First Plaintiff v Defendant

2 The plaintiffs' amended originating process filed on 5 September 2018 claims, inter alia:

1. A declaration that the defendant has contravened section 588G of the Act with regard to the debts.
2. An order pursuant to section 588M of the Act that the defendant pay the Company the sum of $242,782.74.

1. Alternatively, an order pursuant to section 1317H of the Act that the defendant pay the Company the sum of $242,782.74.

3 The amount of $117,097.78 claimed by the plaintiffs in paragraph 'D' is in respect of a director's loan. In September 2018, Mr Appel applied to have that claim struck out. On 26 October 2018, Randall AsJ ordered that the relevant paragraphs of the amended statement of claim appended to the amended originating process be struck out by reason that that claim was barred by limitation.

4 The legislative regime applying to insolvent trading claims against directors of companies is contained in Division 3 of Part 5.7B of the Act. Section 588G of the Act provides relevantly in the present context:

Director's duty to prevent insolvent trading by company

(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 the case may be; and

(d) that time is at or after the commencement of this Act.

(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.

[Sections 588G(1A), 588G(3), (3A), (3B) and (4) are not relevant in the present context]

5 Section 588G therefore applies if the following conditions are satisfied:

(i) a person is a director of a company when the company incurs a debt;

(ii) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt;

(iii) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent as a result of incurring the debt or debts including the debt, as the case may be; and

(iv) the time of incurring the debt was at or after 23 June 1993.

6 Once the threshold requirements of s 588G(1) are satisfied, for a contravention of the section to be proven it is then necessary for a plaintiff to establish the matters mentioned in s 588G(2); that the director is aware at the time of incurring the debt that there are such grounds for so suspecting, or a reasonable person in a like position in a company in the company's circumstances would be so aware, and the director failed to prevent the company from incurring the debt. The essence of the contravention of s 588G is the failure to prevent the company from incurring the debt. The establishment of when the debt was incurred and the financial position of the company at that time are also fundamental.

7 The onus of establishing a contravention of s 588G is upon the plaintiff. Section 1332 of the Act provides that, other than proceedings for an offence, it is sufficient if the court is satisfied of the relevant matters on the balance of probabilities.

8 A contravention of s 588G(2) has civil and criminal consequences for directors. In the civil context, under s 588M(2) a company's liquidator may recover from the director as a debt due to the company an amount equal to the amount of loss or damage suffered by the relevant creditor (or creditors), as a result of the director's breach of s 588G(2). Section 588M provides relevantly:

Recovery of compensation for loss resulting from insolvent trading

(1) This section applies where:

( a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b) 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; and

(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d) the company is being wound up;

whether or not:

(e) the director has been convicted of an offence in relation to the contravention; or

(f) a civil penalty order has been made against the director in relation to the contravention.

(2) The company's liquidator may recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

(3) ...

(4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

9 In order to attract the operation of s 588G, there must be the 'incurring' of a 'debt'. The Act does not prescribe when precisely a debt is incurred for the purposes of s 588G. It will vary and depend on the nature of the transaction and it is necessary to analyse the contractual context in each case. The Court of Appeal in New South Wales considered this issue in Hawkins v Bank of China ('Hawkins'),[2] where Gleeson CJ stated:

The words 'incurs' and 'debts' are not words of precise and inflexible denotation. Where they appear ... they are to be applied in a practical and common sense fashion, consistent with the context and with the statutory purposes.[3]

10 Gleeson CJ expressed a view that a debt was incurred for the purpose of s 556(1) of the Companies (New South Wales) Code 1982 (a legislative precursor to s 588G) when, by its conduct or operations, a company necessarily subjected itself to a conditional, but unavoidable, obligation to pay a sum of money at a future time.[4] In Hawkins, Kirby P stated that the expression 'incurs a debt', is, in isolation, entirely apt to describe an act on the part of a corporation whereby it renders itself liable to pay a sum of money in the future as a debt.[5] The act of incurring happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt, or alternatively, the act, omission or other circumstance which causes the company to owe the debt.

11 In Standard Chartered Bank v Antico,[6] Hodgson J stated:

In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable.[7]

This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; second, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and third, as to whether the company would otherwise (in any event) have been liable for the debt.

12 When a debt is incurred for the purposes of s 588G will depend on the nature of the transaction involved. In the case of taxation liabilities, as a preliminary matter, authority favours the proposition that a tax liability is a debt capable of being incurred within the meaning of s 588G.[8] In Commissioner of State Taxation (WA) v Pollock,[9] the Full Court of the Supreme Court of Western Australia held that liability for payroll tax can potentially constitute a debt for the purpose of insolvent trading. Ipp J considered that payroll tax only becomes a 'debt' upon the expiry of the month in which the payroll tax is being incurred, because it is only at this time that the amount of payroll tax to be paid can be ascertained. However a company incurs a contingent liability for payroll tax upon employing an employee in any given month; by analogy, the liability for Superannuation Guarantee Charges would be incurred on each occasion that the company was obliged to remit the periodical payment.

13 In the context of incurring liability for remittance provision taxation, s 588F of the Act provides:

588F Certain taxation liabilities taken to be debts

(1) For the purposes of this Part, a company's liability under a remittance provision to pay to the Commissioner of Taxation an amount equal to a deduction made by the company, after 1 July 1993, from a payment:

(a) is taken to be a debt; and

(b) is taken to have been incurred when the deduction was made.

(2) In this section:

remittance provision means any of the following former provisions of the Income Tax Assessment Act 1936:

(aa) section 220AAE, 220AAM or 220AAR;

(a) section 221F (except subsection 221F(12)) or section 221G (except subsection 221G(4A));

(b) subsection 221YHDC(2);

(c) subsection 221YHZD(1) or (1A);

(d) subsection 221YN(1);

or any of the provisions of Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953.

(3) This section is not intended to limit the generality of a reference in this Act to a debt or to incurring a debt.

14 Thus, the date of incurring the debt in the context of a remittance provision in federal income tax legislation, such as PAYG withholding tax, is when 'the deduction was made' so that, for example, in the case of an employee who is paid wages and has deducted from those wages a tax of the type described in sub-s 2 of s 588F, the company incurs a liability to the Commissioner on each occasion that tax is deducted from the worker's wages.

15 In Shepherd v ANZ,[10] Bryson J was of the view that obligations imposed by law, such as revenue law, can be debts for the purposes of the insolvent trading provisions 'whether or not acts or omissions which the company chose to be involved in brought them into existence'. The authors of Director's Duties During Insolvency observe:[11]

The difference in approach between Hodgson J [in Standard Chartered v Antico and Bryson J] [in Shepherd v ANZ] is that whereas Hodgson J considered the act of the company to be determinative, Bryson J focused on the act of the creditor in electing to be treated as a creditor by crystallising a debt due by demanding payment. These two approaches are not entirely inconsistent. In essence, they both consider the substance of the transaction as instrumental, rather than the form of the transaction, in the light of a commercially realistic interpretation of a transaction 'between two parties'.

In my opinion, not only is it well established that a statutory impost is capable of constituting a debt, but it is also the situation that, if, by reason of the normal, ongoing operations of a company (including the mere passive retention of existing staff or premises) it is rendered liable to pay a statutory impost, then it may be properly said that such impost has been 'incurred' as a debt, by the entity in question...

17 In the context of the supply of goods or services, Mandie J observed in Harrison v Lewis:[13]

The words "incurs a debt" cannot be disregarded but, because of the aim and intent of the section, the focus must be on the conduct and choice of the alleged insolvent company. It is necessary to identify the time when the conduct and choice of the company caused the debt to be incurred because it is at that time that it must be shown that the director who has failed to prevent the company from incurring the debt had or ought to have had the requisite awareness that there were reasonable grounds for suspecting insolvency.

18 In ASIC v Plymin (No 1) ('Plymin') Mandie J observed that rather than conducting a strict legal analysis of the relevant contract to determine when the liability arises, the Court will consider when 'in substance and commercial reality' the liability is incurred:

The weight of authority shows that a debt can be incurred when the contract giving rise to the debt is entered into, even if contingencies affect the debt or the debt is a future debt. In the case of a future debt, it may be incurred at the time of entering the contract if it is then an ascertained or ascertainable amount. By the same token, a debt may in appropriate circumstances be incurred within the meaning of the section at a time later than the entry of the contract under which the debt arises or may arise. Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability...[14]

19 Later in his reasons in Plymin,[15] Mandie J observed:

...I think that it will often be the case, for the purposes of the section, that under a contract for the sale of goods where delivery times are left for future orders or instructions that, as a matter of substance and commercial reality, a debt will be incurred on each occasion when a delivery is ordered...

