96 Thereafter, Mr McFarlane's contribution towards what he understood to be his requirement to provide $150,000 in capital was shown in the records of the company as a loan.
97 In an email dated 5 March 2004, which he forwarded to Mr McFarlane with copies to Mrs Gorman, Mr Matthews and Mrs Parkinson, Mr Parkinson provided some insight as to the shareholders' loan arrangements. It said:
"Chip
I said that I would write a note to you about payback of shareholder loan, you may wish to model what you are doing on a similar basis after you submit your loan to the company.
When the company 'The Institute of Executive Coaching Australia Pty Ltd' was set up, the shareholding was divided with four equal shareholding to the companies owned by Anne, John, Chip and Julie & Barry. John and Anne, being the founders, had effectively diluted their shareholding in the AIEC to achieve this. We were 'given' this shareholding free of charge, but on the basis that payment of $150,000 would be made to the company.
The most efficient way to pay this $150,000 to the company is through 'working time' rather than paying cash. That is that we take a lower 'salary' than normal and the difference over time makes up the $150,000 payment to the company.
Since the company needed cash, Julie and I provided $150,000 in cash as a 'shareholder loan'. However, this is not really a loan, but the money that I owed the company for the shareholding. In order that I may 'earn' my shareholding as above, the company is repaying the shareholder loan to me at the rate of $50,000 per year over 3 years in lieu of 'salary'.
You may wish to pay your contribution to your shareholding in a similar manner, both for you to earn back the cash shareholder loan you are about to provide and to earn the rest of your shareholding through reduced salary payments. I would be happy to discuss with you how you would best do this before we finalise the director's service agreements."
98 Accordingly, as at June 2004, there was reflected in the financial records of the old Institute liabilities owing to B Parkinson of $150,000 and to C McFarlane of $65,000. The applicants placed great weight on the way in which the monies which were intended to be introduced by each of these parties as capital were ultimately reflected in the financial records of the old Institute as loans, and the consequences that flowed, firstly, in considering the financial state of the company at that time and, secondly, in and about the consequences of placing the old Institute into liquidation.
Events leading to administration and sale
99 In order to set the scene for a discussion of the financial state of the company, and to consider whether Mr Parkinson misrepresented it to the meeting of 22 June 2004, I need to consider a course of events which commenced on 4 June 2004, leading up to the sale of the business by the administrator to the new Institute.
100 The starting point for the suggestion made on behalf of the applicants that Mr Parkinson had devised a plan to exclude Mrs Gorman from the business was the consequences of the collapse of the mediation in June 2004. Mr Parkinson said in cross-examination that he no longer wished to work in a business with Mrs Gorman and that a solution was for him to leave. He had no doubt that his wife would also wish to leave, although it would be her choice. Mr Matthews said that he had enjoyed working in the business and that he saw it as a business that "had potential". He knew also that Messrs McFarlane and Matthews wanted to continue to work with him and his wife because they had told him after he had said that he was considering leaving the business.
101 Mr Parkinson denied that he had any particular plan in mind at that stage. He did, however, see Mr Devries who was to become the administrator of the old Institute on 21 June 2004, the day before the directors' meeting. In evidence, Mr Parkinson denied that at that stage he had an intention to appoint a voluntary administrator, but said that it was a matter that he was considering but no decision had been taken. This evidence was in contradistinction to a letter addressed to Mr Parkinson from Devries Tayeh, dated 21 June 2004, which referred to "previous correspondence" in relation to the proposed voluntary administration of the old Institute and said: "As you have indicated, it is your intention to appoint a Voluntary Administrator to the company, I attach for your attention…" and there then followed a reference to a number of documents.
