Duke Group v Pilmer

Judgment (ex tempore)

1. HIS HONOUR: The first plaintiff Anthony Richard Lewis and a company which he owns and controls, the second plaintiff Dawn Grange Pty Ltd, applied by originating process filed on 23 November 2016 pursuant to Corporations Act (Cth), s 1321, for the reversal of decisions of the defendant liquidators to reject four proofs of debt and instead to have those proofs admitted.
2. The first is a proof of debt by Mr Lewis against Fixed Interest Pty Limited for $37,000. The second is a proof of debt by Dawn Grange against Fixed Interest for $1,014,267. The third is a proof of debt by Mr Lewis against Lewis Securities Limited for $179,301; and the fourth is a proof of debt by Mr Lewis against LSL Holdings Pty Ltd for $87,479.
3. The first, second and fourth proofs of debt relate to amounts said to be owed on loan account by the relevant company to the relevant plaintiff. The third proof of debt contains two components: one is an amount said to be owed on loan account of $32,218, and the balance of approximately $150,000 is an amount said to be due to Mr Lewis by way of his entitlements upon termination of employment to pay in lieu of notice, annual leave and long service leave.
4. The companies in question - Fixed Interest Pty Ltd, Lewis Securities Limited and LSL Holdings Pty Ltd - went into voluntary administration on 29 October 2008, and liquidation on 6 February 2009. Messrs Arnautovic and Sibil are the joint liquidators of Lewis Securities and LSL Holdings. Mr Arnautovic is also the sole liquidator of Fixed Interest and two other related companies, Bimow Pty Ltd and Interest Investments Pty Ltd, which five companies together comprised the Lewis Group.
5. Prior to going into administration and liquidation, the Lewis Group operated a business of dealing in securities, specialising in retail fixed interest securities. In the course of their business they received deposits from investors and paid interest to investors. Lewis Securities operated a single bank account with the ANZ Bank, which was used also for the transactions of Fixed Interest and LSL Holdings. To keep account of the transactions of each of the companies with individual clients, ledger accounts were maintained for each client account. All transactions were first recorded in a general ledger, called the Futcash ledger, which was reconciled daily with bank statements. Transactions were then entered into the MYOB system used for generating accounting reports. Concurrently, entries were made in the individual client ledgers showing the movements on the individual client's account.
6. As a licensed financial services provider, Lewis Securities was required to have its accounts audited, although the other companies were not in that position.
7. Prior to the administration and winding up, Mr Lewis was the major shareholder in Lewis Securities and its Managing Director. He was also the sole director of LSL Holdings, Fixed Interest, Interest Investments and Bimow. Subsequent to the winding-up, he became a bankrupt. Proofs of debt were originally lodged by his trustee in bankruptcy on 21 May 2010. Following his discharge from bankruptcy, the trustee in bankruptcy assigned the proofs to Mr Lewis, who may have relodged them. Ultimately, they were rejected by the liquidators - except as to one, in a small respect, which I shall mention in due course - on 10 November 2016.
8. On an application to the Court to review a liquidator's decision to admit or reject a proof of debt, the Court's function is to determine the appeal and to confirm, reverse or modify the liquidator's decision. The fundamental issue is whether the liability claimed in the proof of debt was a true liability of the company at the date of commencement of the winding-up and enforceable against it at that date.
9. It is well established that on an appeal of this kind from a liquidator's decision, the proceeding is treated as a hearing de novo. It is not necessary to show error in the House v The King or appellate sense in the liquidator's decision. The plaintiff/appellant bears the burden of proving that the debt or liability exists, but not of otherwise showing that there was any particular identifiable error in the liquidator's decision. The authorities on which that summary of the principles is based include Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332; Frontier Touring Company Pty Ltd v Rodgers [2005] NSWSC 608; and Re JAY-O-BEES Pty Ltd (2004) 50 ACSR 565.
10. In pre‑trial written submissions, the defendants raised for the first time a defence founded on the Statute of Limitations. They argued that the causes of action in respect of each of the alleged loan claims arose not later than 2008, and that these proceedings were instituted only on 23 November 2016, more than six years after the cause of action so accrued.