20 In this proceeding it will be seen that the largest claim by the plaintiffs against Mr Appel is that said to be owed to Nando's Australia Pty Ltd in respect of Overgold's obligations under a franchise agreement to be discussed below. There are, according to counsel's research, apparently no authorities which deal directly with franchise agreement obligations in the context of incurring debts and of course the position will ultimately depend on the terms of the franchise agreement under consideration. Perhaps the most analogous transaction to that of a franchise agreement, where there is a contract which provides for a prospective liability for periodical payments, is that of the obligations incurred under a lease of land.

21 Liability for rent under a lease is generally regarded as being incurred in the context of insolvent trading as being at the time when the lease was entered into. In Russell Halpern Nominees Pty Ltd v Martin[16] ('Russell Halpern'), the Full Court of the Supreme Court of Western Australia (Burt CJ with whom Smith J agreed, Olney J dissenting) stated:

[T]he contention is that a debt was incurred from time to time as the rent became payable under the agreement. On that basis the appellant says that it can, under s 556(1) of the Code, recover all rent which became payable under the agreement for the period 1 July 1982 until 25 May 1983. That submission should be dealt with upon the basis that the lease was for a term which had not expired when on 25 May 1983 the appellant sold the premises. So understood, the proposition is that a tenant holding premises for a term 'incurs a debt' within the meaning of s 556(1) of the Code upon each and every rent day. I do not think that to be correct. Whatever the expression 'incurs a debt' might mean, it is clearly descriptive of an act which when done by the company in the stated circumstances exposes a director of the company and a person who took part in the management of the company when the debt was incurred, [sic] when the act was done, to a criminal liability ... In a case such as this, when the term of the lease has not expired and when the landlord is holding the tenant to the agreement so that the tenant, whether in occupation of the leased premises or not, becomes liable to pay rent on the agreed rent days, I do not think that any relevant act on the part of the tenant beyond his entering into the lease in the first instance can be identified. And that being so, I do not think it can be said that a tenant company 'incurs a debt' within the meaning of the subsection whenever a present liability to pay rent is created by the tenant's covenant in the lease operating upon the passage of time. To hold otherwise would be to say that if a company when in all respects financially sound were to enter into a lease for a term of years and at some time thereafter and for reasons which could not be anticipated it were to fall on bad times and be unable to pay its debts, the directors would thereafter and on every rent day within the remainder of the term be guilty of an offence for the reason that on that rent day the company 'incurs a debt'. I am unable to accept that... [emphasis added].

22 Russell Halpern is authority for the principle that the only act that satisfies the 'positive act' requirement in the context of a lease is the entry into the contract of lease; a company incurs a debt when it first enters into the lease, it does not incur a separate debt each and every time rent becomes payable under the lease because there is no positive act on the part of the company on those occasions.

23 I shall return to a consideration of when each of the debts the subject of the plaintiffs' claim are respectively incurred later in these reasons.

24 Section 588G only has application where the company incurs a debt whilst it 'is insolvent at that time or becomes insolvent by incurring that debt' i.e. at the time of incurring the debt it is unable to pay its debts as and when they become due and payable within the meaning of s 95A of the Act. There is a considerable body of case law which deals with the interpretation of this notion in the context of corporate insolvency. In summary, the position is as follows:[17]

(i) the test of solvency in the Act incorporates 'the cash flow test' as opposed to the 'balance sheet test';[18]

(ii) in determining insolvency the Court takes into account the financial position of the company as a whole having regard to 'commercial reality';[19]

(iii) the test of insolvency is concerned with the ability of the company to pay all its debts[20] rather than merely particular debts when they become respectively due and payable;

(iv) a temporary lack of liquidity does not constitute insolvency, however there is often a very fine line between the two;[21]

(v) the courts have developed some 'usual indicia' of insolvency which are a useful guide to assist the court in determining insolvency, although not necessarily determinative;[22]

(vi) the question of whether or not a company is insolvent is ultimately a question of fact to be determined by the court[23] (although it is common to refer to an affidavit given by liquidators on this subject as being an 'expert report on insolvency'); and

(vii) liability can be established under s 588G(1)(b) without reference to the particular debt incurred, if at the time the debt was incurred, the company was unable to pay other debts.

25 In Noxequin Pty Ltd v Deputy Commissioner of Taxation,[24] Barrett J stated:

The emphasis must be upon the extent of cash and other liquid assets (by which I mean assets readily convertible into cash), compared with the quantum of debts due and payable and to become due and payable in the immediate future. A comparison between the two can be made only as at a particular point but a state of solvency requires that, at each such point, the cash and liquid assets be sufficient to cover the debts due and payable and to become due and payable in the immediate future...

26 The 'cashflow test' requires a court to ascertain:

(a) the company's existing debts and the company's debts within the near future;

(b) the date each debt will be due for payment; and

(c) the company's present and expected cash resources and the date each item will be received.[25]

27 The 'cashflow test' entitles a court to take into account assets available to the company which can be realised in order to answer indebtedness although there is a temporal limitation to this. In Hall v Poolman,[26] Palmer J stated:

An asset cannot be taken into account in assessing solvency at a particular time without reference to the time it would realistically take to effect realisation and produce cash. It is no indication of solvency - indeed, it is the opposite - to point to property as available to meet debts falling due next month when, even with the utmost expedition, that property cannot be turned into cash for six months. Realisable property can only be taken into account in assessing solvency "if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature". (Citations omitted).

28 Next, s 588G(1)(c) requires that, for a director to be liable, at the time the company incurs a debt, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent, as the case may be. The cases dealing with the notion of suspicion in the context of defences to voidable preference cases in s 588FG(2)(b) ('no reasonable grounds for suspecting insolvency') are apposite. In Queensland Bacon Pty Ltd v Rees[27] the High Court described suspicion (in the context of a preference claim made under a precursor of s588FG(2)(b)) as: 'more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence", as Chambers's Dictionary expresses it.'[28]

29 The test in s 588G(1)(c) is an objective one; the enquiry is not one concerning the particular director whose conduct is under consideration, rather it is an enquiry into the objectively formed state of mind of a person of ordinary competence.[29] Subsection 588G(1)(c) describes a state of reasonable grounds for suspicion of insolvency and the awareness of a reasonable person in a like position in a company in the company's circumstances.

30 The authors of Voidable Transactions in Company Insolvency describe the concept in this way:[30]

'Reasonable' in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking properly to perform his or her duties as imposed by law (when viewed as a whole) and capable of reaching a reasonably informed opinion as to a company's financial capacity. ... Facts and matters must be shown to exist which would give grounds for a director acting in accordance with that standard to suspect insolvency. In this regard in determining whether s 588G(1)(c) is satisfied, the Court must ascertain firstly, what facts concerning the ability of the company to pay their debts as they fell due were, or should have been, known to the director as a competent director of those companies during the period and secondly would those facts have constituted reasonable grounds for suspicion of insolvency.

31 Section 588H prescribes various defences to proceedings for a contravention of s 588G. The statutory defence which is the closest to the position being contended for by Mr Appel is s 588G(2) which provides a defence of reasonable grounds to expect that the company was solvent at the time the debts were incurred. It provides:

(2) 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.

32 In the present context it has been held that the word 'expect' is to be understood according to its usage in ordinary parlance, namely 'to regard as likely to happen' or 'to expect to find' or 'to expect that it will turn out that'.[31] The legislative scheme of s 588G and s 588H are cast in terms such that a director can, at one and the same time, have a 'suspicion' of insolvency and also an 'expectation' of solvency. Reasonable grounds 'for suspecting' that a company is insolvent does not require the same degree of satisfaction as is required to determine if a director has reasonable grounds 'to expect' solvency. The distinction was discussed by Austin J in Tour Print International Pty Ltd v Bott,[32] where he observed:

1. "Expectation", as required by s 588H(2), means a higher degree of certainty than "mere hope or possibility" or "suspecting". The defence requires an actual expectation that the company was and would continue to be solvent, and that the grounds for so expecting are reasonable. A director cannot rely on a complete ignorance of or neglect of duty and cannot hide behind ignorance of the company's affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary inquiries.