102 The contents of this letter conflict with the evidence of Mr Parkinson. I have serious concerns about the veracity of Mr Parkinson's evidence. There is no explanation as to why Mr Devries would write a letter to Mr Parkinson on 21 June 2004 referring to previous correspondence and referring to an expressed intention to appoint a voluntary administrator. Mr Devries was not called by the respondents to give evidence in the proceedings and no explanation was tendered, which would indicate that he was unavailable to do so. I do not accept Mr Parkinson's explanation that as at 21 June 2004, there was no intention to appoint a voluntary administrator. Mr Parkinson's evidence in this regard is also inconsistent with that given by Mr Matthews.
103 Mr Matthews said that he knew that as at 22 June 2004, Mr Parkinson was aware that there was "a possible option" of purchasing the business of the Institute in another company. It was Mr Matthews' understanding that Mr Parkinson had a plan to resolve the problems of the company and that "one possible option" was to put it into administration. Mr Matthews clarified the evidence by saying that the problem that the company faced was the problem involving the breakdown of relationships with Mrs Gorman. He said that Mr Parkinson wanted to continue in a business relationship with him. Mr Parkinson had told him that the only concern that he had was the relationship of others with Mrs Gorman. He understood that Mr Parkinson was working on a resolution that would involve the exclusion of Mrs Gorman. Whether this required putting the company into administration he left in its entirety to Mr Parkinson.
104 Significantly, Mr Matthews said that he had met a representative of the firm who were appointed administrators before the meeting of 22 June 2004. It was some time between 6 June and that date. He said that he was in the company of Mr Parkinson when this occurred.
105 Mr Matthews confirmed that it was his preference to continue in business with Mr and Mrs Parkinson rather than Mrs Gorman and that if someone was interested in Mrs Gorman buying into the business, he would not be willing to participate.
106 Mr Parkinson had arranged for a balance sheet of the business to be prepared as at 30 May 2004. It seems to have been forwarded by facsimile to persons unknown on 4 June 2004.
107 The balance sheet showed total current assets of about $390,000. This included total cash on hand of about $206,000. However, included within these amounts was almost $50,000 shown as a deposit of the second applicant. There was also the sum of $90,159.50 shown as a term deposit, which I assume was referable to the lease bond deposit. In addition, there were credit funds in bank accounts of about $75,000. Furthermore, the balance sheet disclosed trade debtors of approximately $185,000.
108 The balance sheet showed total liabilities of approximately $329,000. However, these included items described as "long term liabilities" being a loan to B Parkinson of $150,000 and to C McFarlane of $65,000. An amount was shown for "total current liabilities" of approximately $110,000.
109 On 10 June 2004, Mr Parkinson sent an email to all of the directors advising that the cash situation of the company was "now critical".
110 Mrs Gorman replied to all directors the same day asking for details about accounts receivable, offering to put some money back into the business and referring to the shareholders' agreement which provided that in the event of a cash flow crisis each of the shareholder parties would contribute $25,000.
111 At some time in around April 2004, Mr Parkinson had negotiated an unsecured $50,000 overdraft facility for the company and corporate credit card credit limits up to $30,000, all with the ANZ Bank. There was a requirement, amongst others, that all directors give a personal guarantee. On 22 May 2004, Mrs Gorman sent her personal details to the bank so that that advance might be processed.
112 On 1 June 2004, Mr Parkinson advised Mrs Gorman that the ANZ bank loan had been approved and requested her 2003 tax details.
113 In the email communication of 10 June 2004 entitled "Cash shortage", Mr Parkinson described the cash situation as "critical". He said: "We currently have less than $2,000 in our account and while there is a cheque for a little over $8,000 which should be cleared by tomorrow, we also need to repay an over-receipt of $6,000 at the latest tomorrow and we also need $3,500 cash for foreign exchange…There are few receivables that are due in the immediate future to relieve this situation." He said that it was likely that the situation would remain "critical for some time."