11. That argument is, in my opinion, and with respect, misconceived. First, this is not a proceeding to recover or enforce the debt the subject of the alleged loans, but an appeal from the liquidator's rejection of a proof of debt. Under Corporations Act, s 553, in every winding up all debts payable by and all claims against the company, being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company. Under s 554 the amount of a debt or claim of a company is to be computed for the purposes of the winding-up as at the relevant date. The relevant date is defined as the date on which the winding-up began (or is deemed to have begun). While that is ordinarily now, in the case of a compulsory winding up, the date on which the winding-up order is made (as distinct from the position before the Corporate Law Reform Act, prior to which it was the date of filing of the winding-up summons), nonetheless, where the liquidation has been immediately preceded by a voluntary administration, it is deemed to have commenced on the "section 513C" day, which is the date on which the administration began. Accordingly, the liquidation here is taken to have commenced on 29 October 2008, when the companies went into administration.
12. In dealing with proofs of debt, the liquidator's function is, therefore, to decide what debts were enforceable against the company as at that date. Debts which had become statute-barred before the commencement of the winding-up are not provable: see Re Fleetwood and District Electric Light Syndicate [1915] 1 Ch 486; Re Art Reproduction Company [1952] Ch 89; Re Northern Ontario Down Company 1954 1 DLR 627; and Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 in which, in summarising the principles, Brennan and Dawson JJ said: The principles which determine enforceability of the liability to which a proof of debt relates are in the main the same as the principles which would be applied in an action brought directly against the company to enforce that liability. Those principles include the law relating to the barring of actions by time; see, for example, Motor Terms Company Pty Ltd v Liberty Insurance Limited (1967) 116 CLR 177.
13. However, debts which are enforceable against the company as at the relevant date must be admitted, and it matters not that they later become statute-barred before the proof is adjudicated or before any appeal from its rejection is commenced. This principle, which was established in 1872, has, so far as I am aware and have been able to establish, never been doubted. In Re General Rolling Stock Company (1872) 7 Ch App Cas 646, a company had been ordered to be wound up in February 1865. The proofs were determined and adjudicated in December 1870, and a dividend was paid in January 1871. In March 1871, the holder of bills of exchange, which had been accepted by the company and had become payable in February 1865, gave for the first time notice of his claim, and applied for leave to prove without disturbing previous dividends. The Master rejected the proof on the ground that the debt was barred by the Statute of Limitations, but on appeal the Court of Appeal in Chancery held that the assets of a company that go into liquidation are subject to the payment of all liabilities of the company subsisting at the date of the winding-up order, and that from that time the Statute of Limitations does not run against a creditor, so that the claimants were entitled to prove, albeit without disturbing the previous dividends.
14. The authority of that decision was plainly accepted by the High Court of Australia in Motor Terms Company Pty Ltd v Liberty Insurance Limited (1966) 116 CLR 177, and the effect of those decisions was summarised, in his Honour's usual concise way, by McLelland J, as the later Chief Judge in Equity then was, in Solla v Scott [1982] 2 NSWLR 832 at 834D: For the purpose of proof in a winding up a Statute of Limitations ceases to run at the commencement of the winding-up: see Re General Rolling Stock Company and Motor Terms Company Pty Ltd v Liberty Insurance Limited.
15. As it seems to me, the statement that the Statute of Limitations ceases to run is no more than a convenient way of describing the effect of a winding up on the rights of a creditor, which is to convert the right to sue the company for its debt and enforce the debt against the company into a right to prove in the liquidation in respect of a debt that was enforceable at the commencement of the winding-up. An appeal from a liquidator's rejection of a proof of debt enforceable at the relevant date is not barred by the circumstance that after the relevant date the limitation period expires.
16. For those reasons, the limitation defence is rejected.
17. Turning then to the several proofs of debt, it is convenient first to deal with what was called claim 4 (referred to in prayers 7 and 8 of the originating process) which is Mr Lewis' claim against LSL Holdings for $87,479.
18. The ledger account in the name of Anthony R Lewis with LSL Holdings Pty Ltd in the tender bundle of ledgers at page 63 shows a balance of that account as at 29 October 2008 of $87,479.74. How that amount has accumulated over the period since the first transaction on the account on 23 June 2000 is apparent on that and the previous page of the ledger, which record the history of movements on the account over that eight year period. The annual financial statements of the company LSL Holdings have recorded the balance due to Mr Lewis on that loan account consistently each year from 2002 to 2008, and for each year the amount shown in the balance sheet as a liability to Mr Lewis accords precisely with the amount shown in the ledger for the last entry prior to 30 June of the relevant year.