33 It will be seen when it comes to consider Mr Appel's defence to this proceeding that, because of what he considered to be the value of the asset base of Overgold by reference to what had been expended on its fit out, he as a director of Overgold could reasonably expect that it could pay its debts from the proceeds of sale of the fit out. In this context, Palmer J observed in Hall v Poolman:[33]\

1. There comes a point where the reasonable director must inform himself or herself as fully as possible of all relevant facts and then ask himself or herself and the other directors: "How sure are we that this asset can be turned into cash to pay all our debts, present and to be incurred, within three months? Is that outcome certain, probable, more likely than not, possible, possible with a bit of luck, possible with a lot of luck, remote, or is there is no real way of knowing?"
2. If the honest and reasonable answer is "certain" or "probable", the director can have a reasonable expectation of solvency.
3. If the honest and reasonable answer is anywhere from "possible" to "no way of knowing", the director can have no reasonable expectation of solvency.
4. If the honest and reasonable answer is "more likely than not", the director runs the risk that a Court will hold to the contrary in an insolvent trading claim.
5. If the honest and reasonable answer is "no way of knowing yet, we need more information", the director must then ask: "How long before we have the information so that we can give a final answer?"
6. If the honest and reasonable answer to that question is: "By a definite date which will not extend the realisation period (if there is to be one) beyond three months", the director may reasonably say: "Let's wait until then before deciding".
7. If the honest and reasonable answer is "there is no way of knowing yet when we will have the information to make a decision", the director must say: "Then there is no way that we can now have a reasonable expectation of solvency and there is no way we can reasonably justify continuing to trade without knowing when we will know whether the company is insolvent. Call the administrators". By this series of questions and answers I do not mean to lay down some pro forma test of directors' liability for insolvent trading. Each case depends on its particular facts. These questions and answers merely serve to illustrate that when a company is struggling to pay its debts, the directors must face up to the issue of insolvent trading directly and with brutal honesty: they must not shirk from asking themselves the hard questions and from acting resolutely in accordance with the honest answers to those questions. I shall return to a consideration of Mr Appel's contention in this regard in my consideration at the conclusion of these reasons.

34 Mr Appel has been the only director of Overgold since its incorporation in January 2005.

35 On 27 April 2010, Overgold entered into a franchise agreement ('Franchise Agreement') and a licence agreement ('Licence Agreement') with Nando's Australia Pty Ltd ('Nando's) and began operating a Nando's store at Hampton, Victoria ('Premises') ('Nando's Store') as part of a fast food franchise chain.

36 Clause 3 of the Franchise Agreement provided for payment of an initial franchise fee of $48,500, along with an initial promotion fee of $5,000 together with a monthly franchise fee and a monthly marketing fee within seven days of the end of each calendar month during the period of the Franchise Agreement. The Franchise Agreement provided for a five year term, with an option of one further term of five years.

37 The Franchise Agreement made provision for Nando's entitlements upon termination of the Franchise Agreement. It will be seen below that the Franchise Agreement was terminated by reason of Overgold ceasing to carry on the franchise business, and that ANZ sold the fit out as controller under its charge to Nando's who then began apparently operating it under a new franchise. In such circumstances, the Franchise Agreement provided that:

18.1 Upon termination of this Agreement and provided that the parties have not entered into a new franchise agreement in respect of the Franchised Business or this Agreement is not renewed, then Nando's may without prejudice to any of its rights hereunder either:

18.1.1 Close the Franchised Business; or

18.1.2 Subject to the terms hereinafter set out, continue to operate the Franchised Business for its own account.

18.2 If Nando's exercises its rights to continue the Franchised Business as aforementioned, Nando's shall acquire from the Franchisee who shall be obliged to sell to Nando's all the fixtures, fittings, furnishings and equipment contained in the Franchised Business for a purchase price as agreed between the parties and failing agreement the market value shall be determined by an independent valuer appointed by Nando's and specialising in such valuations. The valuation shall be final and binding on the parties.

18.3 Nando's shall pay the purchase price of the fixtures, fittings, furnishings, equipment and Nando's of the Franchised Business less any monies owing by the Franchisee to the Nando's within twenty one (21) days after determination of the purchase price.

18.4 If any of the fixtures, fittings, furnishings and equipment in the Franchised Business are owned or are charged in favour of a bank or financial institution, Nando's shall not be obliged to purchase such fixtures, fittings, furnishings and equipment and shall allow such party to remove those fixtures, fittings, furnishings, and equipment.

38 Overgold did not lease the Premises, but rather it occupied it under the terms of the License Agreement. Under the Licence Agreement, Overgold was obliged to pay all of the rent and outgoings incurred by Nando's under a lease of the Premises entered into by Nando's as tenant with a Mr and Ms Cseh as landlords ('the Lease'). The terms of the Licence Agreement provided inter alia that Overgold must pay Nando's the Fees and Outgoings within seven (7) days of the date on which the Fees and Outgoings were payable under the Lease.[34]

39 In April 2010, Nando's provided a quotation to Overgold to construct a fit out at the Premises for $571,480 excluding GST. On 21 April 2010, Nando's sent a tax invoice to Overgold for $602,778 including GST for the fit out.

40 In April 2010, the ANZ Bank ('ANZ') agreed to loan $274,724 to Overgold ('ANZ Loan') secured by a charge over Overgold's assets ('ANZ Charge'). Mr Appel entered into a guarantee of Overgold's obligations under the ANZ Loan. On 5 May 2010, Overgold drew down the full amount of the ANZ Loan.

41 Overgold applied the proceeds of the ANZ Loan together with $300,000 provided by Mr Appel's father, Mr Morris Appel ('Mr Appel Snr') to meet the cost of the fit out. As will be seen, the advance by Mr Appel Snr is characterised in the balance sheets of the company as 'owner/shareholder capital'.

42 Overgold operated the Nando's Store from March 2010 to 30 June 2012 when it ceased trading and Mr Appel departed the Premises.

43 On 4 July 2012, Nando's terminated the Franchise Agreement and the Licence Agreement.

44 In October 2012, the ANZ Loan went into default, and demand was made by ANZ on Mr Appel under the guarantee. In March 2013, ANZ obtained a default judgment against Mr Appel.

45 On 25 February 2013, ANZ was appointed controller. On 14 March 2013, ANZ sold the fit out to Nando's for $23,936.

46 On 20 February 2013, Overgold was ordered to be wound up in insolvency by order of this Court. The first plaintiff, David Quin, ('Mr Quin') and Clyde White were appointed as joint and several liquidators.[35]

47 This proceeding was commenced in April 2018. After filing an amended defence on Mr Appel's behalf, his then solicitors Hall and Wilcox filed a notice of ceasing to act on 26 November 2018. He was not represented by lawyers at the trial of the proceeding on 9 and 10 April 2019 and he conducted his own defence with the assistance of Mr Appel Snr.

48 The plaintiffs rely on an affidavit of Mr Quin sworn 29 March 2018. The plaintiffs subpoenaed Mr David Morris ('Mr Morris') of ANZ Bank to give evidence on their behalf.

49 Mr Appel filed two affidavits, his affidavit affirmed 3 April 2019, and an affidavit of Mr Appel Snr.[36]

50 At the trial of the proceeding, Mr Quin and Mr Morris also gave oral evidence on behalf of the plaintiffs and they were cross-examined by Mr Appel. The plaintiffs also cross-examined Mr Appel and Mr Appel Snr.

51 Mr Quin is a registered liquidator and chartered accountant. In his affidavit of 29 March 2018, he deposed that as at the date of winding up, Overgold owed the various debts to the creditors identified and set out a table of same. The updated table of debts owed to creditors as reflected in the plaintiffs' final submissions is as follows:

Australian Taxation Office (Running Balance Account)

Australian Taxation Office (Unpaid Superannuation Contributions)

52 I shall return to the issue of when the debts the subject of the claim were incurred later in these reasons.

53 On the basis of his review of the books and records of Overgold, Mr Quin considered that Overgold was insolvent throughout the period 30 June 2010 to the date it was wound up, 20 February 2013. His opinion in that regard is based on the following matters which he states are evident from Overgold's books and records:

(a) Overgold did not lodge any income tax returns after the financial year ended 30 June 2008.

(b) Overgold did not lodge any BAS after the 30 September 2011 quarter.

(c) As at the appointment date, Overgold had outstanding debts to the ATO of $82,974.55 comprising superannuation of $44,457.09 and a running balance deficit debt of $38,517.46.

(d) On 14 September 2012, the ATO wrote to Overgold recording an acknowledgement by Overgold that it 'may not have met' its superannuation obligations for the period 1 April 2010 to 31 March 2012.

(e) On 18 October 2012, the ATO wrote to Overgold noting that it 'may not have met' its superannuation obligations for the period 1 April 2010 to 30 June 2012.

(f) On 28 November 2012, the ATO wrote to Overgold recording the result of an audit of Overgold, revealing shortfalls in Overgold's superannuation payment obligations in the period 1 April 2011 to 31 March 2012.

(g) On 13 May 2013, the ATO wrote to Overgold, stating there was a shortfall in Overgold's PAYG withholding remission obligations for the period 1 April 2012 to 30 June 2012.

(h) Overgold's MYOB Profit and Loss Statements recorded losses in the financial years ending 30 June 2010 (a $39,236.34 loss), 30 June 2011 (a $114,146.35 loss) and 30 June 2012 (a $124,821.01 loss).

