else: Divisions 36, 165. From the point of view of assessing solvency, accumulated tax losses do not have the result of transforming the company's negative equity from 2009 on into net assets or, more relevantly, net liquid assets.
[13]
Directors' Knowledge
The next question is whether, when the debts were incurred, there were reasonable grounds for suspecting that the company was insolvent, or would so become insolvent by incurring the debt: section 588G(1)(c). In this regard, the liquidator relied upon Barrett J's exposition of the approach in Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583; [2005] NSWSC 831 at [249]-[250]:
249 The inquiry relevant to s 588G(1)(c) is not an inquiry concerning the particular director whose conduct is under scrutiny. It is an inquiry into the objectively formed state of mind of a person of ordinary competence. …
250 The central word in s 588G(1)(c) is 'suspecting'. The criterion is one of suspicion, which is something less developed and less well formulated than expectation. …
The observations of Goldberg J in McLellan, Re Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 also assist, at [144]:
The test prescribed by s 588G(1)(c) is an objective test: Powell v Fryer [2001]
SASC 59; (2001) 159 FLR 433, Hall v Poolman (above) at [231]. The concept of 'suspecting' or 'suspicion' involves having a state of mind which falls between having a firm belief or a significant degree of satisfaction that insolvency exists on the one hand and wondering whether it exists on the other. The concept of having a 'suspicion' requires an affirmative feeling: Hall v Poolman (above) at [231].
Having regard to the available financial information from July 2009 on, which I have already summarised, it seems to me that there were reasonable grounds for a director of ordinary competence to suspect that the company was insolvent.
The next question is whether the directors actually knew, or should have known, that there were such grounds: section 588G(2)(a) or (b). As to actual knowledge, Christopher and Andrew both deny suspecting insolvency at the relevant times. Christopher said that he did not suspect insolvency at all "because the information I had been given during my life as a director indicated otherwise". I do not accept this evidence. The information available to Christopher from 2009 to 2013 pointed strongly to insolvency. I reject his evidence that he had "no idea". Nor do I accept his evidence that he and his wife could, at any time, have lent money to the company to pay its tax debts. If that were so, it is odd that such a loan was not obtained from 2009 until a liquidator was appointed in 2016.
[14]
Defences
The directors rely on the defence in 588H(2) of the Corporations Act, being:
It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
It was submitted that Christopher reasonably believed that the company would make a profit from the scrap metal materials purchased from Ausgrid. No submission was made in respect of the debts incurred to the ATO, nor the increase in the debt owed to Ausgrid and the ATO whilst Andrew was a director.
Given the prolonged period of insolvency leading up to the Ausgrid invoices, I am not prepared to accept that Christopher had reasonable grounds to expect, or did expect, that the company was solvent when it bought scrap metal from Ausgrid. Further, the Ausgrid invoices required payment within about three weeks of issue. Whilst Christopher may have hoped that purchasing the scrap metal from Ausgrid would have produced profits for the company, there is no evidence that the company expected to earn such profits before the invoices were due for payment, nor that the company had other means of paying the invoices, for example, sufficient funds in its bank account. The defence has not been established.
Further, the directors say that they ought fairly be excused for any insolvent trading under section 1317S(2), which provides that the Court may relieve a person, either wholly or partly, from liability for insolvent trading if in the proceedings it appears to the Court that the person has acted honestly, and having regard to all the circumstances of the case the person ought fairly to be excused: Smith (in his capacity as liquidator of ACN 002 864 002 Pty Ltd (in liq) (formerly known as Petrolink Pty Ltd)) v Boné (2015) 104 ACSR 528; [2015] FCA 319 at [393]ff per Gleeson J; Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [785]ff per Edelman J. For the reasons I have already given, I am not satisfied either that the directors acted honestly or that they ought fairly be excused having regard to all the circumstances of the case.
[15]
Compensation
For these reasons, it is appropriate to order the directors to compensate the company for loss resulting from insolvent trading. What should the amount of compensation be? As Barrett J explained in Edenden v Bignell [2007] NSWSC 1122 at [30], the creditor's debt is distinct from the loss and damage suffered in relation to the debt because of the company's insolvency. In some cases, the loss and damage will be the same as the debt but it may be less, for example, where the creditor has received a distribution from the liquidator, or may even exceed the debt. As Brereton J put it in In the matter of Salfa Pty Limited (in liquidation) [2014] NSWSC 1493 at [21]-[24], the original amount of the debt will be the starting point but is not necessarily the amount of the loss or damage. See likewise In the Matter of Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724 at [216] per Black J.