19. The most recent balance sheet for LSL Holdings, which appears at court book volume 2 page 290, being the balance sheet as at 30 June 2008, shows as a liability, under the subheading "Loans Payable Related Parties, Lewis, Anthony Richard, $112,479.74". When one looks at the ledger account in the tender bundle of ledgers at page 63, the balance shown as due to Mr Lewis as at 31 July 2008 is the same figure of $112,479.74. It was reduced, by a transfer on 11 August of $25,000, to the amount of $87,479.74 now claimed. What appears to be an MYOB printout of the general ledger for LSL Holdings also shows the same balance of account number 2/2320 for Mr Lewis, as does the LSL Holdings general ledger detail for 1 July 2007 to 29 October 2008 at court book volume 7 page 2159.
20. Corporations Act, s 286(1) provides: 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.
21. Corporations Act, s 1305 provides by subs (1) that a book kept by a body corporate under a requirement of the Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.
22. It is established that annual financial statements and the ledgers that underlie them are relevantly financial records kept under a requirement of the Act, namely, s 286. This was established in respect of the predecessor provisions - s 267 of the then Companies Code - in Duke Group v Pilmer (1994) 15 ACSR 255 especially at 261 to 263; see also Van Reesema v Flavel (1992) 7 ACSR 225 at 229 and 230.
23. Quite apart from their status under Corporations Act, s 1305, the documents are plainly business records of the company, and evidence of the representations that they contain. No doubt has been raised as to the reliability of the ledgers and the balance sheets to which I have referred. Even without the provisions of s 1305(1), they would evidence the existence of the relevant debt. That position is fortified by the presumption raised by s 1305 (1); but there has been no serious suggestion that the ledgers are fabrications or contain false or incorrect entries. The process by which they were brought to account on a daily basis has been explained and, as it seems to me, it is telling that they correlate each year with the company's financial statements. I am comfortably satisfied on the evidence before this Court that LSL Holdings was indebted to Mr Lewis at the relevant date for $87,479, and the rejection of that proof of debt will be reversed.
24. It is next convenient to deal with the first part of the third claim, by Mr Lewis against Lewis Securities on loan account for $32,218. The ledger for Mr Lewis' loan account with Lewis Securities Limited, which is set out for the period from 2003 to 2008 over 16 pages in the tender bundle of ledgers, culminates for relevant purposes at page 60 with a balance due to Mr Lewis of $32,218.30 as at 29 October 2008. However, as I have said, the history can be traced over previous years as to how that balance has been reached. Relevantly for that purpose, it can be observed from the ledger account that as at 30 June 2008 the balance due to Mr Lewis was $10,676.
25. At court book 287 is the balance sheet for Lewis Securities Limited as at 30 June 2008, which contains amongst the liabilities, under the heading "Loans Related Persons/Corps", the entry "Lewis AR (Tony) $10,676.60". The MYOB general ledger detail for Lewis Securities Limited on Mr Lewis' account 2/3450 shows the closing balance as at 27 October 2008 again as $31,962.08, together with the preceding history. Again, it seems to me that there is no reason to doubt the accuracy of the ledgers and the balance sheet which corresponds with the ledgers. The rejection of that proof of debt will be reversed and the proof admitted.
26. I deal next with the second claim, by Dawn Grange against Fixed Interest for $1,014, 267. According to ledger accounts for Dawn Grange with Lewis Securities Limited, Dawn Grange had three accounts with Lewis Securities Limited (Dawn Grange, Dawn Grange No 2 and Dawn Grange No 3) and one with LSL Holdings Pty Ltd (in the name of Dawn Grange), each of which had operated, in the case of Dawn Grange Pty Ltd from 1992, in the case of the No 2 account from 1992, in the case of the No 3 account from 1998, and, in the case of the account with LSL Holdings, from 2001. The history of those accounts over the years from when they commenced until 2003 is set out in ledger accounts commencing at pages 27, 33, 40 and 43 of the tender bundle of ledgers.
27. By 26 June 2003, Dawn Grange was owed by Lewis Securities Limited on the Dawn Grange account $455,074.46, on the No 2 account $2,676.44, on the No 3 account $324,353.31, and by LSL Holdings $273,439.60. Those ledger accounts show each of them as having been reduced to zero on 26 June 2003, by an entry transferring the credit balance to Fixed Interest Pty Ltd, described as "Loan to Fixed Interest Pty Ltd". The ledger account of Dawn Grange with Fixed Interest Pty Ltd commences with four entries on 26 June 2003 for the corresponding amounts, producing a credit balance of $1,055,543.81. It then records the movements on that account over the subsequent five years to 28 October 2008 with a balance as at that date of $1,014,007.21 being the amount the subject of the claim.