(i) Overgold's MYOB profit and loss statements do not record any depreciation expense in relation to Overgold's plant and equipment and a substantial depreciation expense should have been recorded, indicating that the underlying loss in each of the financial years 2010 to 2012 was much higher than recorded in the profit and loss statements.

(j) Overgold's balance sheets for the periods at 30 June 2010, 2011 and 2012 record a net asset surplus of $535,487.66 in 2010, $146,617.31 in 2011 and $21,796.30 in 2012.

(k) From at least 1 April 2011, Overgold had outstanding debts to the ATO in connection with superannuation guarantee charges. As at 20 February 2013, Overgold had outstanding superannuation guarantee liabilities of $44,457.09.

(l) From at least May 2011, Overgold had outstanding debts to the ATO for GST which were never paid. As at 20 February 2013, Overgold's running balance account was in debit for $38,517.46.

(m) Overgold's MYOB Profit and Loss Statements recorded losses in the financial years ending 30 June 2010 ($39,236.34), 30 June 2011 ($114,146.35) and 30 June 2012 ($124,821.01).

(n) Overgold's profit and loss statements disclosed net losses in FY2010 ($37,057.79), FY2011 ($72,985.39) and FY201235 ($124,821.01). Mr Quin observed that Overgold's MYOB profit and loss statements did not record any depreciation expense in relation to Overgold's plant and equipment and that a substantial depreciation expense should have been recorded. He said that this was indicative that the underlying loss in each of the financial years 2010 to 2012 was much higher than that recorded in the profit and loss statements.

(o) Overgold's balance sheets for the periods at 30 June 2010, 2011 and 2012 respectively record a net asset surplus of $535,487.66 in 2010, $146,617.31 in 2011 and $21,796.30 in 2012. In Mr Quin's opinion, based on his investigations into the affairs of Overgold, adjustments are required to be made to Overgold's balance sheets. Overgold's balance sheets for 2010, 2011 and 2012 had recorded the value of the fit out as $570,000. The business (essentially the fit out) was sold for $23,936 on 14 March 2013 by ANZ (in its capacity as controller of Overgold). ANZ obtained a valuation of the business prior to the sale which valued the business at $36,125 as a going concern and $18,465 if sold at auction. The plaintiffs submitted that the value of Overgold's business should be written down to $23,936 to reflect the actual realisable value of the business as demonstrated by the sale of the business on 14 March 2013, and the balance sheets should be adjusted accordingly.

54 In this regard Mr Miller contended that it was appropriate to write down the value of Overgold's business to $23,936 for the entire trading period, March 2010 to 30 June 2012, by reason that Overgold never made any profit and that therefore, Overgold's business at all times never had any value as a going concern. Mr Miller contended that this is made out by the fact that Mr Appel departed the business on 30 June 2012 after trying to sell it for a year. Its only value was that associated with its plant and equipment which was independently valued in the range of $18,465 to $36,125 and it was said the ultimate price achieved, $23,936, was within that range.

55 The balance sheet for the financial year ended 30 June 2010 does not record the ANZ Loan of $274,724 and the advance provided by Mr Appel Snr for $300,000 as liabilities. These amounts are recorded instead as "owner/shareholder capital"; if the balance sheet for that year is adjusted to record the ANZ Loan and the advance from Mr Appel Snr as liabilities, the net asset deficiency is $586,780.34.

56 The balance sheet for the financial year 30 June 2011 does not record the advance from Mr Appel Snr for $300,000 as a liability, although the ANZ Loan (then standing as $255,655.61 is reported as a liability). Again, the advance provided by Mr Appel Snr is recorded as "owner/shareholder capital" and if the balance sheet for that period is adjusted to record the advance from Mr Appel Snr as a liability, the net asset deficiency is $700,926.69.

57 The balance sheet for the financial year 30 June 2012 does not record the advance provided by Mr Appel Snr for $300,000 as a liability, but again, records the ANZ Loan, as a liability of $249,431.39. The advance provided by Mr Appel Snr is again recorded as 'owner/shareholder capital'. If the balance sheet for that year is adjusted to record the advance provided by Mr Appel Snr as a liability, the net asset deficiency was $825,747.70.

58 In his affidavit, Mr Quin provides an adjusted net asset position based on his calculations and the suggested adjustments described. He deposed that based on his calculations the adjusted net asset position for the Company shows net asset deficiencies of $12,056.34 in 2010, $400,926.69 in 2011 and $525,747.70 in 2012. He states the working capital of the Company was therefore deficient in 2010, 2011 and 2012 as follows:

59 In broad terms, the ratio referred to is a computation of readily realisable assets (current assets) against the liabilities payable in the current period.[41]

60 In the context of s 588G(2), Mr Miller contended that:

(a) there were reasonable grounds for suspecting that Overgold was insolvent or would become insolvent; and

(b) Mr Appel was aware (or a reasonable person in his position as director of Overgold would have been aware) that there were reasonable grounds for suspecting that Overgold was insolvent or would become insolvent.

61 In support of this, Mr Miller submitted that Mr Appel knew, or ought to have known, the following:

(a) Overgold had suffered operating losses in each of the years FY2010, FY2011 and FY2012;

(b) Overgold had a net deficiency of assets in each of the years FY2010, FY2011 and FY2012. Mr Appel knew that he had not repaid his loan from Overgold and had no intention of repaying the loan. Further, Mr Appel knew or ought to have known that the value of Overgold's business as recorded in the balance sheets was significantly overvalued;

(c) Overgold failed to lodge income tax returns from 2008 onwards, and failed to lodge BAS after 30 September 2011;

(d) from at least May 2011, Overgold had an RBA deficit debt owing to the ATO which it could not pay;

(e) from at least 1 April 2011 Overgold had outstanding superannuation guarantee charges to the ATO which it could not pay;

(f) Overgold owed the debts described in paragraph 51 above, which it could not pay; and

(g) the matters described above were each known to Mr Appel, or would have been known to a reasonable person in his position as director of Overgold and that each of those matters provide reasonable grounds for suspecting that Overgold was insolvent or would become insolvent.

62 Mr Morris stated that he was employed as a bank manager with ANZ and had approximately 42 years' experience. He stated that in April 2010 ANZ advanced $252,000 to Overgold and this advance was secured by a first ranking charge over Overgold with Mr Appel providing a personal guarantee.

63 He noted that ANZ considered its options in respect of initiating bankruptcy proceedings against Mr Appel after obtaining judgment against him in March 2013, however it was decided that it would not be a 'cost effective solution'.

64 Mr Morris stated that the valuation of the plant and equipment provided by Dominions valuers, dated 19 November 2012 was commissioned on the assumption that Nando's would approach ANZ in an attempt to purchase the plant and equipment and the valuation enabled ANZ to be prepared with an indication as to the appropriate value. ANZ did not advertise the plant and equipment for sale on the open market by reason that the costs which would be incurred in a sale to a purchaser other than Nando's for their removal, including the making good costs, the labour, auction and storage costs, would have been at least $18,000 and have dramatically reduced the net proceeds available to creditors. The valuation placed an auction valuation figure on the fit out of $18,000 and a fair market value of $36,000. There were 61 items of plant and equipment, some of which were fixtures which if removed would have damaged tiling which would have incurred make good costs, as well as the costs of engaging plumbers and electricians to disconnect the items. This sale of plant and equipment to Nando's realised $23,936.

65 Mr Morris stated that in his experience in dealing with approximately 30 of this type of controllership, the sale of second-hand plant and equipment in restaurants generally provided a small return in comparison to the expenditure incurred in the initial fit out, as the second hand value of the equipment is typically much less than the brand new retail cost. Further, there are significant quantities of second-hand equipment available to purchasers from other sources at any given time.

66 Mr Appel's cross examination of Mr Morris was predominately directed to the issue of the amount for which the plant and equipment was sold to Nando's and how ANZ came to accept such a low figure. Mr Morris stated that he could not recall the circumstances of how the sale price was first offered or the details of the negotiations which followed.

67 Mr Appel asked Mr Morris if he was content with the sum realised for the sale of plant and equipment. Mr Morris stated that it was and that the assessment of whether the sum realised was acceptable was based on the Dominion's valuation, rather than the original cost of the equipment. Mr Appel questioned if ANZ was precluded from selling the plant and equipment to the wider market to which Mr Morris responded that the sale to Nando's was preferred as they were the most likely buyer and the sale to Nando's achieved a reasonable outcome given the potential costs involved in selling to another buyer.

68 Mr Appel questioned Mr Morris as to whether any other Nando's franchisees were approached in order that ANZ could obtain a better price and Mr Morris responded they were not. Mr Appel enquired as to whether Mr Quin was satisfied with the sale price for the plant and equipment and Mr Morris indicated that there was no objection from Mr Quin.