As to what the amount of compensation should be, in Christopher's case, the liquidator submitted that it comprised two elements:
1. The tax debt arising from the business activity statements lodged for the quarter ended 30 June 2009 to the quarter ended 31 December 2013, which debt Christopher failed to prevent by placing the company into administration or ceasing to trade at an earlier stage. Taking into account payments made towards the tax debt, as well as accumulated interest, the loss and damage was $26,647.80.
2. The Ausgrid debt arising from the 5 invoices, which debt Christopher failed to prevent the company from incurring by not agreeing to purchase the scrap material that gave rise to the debt. The total of the Ausgrid invoices, plus interest and the costs of the Local Court proceedings, as at the date of hearing, was $109,019.06.
In Andrew's case, the liquidators submitted that the amount of compensation was:
1. The continued accumulation of interest on the tax debt, which debt Andrew failed to prevent by not placing the company into administration or ceasing to trade at an earlier stage, being $3,564.71.
2. The costs of the Local Court proceedings brought by Ausgrid, which he failed to prevent by placing the company into administration or ceasing to trade at an earlier stage or by consenting to judgment. Ausgrid has suffered loss and damage as a consequence, being the legal costs of the Local Court proceedings plus interest, which totals $30,100.06.
[16]
Orders
For these reasons, the Court makes the following orders:
1. Order pursuant to section 588M(2) of the Corporations Act 2001 (Cth) that the first respondent, Andrew Thaler, pay to the company $13,242 together with interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW) from 27 June 2016 to date in the amount of $2,135.
2. Order pursuant to section 588M(2) of the Corporations Act 2001 (Cth) that the second respondent, Christopher Thaler, pay to the company $103,709 together with interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW) from 3 January 2015 to date in the amount of $25,192.
3. Order the first and second respondents to pay the applicant's costs of the Interlocutory Process filed on 10 October 2018.
[17]
Amendments
24 May 2019 - [38] - amendment to citation date
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Decision last updated: 24 May 2019
The company did not comply with these orders and, on 27 June 2016, Black J lifted the stay and ordered that the company be wound up. In his Honour's reasons, Black J noted:
Although the company's director appeared, on a previous occasion before Brereton J, he has not subsequently taken steps to comply with the steps necessary to obtain leave to represent the company in the proceedings, or with the directions made by Brereton J for the filing of evidence, and has not appeared today, and there was no appearance for the company when the matter was called.
On 28 June 2016, the liquidator wrote to Andrew requiring him, within 14 days, to complete a Report as to Affairs and:
Deliver to me all money or property in your hands to which the company is entitled and all books in your possession that relate to the company.
If you know where other books relating to the company are, tell me where they are.
The liquidator advised that section 530A(2)(a) and (b) of the Corporations Act 2001 (Cth) obliged Andrew to provide the information sought by the liquidator and, further, that Andrew was required to deliver up all books, documents, papers and writings in his custody or under his control belonging to the company. The liquidator received a terse reply from Andrew to the effect that an appeal would be lodged against the order appointing a liquidator. Andrew did not specifically respond to the liquidator's request for documents.
On 11 July 2016, the liquidator repeated his request for the company's books and records, directing Andrew to his obligations under section 530A(1) of the Corporations Act 2001 (Cth). There was no reply. Section 530A(1) provides:
As soon as practicable after the Court orders that a company be wound up … each officer of the company must:
(a) deliver to the liquidator … all books in the officer's possession that relate to the company, other than books possession of which the officer is entitled, as against the company and the liquidator …, to retain; and
(b) if the officer knows where other books relating to the company are - tell the liquidator … where those books are.
Failure to comply is an offence of strict liability unless the person has a reasonable excuse: section 530A(6), (6A) and (6B).
On 1 September 2016, the liquidator wrote to Andrew noting that he had failed to provide any books and records. The liquidator said that he considered that the company had not complied with its obligations under section 286, giving rise to a presumption of insolvency under section 588E(4). This had the result that the company was presumed to have been insolvent from 27 June 2009, being a period of seven years before the appointment of the liquidator in which books and records ought to have been kept, entitling the liquidator to recover loss or damage suffered by the company as a result of insolvent trading. The liquidator advised that he had received creditor claims of $112,634.96 and demanded payment of this sum from Andrew. The liquidator drew Andrew's attention to the defences in section 588H of the Act. The liquidator received no response.