114 In cross-examination, Mr Parkinson was taken to the state of the company's bank accounts as at 10 June 2004. A trading account showed a credit balance of $1,967.48. However, the company also conducted a "premium business account". As at 10 June 2004, there were credit funds in that account of $31,907.89. It is probable that that amount did include the sum of $8,800 deposited that day. Nevertheless, the overall position of the company as portrayed by Mr Parkinson in his email was worse than that revealed by the company's banking records. Indeed, in referring to the one trading account only, it may be inferred that Mr Parkinson deliberately misled those who were attending the meeting. It is inconceivable that he was not aware of the existence of the other bank account.
115 On 11 June 2004, Mr Parkinson, as a director, issued a notice of board meeting to all directors to be held at 10:30am on 22 June. The agenda was stated as "To consider and if thought appropriate to pass the following resolution…to consider and discuss the future affairs of the company and the possible appointment of an Administrator."
116 There was evidence in the proceedings that around 11 June 2004, there was a conversation between Mrs Gorman and Mrs Parkinson. Mrs Parkinson advised Mrs Gorman that it was necessary to resolve the dispute that had arisen between the directors indicating that unless there was a resolution, it might be necessary to put the company into administration. At that stage, Mrs Parkinson made an offer to pay Mrs Gorman $250,000 to leave the company. Mrs Gorman asked where the money was coming from but received no reply. She later responded to that offer in correspondence, but the matter was not pursued further by either Mrs Gorman or Mrs Parkinson.
117 It was said on behalf of the applicants that such an offer was part of the plan which involved putting the company into administration, this being a threat which was made at the time that the offer was conveyed.
118 On 16 June 2004, Mrs Gorman wrote to Mr and Mrs Parkinson rejecting the offer that she had received to leave the company upon payment to her of $250,000.
119 Later in the letter, Mrs Gorman proposed a number of alternatives to the appointment of an administrator. These included use of the credit monies of approximately $71,500 in the company's cheque account, the use of an overdraft facility with ANZ bank which she understood to have been approved in the sum of $120,000, the calling up of shareholder contributions of $25,000 each as contemplated by Clause 7.2 of the shareholders' agreement and calling upon Mr McFarlane to contribute the balance of his agreed investment of $150,000, noting that he had contributed only $65,000 to that date.
120 On 21 June 2004, Mrs Gorman prepared a discussion paper for the board meeting the following day. It sought recourse to the company's accountants, Hall Chadwick, to examine the company's financial position and give some advice about it. She also proposed that further attempts be made to resolve the impasse between the directors.
121 On 21 June 2004, Mr Parkinson prepared a memorandum for directors for consideration at the board meeting the next day.
122 That memorandum first referred to an adjustment of $98,000 for a beneficiaries' loan account that was a hangover from the accounts of 30 June 2003, which had only just come to hand. This involved monies that were associated with the earnings of Mrs Gorman and Mr Matthews from the business prior to it being acquired by the company. This matter was said to be reflected in an updated balance sheet attached to the memorandum.
123 Mr Parkinson noted that a cash flow analysis, which was attached, "shows current payables exceeding available cash resources by $114,229. This situation will deteriorate significantly over the coming couple of months such that this will likely increase to around $180,000." An attached letter from Hall Chadwick enclosing the 30 June 2003 financial accounts stated that a total of $98,383.11, under the heading "Beneficiaries' Loan Account", included an amount of $77,566.75 for "drawings to be allocated." These appear to have been the net balance of a number of payments out of the business to, presumably, CIC. In cross-examination, Mr Parkinson said that the cash flow figures were provided to him by office staff.
124 The minutes of the directors' meeting, held on 22 June 2004, became evidence in the proceedings. All of the principal persons involved were present including Mr Matthews. There was tabled the memoranda prepared by Mrs Gorman as well as Mr Parkinson's memorandum to which I have earlier referred.
125 A motion by Mrs Gorman to appoint an independent auditor to audit the figures was defeated. Mr Parkinson indicated that he was confident that the cash flow figures that he had presented were sufficiently accurate.