69 Mr Morris stated that the negotiations with Nando's started in February 2013, before the appointment of the liquidator, and that he dealt with Carlos Antonius from Nando's when negotiating the sale. He stated that the business conducted by Overgold had ceasing trading and the value which was obtained for the plant and equipment was on the basis of a forced sale. He explained the basis of his view that if it was a normal business sale on the open market, the amount realised would have been in the order of $36,000.

70 I observe at this juncture that ANZ had a strong vested interest in obtaining the highest possible price of the sale as it could apply all of the proceeds against the debt that Overgold owed it under the ANZ Loan. In the result, it has only received approximately 10% of the monies owed from the sale and has not pursued Mr Appel for the judgment it has against him.

71 Mr Quin was cross-examined by Mr Appel. Mr Appel cross-examined Mr Quin on the issue of the length of delay in bringing the proceeding and the decision to do so notwithstanding Mr Quin's awareness that Mr Appel was not in a strong financial position. Mr Quin responded that it was not uncommon for delay to occur before bringing a proceeding such as this and for proceedings to brought despite a defendant having limited capacity to satisfy any claim brought.

72 Mr Appel then cross-examined Mr Quin about the sale of the plant and equipment. Mr Quin confirmed he was satisfied that ANZ had complied with its obligations in accepting the sale price it received from Nando's for the plant and equipment. Mr Quin stated that he regarded the sale process as being above board.

73 Mr Appel enquired as to whether Mr Quin had been offered funding from any creditors to which Mr Quin responded the only offer of funding was from Mr Appel Snr at one stage via solicitors.

74 Mr Appel enquired as to whether Mr Quin considered that every business that did not immediately make a profit when it commenced trading is trading while insolvent to which Mr Quin responded that if a company never made a profit it would be an indicator of insolvency.

75 Mr Quin was asked how he was able to express an opinion that Overgold was insolvent from a matter of only weeks after opening. In response, Mr Quin stated that Overgold was never in a positive position, it always made losses, it had a deficiency of working capital and a deficiency of assets against its liabilities. In this regard, Mr Quin stated the Running Balance Account liabilities were in relation to GST and PAYG withholding, but not income tax as Overgold had never made a profit.

76 Mr Quin was not aware of any supplier or other creditor who had commenced legal action against Overgold prior to 30 June 2012 or if prior to the business closing was he aware of any creditors not being paid. Mr Quin responded that he was not aware of any such actions but the ATO and Nando's were not being paid and that there was no instalment arrangement in place to pay the liability to the ATO.

77 Mr Quin was not aware of any dishonoured cheques or statutory demands. The ATO had conducted an audit which revealed that Overgold had not made superannuation payments going back to April 2011.

78 When Mr Appel opened his case, because he was self-represented, I allowed some latitude as to the extent of that opening, but did emphasise to him that his opening did not constitute evidence in the proceeding. As stated above, he filed very short affidavits affirmed by himself and Mr Appel Snr which did not elaborate on the matters referred to in his defence. Nonetheless it is clear that the central tenet of his defence was that the insolvency of Overgold arose by reason of what he contended was the poorly conducted sale process of the business by ANZ and the subsequent failure of the liquidator to pursue the interests of creditors.

79 Mr Appel stated that prior to the taking up the Nando's franchise, he was employed as the National Property and Development Manager of Nando's. In that role he oversaw the identification and the acquisition of new sites for Nando's outlets. Nando's would typically take up a lease of the premises from a landlord and licence it to a franchisee who would remit rental to Nando's. At any given time there would be 20 to 40 sites under review. He indicated that this structure allowed Nando's 'ultimate power' over the site if a franchisee defaulted. Mr Appel stated that Nando's had broad powers which enabled it to walk in and effectively take control. He stated that one of his duties at Nando's was to enforce franchisees' obligations under the agreement and to take action on Nando's behalf. He recognised that Nando's had broad powers to walk into his business and take control under the terms of the Franchise Agreement.

80 He stated that it was very common for Nando's to allow royalties payable under the Franchise Agreement to accrue. In the course of his role of Nando's he negotiated with franchisees. Typically Nando's would allow the royalties to accrue on the proviso that occasional payments were made 'as a sign of good faith'. He personally guaranteed the performance of the Franchise and Licence Agreements. He used the means available to him to negotiate with Nando's what he described as 'an abatement of the royalties'. He stated that although the royalties debt continued to increase, Nando's were content with the situation. He dealt with colleagues at Nando's who had been work colleagues for many years. He agreed with the proposition that the Franchise agreements, being drafted by Nando's, were quite onerous for franchisees and they were 'designed ultimately to be enforced and ultimately called up ... 'There is no ... old mates act applying here'.

81 Mr Appel stated that Ms Karen Salim was one of the accounts personnel at head office who discussed the arrangement to discharge the obligation to pay royalties. He told her that his intention was to sell the business and she indicated that she would inform the board of Nando's of the position in that regard.

82 Mr Appel contended that the business was a readily realisable asset and there was a backlog of potential franchisees. He was told by business brokers that it would take months to a year to effect a sale. He engaged Mr Frank Bella as a business broker to try and sell the business but it reached the point where he stated he decided to shut the business down because 'there might be a chance of insolvency'. He was unwilling to throw good money after bad and did not want to take the risk of trading whilst insolvent.

83 He states that Overgold ceased trading on 30 June 2012. On 4 July 2012 Nando's served a notice of termination of the Franchise Agreement, sent to him by letter from Nando's solicitors dated 4 July 2012. The letter enclosed notice terminating the Franchise Agreement on the basis that Overgold had voluntarily abandoned the franchise business. From around July 2012 to approximately 2016, Nando's carried on business at the Nando's store with a view to selling the franchise to a new franchisee.

84 Mr Appel stated that the closing of the business triggered an event under the Franchise Agreement whereby Nando's was obliged to step in and sell the assets of the business. His advisers told him that it was 'fruitless to keep the business running waiting for a purchaser to come along'. As for superannuation liabilities, he referred to the GEERS scheme (General Employee Entitlements and Redundancy Scheme) (a Commonwealth Government scheme to protect workers whose employers go into insolvency administration), but he indicated that he did not expect payment under that scheme to absolve him from liability.

85 In his affidavit, Mr Appel exhibits a copy of a final "Building, Shop Fitting and Fixture Quotation" ('the Quotation') dated 20 April 2010. The Quotation was prepared by Nando's and used by Mr Appel to procure the ANZ Loan which was applied to purchase the fit out and establish the business.

86 The opening of Mr Miller's cross-examination largely involved taking Mr Appel to various documents in the court book in order to confirm various aspects of the plaintiffs' case, most of which were not contentious. Mr Miller put it to Mr Appel that the balance sheet as of June 2012 recorded an amount of $117,000 owing by Mr Appel to Overgold which Mr Appel never repaid and Mr Appel confirmed this. Mr Miller put it to Mr Appel that he never intended to repay the loan, and that he was not personally financially capable of repaying the loan. Mr Appel indicated that 'he had not elected to repay the loan'. Mr Miller sought to establish that Mr Appel was not capable of repaying the loan personally but Mr Appel denied that this was true.

87 After having taken Mr Appel through his home loan statement, personal savings account and asset line account statement, Mr Miller put it to Mr Appel that it was evident that he did not have the capacity to repay the loan of $117,000 to Overgold. Mr Appel stated that he had options at his disposal such as using funds from other bank accounts or that he could have procured further funds from his family or sought an advance on his salary, but I consider that his evidence concerning this was at the best very vague and not substantiated or elaborated upon.

88 Mr Appel asserted in general terms that he had the capacity to repay the loan but did not identify any specific source of funds. He stated that he earned 'quite a significant salary' while he was employed by Nando's prior to commencing business as a franchisee, so he 'may well have had the capacity to repay the loan' but would have been drawing down on his personal funds and he was not able to recall after six years what his plans were at that time.

89 Mr Miller questioned Mr Appel on what equity he had in the home that he owned in East Malvern. Mr Appel stated that there "may have been" between approximately 10-20% equity. Mr Miller suggested to Mr Appel that he and his wife never had at any time more than $10,000 available in savings and this was confirmed by reference to their bank accounts. Mr Appel contended however that his wife had a separate bank account and that he possessed physical cash (ranging from $20-25,000) during that time which was retained from cash payments made to his wife's business.