On 10 October 2018, the liquidator filed an Interlocutory Process seeking orders for compensation in respect of insolvent trading. In support of the application, the liquidator deposed that, apart from the tax returns and financial statements obtained from the company's former accountant and 5 bank statements, the liquidator has obtained no books or records of the company. The liquidator has not identified any assets of the company. He has no records to indicate that the company ever held any assets from which the debts the subject of the proceedings could have been paid when due. The liquidator is without funds in the liquidation.
On 9 December 2016, Ausgrid sent a letter to the company advising that the New South Wales Government had entered into a lease transaction with a consortium of investors who would now operate Ausgrid by a partnership between the members of the consortium. The partnership would operate under a new Australian Business Number. Further:
All rights and obligations associated with contracts with Ausgrid prior to this transaction have been transferred to Ausgrid Operator Partnership. This means that our current contracts with you will continue with the Ausgrid Operator Partnership unchanged, other than the entity and the ABN details.
It may be that, had he read more widely, Andrew would not have made the submission that Blackstone states the law as it exists today. As Sir William explains at the beginning of Chapter 18 (at 457-8):
THE first division of corporations is into aggregate and sole. Corporations aggregate consist of many persons united together into one society, and are kept up by a perpetual succession of members, so as to continue for ever: of which kind are the mayor and commonalty of a city, the head and fellows of a college, the dean and chapter of a cathedral church. Corporations sole consist of one person only and his successors, in some particular station, who are incorporated by law, in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had. In this sense the king is a sole corporation: so is a bishop: so are some deans, and prebendaries, distinct from their several chapters: and so is every parson and vicar.
ANOTHER division of corporations, either sole or aggregate, is into ecclesiastical and lay. Ecclesiastical corporations are where the members that compose it are entirely spiritual persons; such as bishops; certain deans, and prebendaries; all archdeacons, parsons, and vicars; which are sole corporations: deans and chapters at present, and formerly prior and convent, abbot and monks, and the like, bodies aggregate. These are erected for the furtherance of religion, and the perpetuating the rights of the church.
Needless to say, the law of corporations has evolved significantly from 1753 to the enacting of the Corporations Act 2001.
In any case, it is sufficient to note that statute overrides the common law. Section 6(2) of the Electricity Network Assets (Authorised Transactions) Act provides:
The Ministerial Holding Corporation so constituted is taken for all purposes, including the rules of private international law, to be a continuation of, and the same legal entity as, the electricity network SOC concerned and a reference in this Act to the electricity network SOC includes a reference to the Ministerial Holding Corporation.
That is, the Electricity Network Assets (Authorised Transactions) Act provides that, notwithstanding the changes made in respect of Ausgrid, its new persona is, for all purposes, to be a continuation of, and the same legal entity as, Ausgrid. As much was confirmed by Ausgrid's letter to the company. As such, the company's debt to Ausgrid was not extinguished.
Therefore, it seems to me that the requirements of section 588M(1)(b) are satisfied in respect of the both the loss and damage suffered by the ATO and Ausgrid.
The fact that the company's accountant was able to prepare tax returns and financial statements for the financial years ended 30 June 2009 to 30 June 2013 suggests that, for those years, the company kept financial records in accordance with section 286(1). Whilst the financial statements were not audited, section 286(1)(b) only requires a company to keep financial records that "would enable" financial statements to be audited, not that the financial statements be in fact audited. However, the obligation to keep financial records under section 286 is twofold: firstly, to keep records which record the company's transactions and financial performance sufficient to enable financial statements to be prepared; and, secondly, to retain those records for seven years. The records which must be retained are not simply the financial statements that were prepared from the financial records, but the underlying financial records from which the financial statements were prepared.
Although the directors both said that they complied with section 286, the evidence before me suggests that the company did not. The accountant did not hold any such records. Andrew did not provide any records to the liquidator despite repeated requests.
Although it is not necessary to decide it in this case, it is likely that the directors' privilege against self-incrimination has been abrogated by section 530A of the Corporations Act for the reasons stated by Allsop J.
In this case, the evidence before me indicates that:
1. The company's accountant does not have any records beyond the tax returns and financial statements for the financial years ended 30 June 2009 to 30 June 2013.
2. The company failed to lodge tax returns after the financial year ended 30 June 2013 or BAS statements after the quarter ending 31 December 2013.
3. The directors have tendered a very small number of records, which indicates that some documents exist but very few.
4. Andrew did not respond to the liquidator's repeated demands for the production of the books and records, nor did he claim the privilege against self-incrimination at the time of those requests.
