Farnsworth (Liquidator), in the matter of Nat Logistics Australia Pty Ltd (In liquidation) [2024] FCA 676

INTRODUCTION 1 The plaintiff is Adam Farnsworth in his capacity as Liquidator of Nat Logistics Australia Pty Ltd ACN 634 590 195 (NATA) and Nat Logistics Qld Pty Ltd ACN 633 777 929 (NATQ). The Liquidator's appointment to NATA and NATQ was precipitated by the death of the sole director and shareholder of each of the companies, as a result of which NATA ceased its business activities. 2 By his originating process filed 10 May 2024, the Liquidator seeks a direction pursuant to s 90-15 of the Insolvency Practice Schedule (IPS) to the Corporations Act 2001 (Cth) (Act) that he is justified and is otherwise acting properly and reasonably in: (a) treating the sum of $477,303 (the Funds) held in the name of NATQ in its account with the National Australia Bank (NAB) (account no. ending in the number 988) (NATQ Liquidation Account) as the property of or otherwise beneficially owned by NATA; and (b) transferring the Funds from the NATQ Liquidation Account to the account in the name of NATA at the NAB (account no. ending in the number 140) (the NATA Liquidation Account). 3 The Liquidator has standing to bring this application: s 90-20(1)(d), IPS. 4 The Liquidator has identified Kit 5 Pty Ltd (the Landlord) and Shamiron Enterprises Pty Ltd as interested parties and is not aware of any other party who may be adversely affected by the orders sought. The Landlord and Shamiron have been notified of the application and have not sought to intervene or be heard in relation to the application. ASIC has also been notified of the application and similarly does not seek to be heard. 5 The Liquidator seeks a judicial direction to the effect that he is justified in transferring the Funds from the NATQ Liquidation Account to the NATA Liquidator Account in circumstances where the Liquidator has been unable to identify a legitimate commercial rationale for why the Funds were transferred when they were. Based on his investigations, the Liquidator deposes that the books and records of NATQ and NATA do not include information upon which the transfer of the Funds from NATA to NATQ may be explained or commercially justified. His inquiries of the companies' staff and external accountant have similarly yielded no explanation for the transfer. The Liquidator deposes to his conclusion that the transfer cannot be explained by normal commercial practice in circumstances where NATQ did not trade and appears to have only served one function, namely acting as the lessee of premises used in NATA's business in circumstances where rent on those premises was paid by NATA, from its bank account, and protected by a bank guarantee provided by NATA, and where there was no rent outstanding at the time of the director's death.

EVIDENCE 6 The Liquidator relies on: (a) his own affidavit sworn 10 May 2024 and Exhibit AF-1 to that affidavit; (b) an affidavit of Martin Rosenblatt, solicitor, affirmed 19 June 2024 and Exhibit MR-1 to that affidavit.