90 Mr Appel agreed that Overgold had suffered a series of losses which were getting larger as time went on. He did not agree that Overgold never lodged income taxation returns for the period March 2010 until June 2012, stating 'I have no recollection of not filing tax returns.' Mr Miller put it to Mr Appel that he did not file income tax returns during the trading period March 2010 to June 2012 and Mr Appel stated he believed that tax returns were filed, but under the name of the trust. Mr Miller took Mr Appel to a letter from the ATO of which annexed a table of outstanding lodgement obligations and which demonstrated Overgold failed to lodge income tax returns after 2008. Mr Appel responded that he had engaged accountants to prepare a set of books and to manage his taxation affairs and that as far as he knew his accountants were performing that task. I do not think that much flows from the failure to lodge those returns as it seems to be common ground that Overgold never made a profit upon which it would have incurred liability for income tax.

91 Mr Miller then took Mr Appel to documentation from the ATO which provided notification to Overgold as trustee of obligations which had not been complied with. In each instance Mr Appel stated he did not recall receiving the relevant correspondence from the ATO.

92 Mr Miller put it to Mr Appel that Overgold failed to comply with its superannuation obligations for each of the quarters June 2011, September 2011, December 2011 and March 2012. Mr Appel denied that this was true and said that he could not recall the specifics of superannuation payments during those quarters. Mr Appel stated that although during this period he recalled letters which notified Overgold of outstanding superannuation obligations, there was no legal action taken. Mr Miller put it to Mr Appel that during 2011 he was aware Overgold was non-compliant in respect of its superannuation guarantee obligations, which Mr Appel denied, without elaborating on that denial. Mr Miller also questioned Mr Appel about correspondence from REST Super and Australian Super which again Mr Appel stated he could not specifically recall.

93 Mr Miller took Mr Appel to a letter from the ATO addressed to Mr Appel as director of Overgold which stated that, during a telephone discussion, Mr Appel had 'acknowledged [that he] may not have met [his] superannuation obligations for [the periods specified in 2011]. Mr Miller then took Mr Appel to another letter from the ATO sent to Mr Appel dated 18 October 2012, and an ASIC Report as to Affairs signed by him as a director of Overgold, indicated that Overgold had not met its superannuation guarantee obligations.

94 With respect to the ASIC Report as to Affairs, Mr Appel stated that Mr Adrian Foo from PCI completed the questionnaire. Mr Appel accepted that he had signed off on the questionnaire and certified that it was true and correct. Mr Miller then questioned Mr Appel about his attempts to sell the business. Mr Appel stated that he did take steps to sell the business as a going concern over a period of over a year. He did not accept any offers but was hoping to sell the business for approximately $400-450,000 but may have accepted less.

95 Mr Miller put it to Mr Appel that the business was a liability which Mr Appel denied. He stated that for the right franchisee the business could have been profitable. Mr Miller put it to Mr Appel that no purchaser would have purchased the business subject to the ANZ Charge. Mr Appel disagreed with this and stated that Nando's had essentially agreed to purchase the business in that way, although he conceded there was no record of the conversations which took place evidencing these discussions.

96 In his affidavit of 3 April 2019, Mr Appel Snr stated that when his son wanted to establish a Nando's restaurant in 2010, he approached him to assist him financially. He agreed to do so, and advanced him a total of $300,000 by way of loan, over two years. Mr Appel Snr said he was secure in the knowledge that his son had spent in excess of $600,000 to develop, fit out and establish the business. When he and his son considered that the business was underperforming, they discussed selling it. Mr Appel sharply criticised the sale process whereby the fit out was sold for 'far below the true value' resulting in Overgold being denied the ability to pay its creditors.

97 Mr Appel Snr deposed that, at all times, he and his son were secure in the knowledge that at the very least the sale of business and the assets such as furniture, fit out, plant and equipment would more than cover the debts the business incurred.

98 Mr Appel Snr stated that he was at all times 'continuing to provide a funding facility for the defendant's business' but despite this, his son was of the belief that it was time to either sell the business or close it down and sell its assets.

99 Mr Appel Snr states that his son was aware that if he stopped funding him this could have led to insolvency. The ANZ bank took possession of the assets of the business but he was certain that the sale of the assets and the business would more than adequately cover its debts and ought to realise a sum of approximately $450,000 or more.

100 Mr Appel Snr asserted that the sale of the business and the assets by the ANZ to Nando's for $23,936 was far below the true value. As ANZ and Nando's had a business relationship, the sale of undervalue to Nando's was 'likely a sweetheart deal' (i.e. not at arm's length).

101 Mr Appel Snr stated that the sale for undervalue has left Mr Appel in a seriously disadvantaged position and the conduct of ANZ and Nando's was not investigated vigorously enough by the liquidators.

102 Mr Appel Snr stated that to assist his son and to enable the liquidator to repay the creditors, he volunteered to remove himself as creditor. He states that unfortunately the sale of undervalue by ANZ to Nando's, and the liquidators' failure to investigate this sale has resulted in his son being denied a fair process.

103 He states that he decided to cease lending further funds to his son as he felt it obvious that the sale for undervalue by ANZ and the liquidator's failure to investigate left him no choice.

104 Mr Miller's cross-examination of Mr Appel Snr was directed to confirming that he loaned Overgold $300,000 in 2010 for the purpose of paying for the fit-out of the store. Mr Appel Snr confirmed he loaned the money to Mr Appel 'for him to pay for the fit-out or establish his business.'

105 In his submissions, Mr Appel contended that if the creditors did suffer loss and damage as a result of his trading on when Overgold was insolvent, (which he denied), such loss and damage was caused by ANZ's failure to take reasonable care to sell the franchise and its assets for their market value or best price reasonably obtainable in accordance with s 420A of the Act. Mr Appel contended that Overgold has a claim against ANZ in negligence and/or breach of duties. Mr Appel claims the plaintiffs' claim against him should be offset by the difference between the sale price of assets and the market value or best possible price reasonably obtainable for the franchise and its assets and therefore reduced to nil.

106 Mr Appel criticised the valuation by ANZ for effectively valuing the business for $36,125, being the going concern value, when it was being offered for sale by Nando's' own in-house business sales manager for $350,000 - $400,000 excluding GST against a minimum market value of $450,000 excluding GST, and expenditure on setup of not less than $535,487.66).

107 Mr Appel denied that he was ever aware of Overgold's insolvency or the possibility of insolvency, and denies that there were any reasonable grounds for suspecting Overgold was insolvent or likely to become insolvent. He asserted that at all times held a reasonable expectation that any debts could be met by Overgold's cashflow and the financial accommodation that it was receiving from time to time from his father and that the value of Overgold's business and assets could be realised for an appropriate value which would discharge any liabilities that the business might have accrued whilst trading.

108 As to the alleged debt to Collins Commercial Pty Ltd which is claimed by the plaintiffs, he asserted that Nando's obligations under the Lease with the landlords did not impose any obligation on him for the outstanding amount. Nando's were required to pay the outstanding amount (otherwise it would have lost possession of the rented Premises). He asserted that the fact that Nando's has performed its obligations under the Lease by payment of rent and outgoings which are mentioned in the invoice but failed to later claim that cost from Overgold (or from him as guarantor of the Licence Agreement) renders the claim 'invalid'.

109 Mr Appel contended that the remaining alleged debts, which he says are minor, all could have been paid by him had proper processes been carried out and had his best endeavours and its own efforts to complete a sale to Nando's and liquidate the remaining assets not been hampered.

110 Mr Appel contended that certain debts have already been forgiven by creditors and therefore are no longer relevant, and others have likely been forgiven and are no longer being sought and Mr Quin has not proven that this is not the case.

111 Mr Appel submitted that Overgold was never insolvent by reason of the following factors:

(a) Overgold received financial assistance from his father as and when required and these debts were not 'real loans' in the sense that Mr Appel Snr had discretion to forgive any loan and to enable Mr Appel to use the funds for any purpose. These funds were available throughout Overgold's trading and were available even after the business ceased temporary operation prior to he and Mr Appel Snr's joint decision to sell Overgold's business;

(b) at no time before the final weeks of the restaurant's operation had Mr Appel and Overgold ever breached any obligations it had to creditors for payment of invoices, or repayments of loans and no legal action was ever taken by any suppliers or creditors prior to Mr Appel voluntarily closing Overgold's doors; Mr Appel enjoyed good commercial relationships which enabled flexible payment arrangements; and

(c) most suppliers and creditors of the business were on weekly or monthly payment terms and if Overgold was insolvent, it would not have been able to enjoy the uninterrupted supply of goods and services which it did right up to the date the store was closed. It was not in default to the banks that had provided finance to Overgold; unpaid royalties which were accruing to Nando's were being allowed to accrue due to agreement between Nando's and Overgold and were to be offset by the sale of the business and realisation of assets. All other unpaid debts that were accruing were being managed and recovery action was never taken prior to Overgold closing its doors.

112 Mr Appel contended that many businesses in a similar position to Overgold commence with net losses as the business develops and for this reason Overgold's performance was not unique or unusual.