28. When one examines the balance sheets for Fixed Interest for 2003, 2004, 2005, 2006, 2007 and 2008, each contains an entry reflecting as owing to Dawn Grange an amount that corresponds with the amount in that ledger. The last of them, at court book page 292, being the balance sheet as at 30 June 2008, records as a liability, under the heading "Loan Wholly Owned Subsidiary", the entry "Loan Dawn Grange Pty Ltd, $1,014,737.21".
29. That amount corresponds with the balance on the ledger account as at 23 April 2008 which was the last entry before 30 June 2008. Some minor movements since then have reduced it to the amount presently claimed.
30. It was submitted that Mr Lewis agreed that there was no loan agreement or other document, at least available to him, to evidence the underlying transactions, and that there were some dubious aspects to the origin of the loan - essentially because, in correspondence with the liquidator, he had attributed a decision to transfer the loan from Lewis Securities to LSL Holdings to then directors of the company when he was also a director, and that the transaction took place on the very day that he became a director. However, in the context that, as it seems to me, he acquired the company from the previous owner for an amount not very different from the amount of these loans, the transaction is an entirely understandable one to take place at the time that he would become a director.
31. It is evident that the liability has been recorded in LSL Holdings' books for many years before there was any contemplation of the financial difficulties that resulted in administration and liquidation. In my view, no sufficient reason to doubt the reliability of the company's records has been established. Those documents evidence the existence of the liability, and I am satisfied on the evidence before this Court that that liability did exist as at the relevant date. The rejection of the proof of debt in respect of it will be reversed and the proof will be admitted.
32. Next then is the first claim, by Mr Lewis against Fixed Interest for $37,000. The balance sheet of Fixed Interest as at 30 June 2008, Court Book 292, records as a liability, under the heading "Deposit At Call, related parties" the item "Loan Lewis AR, $37,000". Fixed Interest's ledger account with Lewis Securities at Tender Book of Ledgers p 10 contains an entry on 4 July 2007, "AR Lewis Deposit, $37,000". The effect of that deposit was to reduce Fixed Interest's indebtedness to Lewis Securities from $251,000 to $214,000. That reduction was then apparently used to fund the purchase by Fixed Interest of 2,000 shares in Ricker Group on 9 July, for $37,000 approximately.
33. Mr Lewis explained in his affidavit evidence that he had a line of credit with ANZ, from which on 4 July 2007 he drew down $200,000, which he allocated in four different ways. That is corroborated by an extract from the Futcash ledger, which shows on 4 July a total amount of $200,000 received from the ANZ Bank, of which $89,000 was attributed to "Lewis AR", $37,000 to Bimow, $37,000 to Fixed Interest, and $37,000 to Interest Investments.
34. The MYOB general ledger detail for Fixed Interest records, under "Loan account 2/4960, Loan Lewis AR", a credit on 4 July 2007 of $37,000 from ANZ Bank, and an ending balance of $37,000. Another MYOB document, entitled "Account Transactions Accrual", shows in respect of the same account, number 2/4960, a credit on 4 July 2007 from ANZ Bank in the name of AR Lewis, of $37,000.
35. It seems to me clear enough from those entries that what has happened is that Mr Lewis has advanced $37,000 to reduce Fixed Interest's indebtedness to Lewis Securities. Unless that was intended to be a gift to Fixed Interest -which appears unlikely in the extreme, given the way these companies operated on loan account - it must have been a loan, and that intention is entirely confirmed by the general ledger to which I have referred which describes it as a "loan".
36. I am comfortably satisfied on the balance of probabilities that Fixed Interest was indebted to Mr Lewis for $37,000 in that respect. The rejection of the proof of debt will be reversed and the proof will be admitted.
37. I turn finally to the second part of the third claim, which is Mr Lewis' claim for his employment benefits against Lewis Securities upon termination of his employment. Mr Lewis gave evidence, which was not disputed, that he commenced employment with Lewis Securities in November 1985, and remained there until his employment came to an end with the company going into liquidation in February 2009. That he was an employee drawing a salary is confirmed by his personal income tax returns for the period 2001 through 2009, and by group certificates which were issued to him by the company for 2006, 2007 and 2008. It is also clear enough that he remained an employee during the administration, and that he continued in employment during the period of administration.