BACKGROUND 7 NATA was registered on 2 July 2019. It operated a warehousing and logistics business from leased premises including premises in Parkinson, Queensland. Relevantly, NATA's warehousing operations moved from Unit 1 of 59 Corymbia Place, Parkinson to Unit 2 of 59 Corymbia Place, Parkinson by about May 2023. Following expiration of the lease on Unit 1, Unit 1 was leased to Shamiron and Shamiron appear to have undertaken make good works to Unit 1, seemingly at the direction of the Landlord. The Liquidator's position in relation to any claim in respect of the make good work undertaken by Shamiron is that any claim which Shamiron may have in respect of those works is a claim against the Landlord and not NATQ, there being no contractual relationship between Shamiron and NATQ. The Liquidator properly draws to the Court's attention that the Landlord may have a claim in respect of the make good works against NATQ. The Liquidator has invited a proof of debt from the Landlord but at the time of this application no such proof has been lodged. 8 NATQ was registered on 29 May 2019. The Liquidator's evidence is that NATQ did not conduct any trading and did not derive any income. NATQ appears to have had no internal accounting system. No financial statements, Business Activity Statements or income tax returns were ever prepared or lodged for NATQ. NATQ appears to have had no discernible purpose other than to act as the named lessee of the Queensland premises, specifically: (a) Unit 1, until about 31 March 2023 (Unit 1 Lease); and (b) Unit 2, from about 30 May 2023, upon the registration of a transfer of the lease of Unit 2 (Unit 2 Lease). 9 The Unit 2 Lease was still on foot at the time of the Liquidator's appointment. 10 All the rent under the leases for both Units 1 and 2 were paid by NATA from its bank account. Further, NATA provided a bank guarantee in favour of the Landlord in the amount of $172,373 in respect of the Unit 2 Lease (NATA Guarantee). 11 As mentioned, sole director and shareholder of both NATA and NATQ, Mr Agapios Agapiadis, passed away on 18 June 2023 and NATA ceased trading soon thereafter. As at the date of the director's death, no rent was outstanding with respect to the Queensland premises. The Landlord invoiced NATQ with respect to certain make good obligations but the invoice is dated 6 July 2023, in respect of a claim made on the Landlord on 30 June 2023. Both of these invoices post-date the director's death. 12 In the present case, the Liquidator has expressed a preliminary view that NATA was likely insolvent as at its inception. However, the Liquidator's evidence is that it is not financially viable to undertake the necessary further investigations to confirm that this was the case. The Liquidator further deposes to the fact that the transactions relevant to this application all fall within the 2 year relation back date pursuant to s 588FE(3). In these circumstances, the Liquidator deposes to his conclusion that the relevant transactions appear to comprise uncommercial transactions that may be amenable to orders for repayment pursuant to s 588FF(1). 13 The current financial position of each of NATA and NATQ is the subject of detailed evidence in the Liquidator's affidavit, which includes in Exhibit AF-1, a copy of the Liquidator's Statutory Reports for each of NATA (dated 5 January 2024) and NATQ (dated 9 February 2024). 14 NATA maintained one bank account with the Commonwealth Bank of Australia (CBA), with the account number ending in 929. NATQ maintained three bank accounts with CBA, with the account numbers: (a) ending in 715; (b) ending in 738; and (c) ending in 746. 15 The Liquidator's investigations have revealed that, in the period before the director's death, funds were transferred between the bank accounts of NATQ and NATA as follows: (a) a total amount of $1,326,000 was transferred from NATA to NATQ (account number ending in 746) from 20 March 2023; (b) an amount of $1,061,375 was transferred by NATQ to NATA; and (c) an amount of $210,550 was accumulated in another NATQ account (ending in 715) from dealings with NATA, and then transferred back to NATQ (account number ending in 746) in the period from January 2023. 16 In the result, and as at the date of the director's death, an amount of $477,303 stood to the credit of the NATQ accounts. The Liquidator's analysis demonstrates that the credit balance was derived solely from the transfers from NATA to NATQ. It is this amount that is the subject of the judicial direction which the Liquidator seeks in this application. The Liquidator seeks a direction that he is justified in treating the Funds as the property of or otherwise beneficially owned by NATA.

LEGISLATION AND PRINCIPLES 17 The principles relevant to making judicial directions pursuant to s 90-15(1) of the IPS are well-established. 18 A recent and comprehensive exposition of the legislation and applicable principles is found in the decision of Button J in Morgan, in the matter of Traditional Values Management Ltd (in liq) [2024] FCA 74, relevantly for the purpose of this application, at [26] to [29]. I will not repeat those principles here. I apply them in my consideration of whether to make a direction substantially in the form sought by the Liquidator. 19 The points of principle that the Liquidator emphasises in the context of this application are as follows. 20 Section 90-15 of the IPS confers a very broad power on the Court. There must be a reasonable and proper basis for the making of such a direction. Further, it must be just and beneficial to do so. The legal effect of the direction is to protect the liquidator from any personal liability, following a full and fair disclosure to the Court, upon the Court's conclusion that the liquidator is justified in acting in accordance with the proposed direction. 21 Although it has been suggested that the power under s 90-15(1) is wider than that conferred by its partial statutory predecessors in that it extends to the determination of substantive rights, the Liquidator does not here seek a direction to that effect. Rather, on this application the Liquidator has adopted the more conservative course of seeking a direction that is limited to conferring a level of protection on him on the basis that he has made full disclosure and has exposed a reasonable and proper basis for the judicial direction to be given.