113 Mr Appel submitted that it was typical for Nando's to handle nearly all sales of existing Nando's stores by reason of their experience and vast network of other franchisees, several of whom he asserted had expressed interest in the store. He submitted that the initial unprofitability did not affect Nando's ability to sell the business for the sums mentioned and ANZ should be held to account for the 'insanely low sum' realised for the business.

114 Mr Appel asserted that Overgold employed professional book keepers and a "top tier" accounting firm as its tax accountant. After closing the store he consulted BDO Australia and other financial experts, none of whom expressed the view that Overgold was insolvent. The opinions of those experts were not in evidence. Steps were taken to effect liquidation and transfer the business of Overgold to Nando's which could have been followed by further payments from Mr Appel's father if necessary. Mr Appel asserted however that after this process commenced Nando's suddenly ceased all communication with him and liquidation action was commenced.

115 Mr Appel asserted that Overgold could have paid all debts at any time had the need arisen but that he had first decided to explore other options available to him. He was deprived of the opportunity to discharge the debts whether through further financial assistance, a sale of the business for a reasonable sum, a combination of both or by some other means. He submitted that the management by his legal advisers of the ATO debt prevented legal action being taken as it may have been long before the liquidation. He states that he used his best endeavours to make arrangements with all creditors up to and including the date it ceased trading otherwise Overgold would have been the subject of legal action long before this time.

116 Mr Appel denies any contravention of the Act as specified in the plaintiffs' amended statement of claim. He submits that the amount of the plaintiffs' claim, $258,892, is grossly inflated and has been miscalculated and that any loss or damage the plaintiffs allege was suffered by creditors could have been avoided by any number of better options available to the plaintiffs, for example the purchase of the business by Nando's for a fair and reasonable sum.

117 Mr Appel asserts that Mr Quin has failed in his duties, including his duty to handle this matter in a timely way, and refers to the plaintiffs' claim against him for unpaid loans which resulted in a costs order in his favour as an example of this.

118 In addition, the ANZ Charge was over Overgold's assets, or at least its plant and equipment located at the Premises, and Overgold had no capacity to discharge the debt owing to the ANZ. Mr Miller observed that it would not make commercial sense for an incoming purchaser to take over ownership of the business in circumstances where the charge was over the plant and equipment to secure a loan and that loan could not be paid and the security discharged.

119 The evidence is clear that Mr Appel was the sole director of Overgold since its incorporation in January 2005 until it went into liquidation on 20 February 2013. As such, for the purposes of s 588G(1)(a), he was a director of Overgold at a time when each of the debts identified in paragraph 51 were allegedly incurred.

120 Many of the debts the subject of the plaintiffs' claim are relatively small and the dates that they were incurred are, on an application of the principles described above, in my opinion, not controversial for the purposes of s 588G(1)(a).[42] The invoices and other accounting documents put into evidence by the plaintiffs establish in my view, with some major exceptions, to which I will come shortly, that the debts were incurred in the relevant sense on or about the dates mentioned in the column headed 'date incurred' in the table in paragraph 51.

121 I do not consider, however, that the dates nominated for the incurring of the debts to Nando's in respect of franchise fees (for $115,706.17) and for Collins Commercial and Industrial Pty Ltd (for $16,639.63, apparently an amount for rent and outgoings in respect of the Premises for April to July 2012), were incurred on or about the dates contended for by the plaintiffs. As I have observed above, the most analogous type of transaction is where liability is created to pay rent under a lease of real estate and authority on this issue is that liability for rent under a lease is regarded as being incurred in the present context when the lease is entered into.[43]

122 The Franchise Agreement (and the Licence Agreement) were entered into on 27 April 2010. As noted, under the terms of clause 3 of the Franchise Agreement, Overgold, in consideration for the grant of the franchise by Nando's to it, undertook to pay a monthly franchise fee and a monthly marketing fee, within seven days of the end of each calendar month during the period of the Franchise Agreement. In my view, liability for the franchise fee and marketing fee was incurred by Overgold when it entered into the Franchise Agreement. In his written submissions, Mr Miller pointed to a number of statements generated by Nando's which identified invoices directed to Overgold for the period 23 February 2011 to 1 July 2012. The larger invoices were in respect of franchise fees payable under the Franchise Agreement and there were other much smaller additional invoices for incidental charges made under the Franchise Agreement. In my opinion, the dates when those franchise fees were invoiced is of no relevance in the present context as the liability to remit them was incurred in the relevant sense when the Franchise Agreement was entered into. That date is 27 April 2010.

123 Similarly, the invoice for $16,639.63, generated by Collins Commercial and Industrial Pty Ltd, related to the rent and outgoings for the Premises. As has been noted, Overgold did not have a lease with the owners of the Premises, Mr and Mrs Cseh: that lease was with Nando's which was liable on the Lease for payment of rental and outgoings. The Collins Commercial invoice of 21 June 2012 is addressed to 'Nando's Australia Pty Ltd' for that reason. Overgold did not incur a debt to Mr and Mrs Cseh (and clearly not to Collins Commercial who were acting as the owners' agents).

124 The Licence Agreement, also dated 27 April 2010, obliged Overgold to pay to Nando's what are described as fees (essentially rent) and outgoings. In my view, that obligation was incurred on 27 April 2010. On that date, Overgold became contractually obliged to remit the rent and outgoings to Nando's under the Licence Agreement. The Collins Commercial invoice of 21 June 2012 identifies various charges, including rent, water rates, owners corporation fees, and other outgoings for the period April through to July 2012, but if one identifies 'that time'[44] i.e. when the obligation to pay such charges was incurred, it was when it entered into the Licence Agreement, 27 April 2010. The position in regard to the franchise fees and the Collins Commercial Claim are, in my view, completely analogous to that considered by the Full Court of the Supreme Court of Western Australia in Russell Halpern.[45]

125 As I have said, each of the dates contended for by Mr Miller in respect of the incurring of the other debts in the table in paragraph 51 are, in my opinion, uncontroversial. In particular, the liability to the Australian Tax Office in respect of running balance account liability and unpaid superannuation contributions were incurred in the date ranges identified in the table by reference to the ATO documentation generated in respect of those liabilities. Many of the debts were incurred quite late in the piece, on the eve of Overgold ceasing trading, but the tax debts were incurred from February 2011 until July 2012.

126 I next turn to a consideration of when Overgold became insolvent. Mr Miller contended that Overgold was insolvent during its entire trading period, but at least at all times from 30 June 2010 to 20 February 2013. Mr Quin gave the opinion in his affidavit that the company was insolvent on and from 30 June 2010 and, in my view, on the balance of probabilities, I would find this to be so.

127 There is not sufficient evidence for the plaintiffs, in my view, to establish that Overgold was cashflow insolvent prior to June 2010. The adjusted balance sheets for the financial year ending 30 June 2010 recorded a net asset deficiency of $12,056.34. After that, the deficiency escalated from $400,926 in the financial year ended 30 June 2011, to $525,747.70 in 2012.

128 The absence of evidence to justify a conclusion that prior to 30 June 2010 Overgold was insolvent may well be explained by reason that its trading was in its infancy and it had very few, if any, creditors. After that time, Overgold was, in my view, never solvent. It never made a profit for the whole of its trading life. The ANZ Loan and the advances by Mr Appel Snr (whether they be characterised as capital injections or loans) appear to have been almost completely expended on payment for the fit out and the establishment of the business.

129 Mr Appel contended both in the context of submitting that the company was solvent when the debts were incurred and in the context of his 'suspicions' as to insolvency and 'expectation' as to solvency that he considered, because the cost expended on the fit out was in the order of $600,000, that Overgold could readily liquidate its assets in the form of the fit out and pay its creditors.

130 There are several difficulties with that contention. The first is that it ignores the fact that the relevant test is a cashflow test. While that test entitles a court to take into account assets available to the company which can be realised in order to meet indebtedness, there is, as Palmer J pointed out in Hall v Poolman, a temporal limitation to this.[46] As his Honour observed, realisable property can only be taken into account in assessing solvency 'if that property is in such a position as to title and otherwise that it could be realised in time to meet the indebtedness as the claims mature'. The evidence in this case is that Mr Appel had the business on the market for a year and was not able to attract a purchaser for it despite his unique connections with other Nando's franchisees. He was a person who, on his own admission, was well acquainted with the Nando's franchise business model. I cannot accept that it was reasonable for him to regard the value of the fit out as being a nest egg, with the value he attributed to it, as a basis for maintaining that Overgold was solvent. He stated that he had worked for Nando's for several years, enforcing the terms of franchise agreements in the very role which would give him unique insights as to the operation of the franchised stores and in particular, how his business was faring compared with other Nando's franchises he came across in his previous occupation at Nando's. He was aware that the terms of the Nando's franchise agreements placed franchisees in a disadvantageous predicament in the event that a franchise ran into difficulties.