5. The directors both said they had complied with section 286 but, having heard Christopher give evidence and Andrew make submissions, I am not prepared to accept their evidence in the absence of corroboration by an unrelated witness or contemporaneous documents.
On the evidence before me, I find that the company complied with its obligation to keep financial records under section 286(1) until the financial year ended 30 June 2013 but did not comply with this obligation thereafter. The company failed to comply with its obligation under section 286(2) for the entire period in question. Section 588E(4) makes clear that the presumption of insolvency arises where the company has failed in either its obligation to keep records under section 286(1) or section 286(2) and, in circumstances where the company has partially complied with the first obligation but entirely failed to comply with the second obligation, it seems to me that the presumption of insolvency arises for the seven year period for which records ought to have still been in the company's possession when it went into liquidation, that is, from 27 June 2009.
Importantly, section 588E(9) makes clear: (emphasis added)
A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the proceeding concerned.
The directors, for whatever reason, have not attempted to adduce evidence tending to prove the contrary.
The directors submitted that, notwithstanding the balance sheets, the company had assets that were not necessarily recorded. Beyond this assertion, there was no evidence before me that this was so and I do not accept this submission.
Even if the presumption of insolvency did not arise, it is apparent from the evidence which I have already set out that the company became insolvent by November 2009. Having sustained losses in the year ended 30 June 2009 and with a deficiency of assets over liabilities, the company fell behind in its payment obligations to the ATO in November 2009 and never managed to 'catch up'. The company incurred losses in 2010, made a tiny profit in 2011 and made losses in 2012 and 2013 before ceasing to trade in August 2013 due to problems with being paid by its customers.
By the time the company decided to purchase scrap metal from Ausgrid, the company had been insolvent for a considerable amount of time, likely some four years. The director of the company at the time, Christopher, cannot reasonably have thought that the company would have been able to pay Ausgrid's invoices given such a prolonged period of insolvency.
In any event, I need only be satisfied that the directors were either aware that there were grounds for suspecting insolvency, or that a reasonable person in their position would be so aware. I am comfortably satisfied that a reasonable director would have kept appraised of the company's bank account balances, its payment of its tax obligations and its financial position as recorded in its financial statements. Reviewing these basic sources of information, a director would have been left in no doubt that the company was insolvent from November 2009 on.
The liquidator's approach would have the effect that the whole amount of interest and costs incurred after Christopher ceased to be a director would be an amount for which both Christopher and Andrew would be liable. This would have the result that the liquidator may be over-compensated for the loss and damage, and is, I think, contrary to principle.
Where the company has a series of directors during a period of insolvent trading, how should the Court determine the amount of compensation to be paid by each? Christopher should pay compensation for the debts which the company incurred during his directorship as those debts stood at the end of his directorship. As to increases in the ATO and Ausgrid debts after Christopher was replaced by Andrew, two approaches present themselves:
1. Andrew should pay compensation for any increase in the ATO and Ausgrid debts indebtedness during his directorship; or
2. Christopher and Andrew should be jointly liable to pay compensation for any such increase.
What favours the former approach is that only a director "at the time when the company incurs a debt" may be liable to pay compensation for insolvent trading: section 588G(1)(a). A director contravenes their duty to prevent insolvent trading by failing to prevent the company from incurring the debt: section 588G(2). What could Christopher have done, after he ceased to be a director, to prevent the ATO and Ausgrid debts further increasing? Any failure was no longer his.
What favours the latter approach is that, the company having incurred the ATO and Ausgrid debts whilst the company was insolvent under Christopher's directorship, the 'die was cast'. It was inevitable that those debts could not be paid when due and would increase until the company ultimately went into liquidation. Further accretions to the debts were a direct result of Christopher's contravention of his duty to prevent insolvent trading. Andrew's subsequent contravention of his duty to prevent insolvent trading contributed to the loss and damage as he took no action to stop the debts increasing further. The situation is akin to successive independent tortfeasors. Where the interaction of several, independent, wrongful acts produces a single indivisible result, each is answerable for all the damage, though the plaintiff is of course not entitled to more than his or her loss. But where each of several defendants causes only part of the total damage and it is practically feasible to split up the aggregate of the loss and attribute identifiable parts to each of them, liability will ordinarily be confined to the portion for which is separately responsible: Fleming's The Law of Torts (10th ed., Lawbook Co., 2011) at [9- 50].