CONSIDERATION 22 As mentioned, the Liquidator, despite investigation, has not been able to identify why the funds were transferred from NATA to NATQ. In addition, the Liquidator deposes to his opinion that NATQ is not entitled to the Funds and that the transactions by which the funds were transferred are potentially voidable. 23 The Liquidator's evidence establishes that NATA was the trading company. Further, that at the time of the relevant transactions, NATA's financial position was one of deficit such that it was in need of funds to meet its obligations to its creditors. On this basis, the Liquidator has concluded that it was not in its interests, or in the interest of its creditors, for funds to be transferred to NATQ where NATA was separately meeting NATQ's liabilities and NATQ had no capacity to repay NATA. 24 The Liquidator deposes to his reasons for eliminating the possibility that the transfers were made pursuant to an inter-company loan or loans. He points to the fact that no accounts or records have been kept by NATA or NATQ that support the existence of any practice of making inter-company loans, or that the Funds had, in fact, been transferred pursuant to inter-company loans. Accordingly, the Liquidator considers that there is an insufficient basis to assert the existence of a loan. The Liquidator also raises concerns as to voidability in circumstances where NATQ had no independent means to repay such a loan. 25 In his evidence the Liquidator deposes to the facts which in his opinion support alternative legal bases that underpin his contention that it is reasonable and proper to obtain a judicial direction that he is justified in treating the Funds as the property of, or otherwise beneficially owned by NATA, namely s 588FB (uncommercial transaction); s 588FDA (unreasonable director-related transaction); and constructive trust. I am satisfied by the Liquidator's evidence and the submissions made in respect of each of the legal bases that there is a reasonable and proper basis for giving the direction in the terms sought. I now turn to whether a direction in the terms sought should be made. 26 The present financial position of each company and the anticipated effect on each as a result of the Liquidator acting in accordance with the direction if given is addressed in the Liquidator's evidence and may be summarised as follows: (1) NATA presently has estimated liabilities of $2,194,833. This includes claims by priority employees of $874,003 although $482,908 of this is a claim by an employee for overtime, which is presently the subject of legal advice. Unsecured liabilities are owed to the Australian Taxation Office (approximately $150,000 of which is in respect of unpaid superannuation), trade creditors ($757,950) and non-priority employee entitlements ($62,880). NATA has estimated realisable assets of $237,032, resulting in an estimated total deficiency of $1,957,801. The Liquidator notes that the proof of debt lodged by the ATO is likely to increase having regard to the apparent non-lodgement of: Business Activity Statements between December 2020 and December 2023; income tax returns between years ending June 2020 and June 2024; and PAYG payment summary statements between years ending June 2023 and June 2024. (2) Should the Liquidator act pursuant to the direction sought, the estimated deficiency will be reduced to $1,480,498. Importantly, the consequence will be that there will then be $714,335 available to meet the claims of the priority (employee) creditors (whose claims currently comprise $874,003). 27 In relation to NATQ the Liquidator's evidence is as follows: (1) The Liquidator has disclaimed the Unit 2 Lease. NATQ faces a potential claim from the Landlord for the remaining lease obligations under the Unit 2 Lease. The Unit 2 Lease term is due to expire on 16 December 2025. The annual rent is $250,312 per annum subject to annual increases of 3%. The Liquidator notes that the Landlord has the benefit of the NATA Guarantee which is secured by a term deposit of $172,373, which represents more than 6 months' rent. This leaves a potential claim of $405,009 for the entirety of the balance of the lease term after application of the NATA Guarantee. As for the balance, the Liquidator notes that any claim would be subject to a duty to mitigate and, potentially, penalty considerations. (2) NATQ also faces a potential claim in respect of the 'make good' work in relation to the Unit 1 Lease. Absent any contractual relationship between NATQ and Shamiron, the Liquidator has determined that Shamiron does not have an admissible claim against NATQ for the make good works for which it has invoiced the Landlord. The Landlord invoiced NATQ for the make good works some three weeks after the death of NATQ's director but has not submitted a proof of debt in this respect and has not sought to be heard on this application. 28 On this basis, the Liquidator submits that at its highest, NATQ may have potential liabilities to the Landlord of $532,394. Further, that if the Funds are treated as the Funds of NATA, NATQ will have no available assets to pay any liabilities it has to the Landlord. Against that, the Liquidator draws attention to the fact that his estimate of $532,394 may not represent NATQ's actual or likely total liabilities given that the Landlord's potential claims have not been subject to any assessment, and may prove to be less. As mentioned, the Liquidator has invited the Landlord to lodge a proof of debt and particularise its claim in the NATQ winding up, but to date the Landlord has not yet done so but did indicate in mid-April 2024 that it intended to do so. 29 Taking into account the present financial position of each company and the anticipated effect on each as a result of the Liquidator acting in accordance with the direction (if made) in the context of the reality of the dealings between NATA and NATQ as revealed by the Liquidator's investigation, I am satisfied that there is a reasonable and proper basis for making a direction in the terms sought. In doing so, I am satisfied that it is appropriate to do so in the terms sought having regard to the limited purpose which such a direction will serve.

CONCLUSION 30 On this application, having regard to careful and thorough disclosure made by the Liquidator, including the steps taken to notify the interested parties, I am satisfied that there is a reasonable and proper basis for the giving the direction in the terms sought and that a direction in the terms sought ought be made. I will make orders accordingly. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.