131 Further, Mr Morris of ANZ, who controlled the sale of the fit out which took place pursuant to the ANZ Charge, indicated that it was his common experience that sales of fit outs in restaurant businesses realised a small fraction of the expenditure which had been undertaken in these types of situations.

132 I also accept Mr Quin's evidence that Overgold's books grossly overvalued the value of the fit out. While to a lay person the very dramatic difference in the expenditure involved in the fit out and what was realised on its sale a comparatively short time afterwards is hard to fathom, the evidence is that this is the reality of the situation. As I have noted, ANZ had a vested interest in getting the best possible price for the business to apply against Overgold's indebtedness to it, and Mr Morris, an experienced bank manager with over 40 years' experience, indicated that the sale price was the best that could be obtained.

133 While Mr Appel Snr advanced substantial monies to Overgold, he could have withdrawn such financial support at his whim, which in fact he ultimately did. Other than a natural inclination to assist his son, he had no obligation to inject funds into Overgold to pay the creditors.

134 The finding that insolvency of Overgold is established on or from 30 June 2010 in my opinion has the consequence that Mr Appel is not liable for the amounts claimed for franchise fees ($115,706.17), nor is he liable for the rental invoice generated by Collins Commercial and Industrial Pty Ltd (for $16,639.63). First, any liability for those matters can only be referrable to the Franchise Agreement and Licence Agreement, liability which was incurred by Overgold on 27 April 2010, prior to the date that insolvency has been established. As regards the Collins Commercial debt, the invoice is directed to Nando's, not Mr Appel, presumably under the terms of the lease that Nando's had with the landlords of the Premises. Even if that claim could be fashioned to be one made under the Licence Agreement the obligation to pay the rent and outgoings claimed was incurred on 27 April 2010.

135 I now turn to the question of whether, in respect of the debts which remain after the exclusion of the Nando's franchise fee and the Collins Commercial debt, at the time that those debts which remain were incurred there were reasonable grounds for Mr Appel suspecting that Overgold was insolvent or would become insolvent as a result of incurring the debts.

136 The date range involved in such an analysis ranges from 1 September 2010 until late June 2012. As I have said, I consider that Overgold was insolvent throughout that period. In my view, there is abundant evidence in support of the plaintiffs' proposition that first, there were reasonable grounds for suspecting that Overgold was insolvent or would become insolvent as a result of incurring those debts, and that a reasonable person in the position of Mr Appel as the sole director of Overgold in a company in Overgold's circumstances would have been aware, of matters which gave rise to reasonable grounds for suspecting that Overgold was insolvent.

137 Those matters are detailed in paragraph 61 of these reasons and I accept Mr Miller's submissions in that regard. In short, Mr Appel must have been aware that Overgold had never made a profit and indeed, had operating losses for the whole of its trading life. On and from 30 September 2011, it failed to lodge BAS and from at least May 2011, had a running balance account deficit debt owing to the ATO with no demonstrable financial resources from which those obligations could be paid. From 1 April 2011, Overgold failed to remit amounts for Superannuation Guarantee Charges to the ATO, and it had no resources to pay such obligations. I do not accept Mr Appel's evidence, really nothing more than unsupported assertions, that he had the personal financial resources to maintain the solvency of Overgold. He gave no explanation as to why those obligations were not met.

138 Mr Appel did nothing to prevent Overgold from incurring the debts. I accept Mr Miller's submission that Mr Appel, as the sole director of Overgold, knew of those matters, or they would have been known to a reasonable person in his position, and that the matters provide reasonable grounds for suspecting that Overgold was insolvent or would become insolvent, creating a clear basis for satisfaction of the matters required to be established in s 588G(2).

139 I next turn to whether Mr Appel could avail himself of the defence provided for in s 588H(2) which provides a defence of reasonable grounds to expect that Overgold was solvent at the time the debts were incurred. I have detailed the authorities which consider this question in paragraphs 32 and 33 above. On an application of the analysis by Palmer J in Hall v Poolman,[47] a reasonable director in Mr Appel's position, armed with the knowledge he had of the affairs of Overgold (or what a reasonable director in his position would have known), in my opinion, could not, on the basis of his knowledge of the financial position of Overgold (or the knowledge he should have had), have reasonably expected that Overgold could pay its debts.

140 That 'knowledge' is of the matters described in paragraph 61. Armed with his knowledge of those matters, I do not consider that he could have had reasonable grounds to expect that Overgold could pay all its debts as and when they full due.

141 In the circumstances, I will order pursuant to s 588M that Mr Appel pay Overgold an amount which takes into account my disallowance of the franchise fees and the 'Collins Commercial' claim. I would ask that the plaintiffs prepare a form of order which is in accord with these reasons and forward it to my Associate.

[1] The total sum claimed as stated in the plaintiffs' closing submissions is $252,854.42.

[2] Hawkins v Bank of China (1992) 26 NSWLR 562 ('Hawkins').

[4] See Hawkins, 572, Powell and Another (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer (2001) 37 ACSR 589, [73] ('Powell').

[6] [1995] NSWSC 31; (1995) 18 ACSR 1.

[8] See Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217 (Ipp J); Sutherland v Liquor Administration Board (1997) 24 ACSR 176 (Young J); Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation (1991) 1 VR 489, [36] (Charles JA with Brooking and Kenny JJA agreeing); Powell (n 4) .

[9] (1993) 11 WAR 64.

[10] (1996) 20 ACSR 81, 81.

[11] Allens Arthurs Robinson, (Thomson Lawbook Co, 2nd ed, 2007) 53.

[13] [2001] VSC 27, [28].

[14] ASIC v Plymin (No 1) [2003] VSC 123; (2003) 46 ACSR 126, [516] ('Plymin').

[16] (1986) 10 ACLR 539, 541-542 ('Russell Halpern').

[17] See Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths Australia, 1st ed, 2015) [2.14].

[21] See Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths Australia, 1st ed, 2015) [2.14].

[24] [2007] NSWSC 87, [15].

[25] See Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths Australia, 1st ed, 2015) [2.16].

[26] [2007] NSWSC 1330; (2007) 65 ACSR 123 at [187].

[27] [1966] HCA 21; (1966) 115 CLR 266.

[28] Ibid at 303 per Kitto J. See also Sands & McDougall (Wholesale) Pty Ltd (in liq) & Anor v Commissioner of Taxation [1998] VSCA 76; (1999) 1 VR 489 at [56] per Charles JA.

[30] See Farid Assaf, Brett Shields and Hilary Kincaid, Voidable Transactions in Company Insolvency (LexisNexis Butterworths Australia, 1st ed, 2015) [10.46].

[31] Carrier Airconditioning Pty Ltd v Kurda (1993) 11 ACSR 247,250.

[32] [1999] NSWSC 581; (1999) 32 ACSR 201, 215, also referred to with approval by Palmer J in Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [262].

[33] [2007] NSWSC 1330; (2007) 65 ACSR 123 at [269]- [275].

1. [34] "Fees" means an amount equivalent to the Rent [cl 1.3]. "Rent" means the rent payable by Nando's under the lease from time to time [cl 1.17]. "Outgoings" means all moneys, other than the Rent, payable by Nando's under the Lease [cl 1.15].

[35] Upon Mr White's retirement, he was removed as a party to the proceeding by order of Randall AsJ on 24 August 2018.

[36] While there were affidavits filed by both the plaintiffs and Mr Appel in the proceeding, such material related to background matters and to the issue of the director loan, which was struck out on 26 October 2018 by order of Randall AsJ. The material also concerned a security for costs application brought by Mr Appel by summons of 13 September 2018, which was unsuccessful.

[37] The plaintiffs' closing submissions referred to 00.00.11 however I note the first AGL invoice referred to by the plaintiff was issued 29 November 2011 in respect of supply period 28.10.11 to 28.11.11.

[40] At the trial of the proceeding, the plaintiffs stated that they would not be pursuing the amount claimed on behalf of Nexia Melbourne Pty Ltd ('Nexia'), for the sum of $5,632.00.

[41] A quick ratio is a ratio used in financial statement analysis. It is calculated by dividing quick assets by current liabilities. 'Quick assets' are those assets that are quickly convertible into cash and are calculated by subtracting inventories from current assets. The quick ratio measures the short-term solvency or liquidity of a trading concern, in particular, the ability to meet current liabilities without relying on the sale of inventory stock. Note that Mr Appel Snr's evidence is that the $300,000 advance was a loan.

[42] Clearly, for the purposes of s 588G(1)(d) the debts were incurred after the commencement of these provisions in the Act, 23 June 1993.

[43] See paragraphs 20‑22 of these reasons.

[44] See s 588G(1) and (2) of the Act.