126 There was a discussion about whether or not directors could forego salaries in the short term. There was no support for such a move other than from Mrs Gorman.
127 Mr Matthews gave evidence about what transpired at the meeting on 22 June 2004 when Mr Parkinson was explaining the documents that were attached to his memorandum. Mr Parkinson told him and the others present at the meeting that there was an immediate cash flow concern, that the company would not be able to pay its bills in July and that he thought that the position would get worse. A document prepared by Mr Parkinson showed that the deficit would be of the order of $114,000 by about the middle of June. It was Mr Matthews' recollection that there was a discussion that was confined to the information that was contained within the pages accompanying the memorandum, but Mr Matthews himself did not ask any questions about them. Mr Matthews was aware at the meeting that Mrs Gorman was proposing that the financial affairs of the company be analysed by its accountants so as to gain some assistance. She was denying that the problem was anything other than a temporary cash flow problem and she was further denying that the company was insolvent or approaching insolvency. Mr Matthews was aware at the meeting that Mr Parkinson rejected Mrs Gorman's suggestions. He conceded that he himself did not have sufficient financial acumen to be able to make his own judgment about the financial affairs of the company. He relied upon the information provided to him by Mr Parkinson. In doing so, he was supported by Mrs Parkinson and Mr McFarlane. Mrs Parkinson was in fact voting on his behalf and he had given her a direction to do so.
128 Mr Matthews was asked about Mrs Gorman's suggestion that each of the directors make a cash contribution to alleviate the cash position. He said that all of the directors except Mrs Gorman declined to do so because of the breakdown in the working relationship between all of them and Mrs Gorman.
129 There was then discussion about payment by Mr McFarlane of the $85,000 shortfall in his $150,000 contribution to equity. Mr McFarlane advised the board that no time frame had ever been agreed for payment of the balance of his monies and that he was unable to contribute any additional monies at that stage.
130 There followed a discussion about beneficiary loan accounts shown in the 2003 financial year.
131 Other suggestions, including seeking an additional equity partner and contribution of additional monies by shareholders, were also rejected. It transpired that no shareholder indicated ability or willingness to provide additional loans or funding to the company.
132 A motion "That in the opinion of the directors, the company is likely to become insolvent and an administrator of the company should be appointed" was passed by all directors, save Mrs Gorman who voted against it. Mr Parkinson proposed that Anthony Devries and Riad Tayeh be appointed as the independent administrators on the recommendation of his solicitors, then known as Abbott Tout. A motion appointing them as administrators was then passed, again by majority.
133 Mr Matthews said that there would have been difficulty in adjourning the meeting on 22 June to consider some of the matters put up by Mrs Gorman as to accounts receivable because of the dispute involving her. That dispute, he said, "was affecting our ability to focus on financial issues. At least in the sense I had that we needed to resolve issues quickly."
134 The principal documents relied upon by Mr Parkinson at the meeting on 22 June 2004 consisted of his memorandum of 21 June 2004, the contents of which I have earlier described, together with a balance sheet which appears to have been printed on 18 June 2004, and, significantly, some cash flow summaries which I shall describe in greater detail shortly. The balance sheet showed net assets of $77,687.97. However, this was calculated after taking into account as long term liabilities loans to B Parkinson of $150,000 and to C McFarlane of $65,000. The situation is, obviously, quite different if one takes those matters into account as capital contributions. Total cash on hand was shown as approximately $95,000 and trade debtors as approximately $92,000.
135 The cash flow document as at 18 June 2004 showed that the company was as at that date in a negative cash flow position of $114,229 and this was projected to increase to $149,860 as at 15 September 2004. Included in the "payables" was a sum then said to be owing to Attain of $63,000 and to CIC of $21,591. If either Attain, which represented the Parkinson interests, or CIC, which represented the interests of Mrs Gorman, was prepared to defer payment of those monies for some few months, then the cash flow position would have improved by about $84,000.