Although the precise question before me does not appear to have received judicial consideration, it seems to me that the former approach is to be preferred, for three reasons. First, it is consistent with the language of section 588G, which is directed to those who are directors "at the time when the company incurs a debt". When a debt is incurred depends on the nature of the transaction. For example, a company incurs a debt when it enters into a lease and not when periodic payments of rent are due under the lease. But a company only incurs a debt for interest on unpaid rent when the failure to pay rent gives rise to the liability for interest: it is the company's failure to pay rent, rather than entry into the lease, which, as a matter of substance and commercial reality, renders the company liable to pay interest and the company incurs the debt for interest from day to day as it continues its default: Standard Chartered Bank of Australia Ltd v Antico (No 1) (1995) 38 NSWLR 290 at 315; (1995) 18 ACSR 1 at 57-8; Bans Pty Ltd v Ling (1995) 16 ACSR 404. In this case, interest was incurred, from day to day, on debts owing by the company to the ATO and Ausgrid throughout the period of Christopher and Andrew's directorships.
Second, it is consistent with the social purpose sought to be achieved by these provisions was explained by Barrett J in Woodgate v David (2002) 55 NSWLR 222; [2002] NSWSC 616 at [36]:
Section 588G and related provisions serve an important social purpose. They are intended to engender in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company's debt burden. The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability at a time when the prospect of that principle resulting in loss to creditors has become real.
An incoming director must familiarise themselves immediately with the company for which they are now responsible and, if they discover that the company is trading whilst insolvent, must act promptly to wind up the company. Sharing the liability for any increase of debts incurred by former directors detracts from this purpose.
Third, under statutory compensation schemes, someone who is liable under the scheme is liable for the whole loss in the absence of a statutory power of apportionment, although they may subsequently be entitled to seek equitable contribution: In the matter of Solar Shop Australia Pty Ltd [2017] FCA 1219 at [52] per Besanko J in respect of section 1317H of the Corporations Act; I&L Securities Pty Ltd v HWT Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; [2002] HCA 41 in respect of section 82 of the Trade Practices Act 1974 (Cth). Whilst there are some proportionate liability provisions in the Corporations Act - Division 2A of Part 7.10 for misleading and deceptive conduct in relation to a financial service or product - there are no similar provisions in respect of compensation for insolvent trading. As Middleton J explained in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; [2007] FCA 1216 at [33]:
The purpose of the Commonwealth legislation is to impose a specific and comprehensive regime imposing liability according to its terms, and to give an entitlement to an applicant to recover the whole amount of which it is established under such enactments the applicant is entitled to recover.
Accordingly, in respect of the ATO debt, from 1 July 2009 to when Christopher ceased to be a director, the balance of the running account increased from nil to $23,083.09. Thereafter, it continued to increase under Andrew's directorship by a further $3,564.71.
In respect of the Ausgrid debt, the whole of the principal debt was incurred when Christopher was a director, in the amount of $78,463. Ausgrid did not, in its invoices, impose interest charges. Ausgrid was, however, entitled to pre-judgment interest. This interest crystallised when judgment was given on 11 November 2015 but represented the failure to pay for the whole period since the invoices were rendered. Relying on the calculations made in the Statement of Claim in the Local Court proceedings, the portion of the pre-judgment interest awarded on 11 November 2015 which had accrued by 2 January 2015 was $2,162.71. Thereafter, interest continued to increase under Andrew's directorship, both pre-judgment and post-judgment, and costs were awarded to Ausgrid.
The liquidator submitted that post-judgment interest should continue to be calculated on the Local Court judgment to the present. However, consistent with my approach to assessing the amount of compensation based on the directors' respective periods of directorship, I consider it more appropriate to truncate this interest calculation at the date of liquidation when the continuing accretion of interest debts could not be halted by Andrew. As Bryson J explained in Bans Pty Ltd v Ling at 419:
On a whole view of [the equivalent former provision of the Companies (New South Wales) Code] and the apparent purposes of the section I am of opinion that a director does not become liable under the section for a debt incurred by the company after the company has been placed in liquidation …
In my opinion the directors are liable under [the section] in respect of interest up to the date when the company went into liquidation, but they are not liable for interest on rent thereafter.
Adopting this approach, the total pre- and post-judgment interest and costs incurred with respect to the Ausgrid debt under Andrew's directorship is $9,677.30.
Interest should be added to these amounts in accordance with section 100 of the Civil Procedure Act 2005 (NSW). For ease of calculation, interest should run from when each ceased to be a director of the company. It was then that the directors' contravening conduct ceased and the loss and damage suffered by reason of their contraventions can be tallied.