38. Mr Lewis deposed that he had never taken long service leave. There is no evidence to the contrary, and on balance, I am prepared to accept what he says in that respect. He also deposes that he rarely took annual leave.
39. However, Mr Lewis was the controlling mind of his employer at all relevant times. He controlled when, how often and for how long he attended work, when he took a day off or when he took a few days off, or whether he left early or arrived late. It was for him to prove that there was an unaccrued balance of untaken annual leave at the date of termination of his employment. It was in his power to maintain annual leave records as required by law, but there is no evidence that any were maintained.
40. In my view, when an employee who is the controlling mind of the employer, being a closely held corporation, presents years down the track a claim for a large amount of accumulated annual leave which has not been taken and/or which is said not to have been taken, produces no employment or leave records to substantiate it, and yet claims to the prejudice of other creditors a large amount of accrued leave, the Court is entitled to expect the clearest and best proof of the existence of the unpaid balance. When the person making the claim is a person who has effectively had control over when he or she will or will not be present at the workplace or might take a day or days or weeks off, that will not be discharged simply by saying, "I rarely took four weeks' leave a year". A liquidator and the Court is entitled to much more than that. I am not prepared to accept that there was an outstanding balance of untaken annual leave as at the relevant date.
41. However, as I have said, long service leave is in a somewhat different category. Absence on long service leave is a far more defined event than the periodical taking of annual leave, and the uncontroverted evidence that Mr Lewis never took long service leave is acceptable.
42. Mr Lewis' proof of debt in respect of his employment claims appears to have been for a total amount of $150,230, which the liquidator regarded as being attributable to termination pay of $10,000, annual leave of $99,230, and long service leave of $45,999, based on an annual salary of $120,000. The liquidator rejected the claim for annual leave and long service leave, and so far as the termination pay was concerned, allowed one month's pay at $2,916.66. That amount was reached by treating the amount shown in his group certificate for 2008 of $35,516 as his annual salary, and dividing it by twelve to calculate one month's termination pay.
43. Corporations Act, s 558, provides that when a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee is entitled to payment under s 556 as if his or her services with the company had been terminated by the company on the relevant date. That means that the date for assessing and calculating Mr Lewis' employment entitlements is the s 513C date, being 29 October 2008.
44. It seems to me that he has established the claim, as at that date, for termination pay and long service leave.
45. It was not in dispute that the relevant multiplier for long service leave was 19.933 weeks for the period of his previous period of service up to that date.
46. There is evidence, in the form of a spread sheet apparently provided to Mr Lewis by the liquidator on 29 September 2009, that in 2008, prior to the company going into administration, he was being remunerated $4,050, per month gross. On that basis, his one month's termination pay ought to have been $4,050 rather than the $2,916 for which he was admitted by the liquidator. $4,050 per month equates, so far as I can tell, to $48,600 per annum or $936 per week. When the long service leave factor of 19.933 is applied to that, the long service leave entitlement is $18,657.
47. Accordingly, it seems to me that the liquidator's rejection of the proof in this respect should be reversed, and Mr Lewis should be admitted for $22,707. When added to the amount applicable to the first part of claim 3, the result is that he should be admitted in respect of claim 3 for a total of $54,925.
48. For those reasons, the Court orders that: 1. The first defendant's rejection of the first plaintiff's proof of debt with respect to Fixed Interest Pty Ltd in the amount of $37,000 is reversed, and the first plaintiff be admitted to proof in the amount of $37,000. 2. The first defendant's rejection of the second plaintiff's proof of debt with respect to Fixed Interest in the amount of $1,014,267.21 be reversed, and the second plaintiff be admitted to proof in the amount of $1,014,267.21. 3. The first and second defendant's rejection of the first plaintiff's proof of debt with respect to Lewis Securities Ltd in the amount of $179,301.64 be reversed, and the first plaintiff be admitted to proof in the amount of $54,925. 4. The defendants' rejection of the first plaintiff's proof of debt with respect to LSL Holdings Pty Ltd in the amount of $87,479 be reversed, and the first plaintiff be admitted to proof in the amount of $87,479. 5. The defendants pay the plaintiffs' costs.

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