136 However, it was in the area of receivables that the applicants levelled the greatest attack on the cash flow analysis prepared by Mr Parkinson and presented by him to the meeting.
137 It must be remembered that Mr Matthews and Mr McFarlane said in evidence that they relied on the information prepared by Mr Parkinson in their support of the resolution to appoint an administrator to the old Institute.
138 Mr Parkinson was subjected to rigorous cross-examination concerning the amounts disclosed as both receivables and payables in the cash flow analysis and accompanying documentation which he had presented to the meeting. He said that he had asked a number of persons in the office to make enquiries of individual clients to assess the likelihood of payments to be made to the company and the timing of those payments. Those enquiries had been made by persons who interfaced with each of the clients concerned. There was a great deal of cross-examination directed to whether or not the information obtained was accurate and whether it should have been included in the documentation presented by Mr Parkinson to the meeting. There is no evidence available to the Court to enable any assessment to be made about the nature and extent of the enquiries made of individual clients and the accuracy of the information obtained.
139 Mr Parkinson said that he had provided those attending the meeting with a profit and loss statement at some point before the meeting occurred. That profit and loss statement appears to have referred to the period 1 September 2003 to 31 May 2004 and was printed on 11 June 2004. It shows a net trading loss of $29,871.12.
140 However, there is evidence that if Mr Parkinson had called for a profit and loss statement for the period 1 July 2003 to 22 June 2004, the date of the meeting, this would have revealed a net profit of $111,196.03. This information comes from a profit and loss statement printed on 9 July 2004. The facility to print such a profit and loss statement for that period was the MYOB accounting system that was used by the company. Mr Parkinson did not give any satisfactory explanation as to why he could not have printed off such a document on 22 June 2004 to present to those attending the meeting. This would have created a much different trading picture for those attending the meeting. It showed that even after payments made to the companies associated with the directors and, presumably, all other known expenses, there was a net trading profit exceeding $111,000. As I have previously stated, Messrs Matthews and McFarlane relied explicitly on the information being given to them by Mr Parkinson. There is no reason to doubt that Mrs Parkinson also relied on information provided to the meeting by her husband.
141 In cross-examination, Mr Parkinson characterised the difficulties confronting the company as being "a short term serious cash problem." He was asked whether this indicated that the company was at that stage insolvent and he responded that it was. Whether or not Mr Parkinson honestly believed that the company was insolvent is a matter that I am unable to determine. However, as I have indicated elsewhere in these reasons for judgment, there are many aspects of the evidence of Mr Parkinson that indicate, in the kindest sense, an inclination to be loose with the truth. As an example, in cross-examination, Mr Parkinson was asked whether he was the managing director of the new Institute. He denied that he was and said that he could not recall ever putting himself forward as the managing director. He was shown a printout from the new Institute's website. It describes Mr Parkinson as "managing director" and contains a photograph and background information about him. This cannot, in my opinion, be a matter of insignificance such that it might slip Mr Parkinson's mind. It is again indicative of a carelessness with the truth.
142 As will be seen, there was, at that stage, no convincing argument to be made out that the company was insolvent.
143 In his evidence, Mr Parkinson complained that after he had invested in the business he discovered an entry in the accounts of the former business operated by Mrs Gorman and Mr Matthews of a "beneficiary loan" of $98,383. This, he said, included a $30,000 loan to Mr Matthews about which there was no paperwork and no details of repayment and the like. He said in a sworn reply document filed in the proceedings on 19 December 2008, of the balance of $68,000, that it related to costs which should have been reflected in the accounts for that year, namely the year commencing 30 June 2003, the costs were not so reflected and therefore the profit should have been reduced accordingly.
144 In the sworn reply, Mr Parkinson said, referring to these monies, that during the board meeting held on 22 June 2004 "the directors considered the available options to do with the impending cash crisis and the repayment of the beneficiary loan was also discussed as a possibility. The first applicant not only refused to repay the loan but refused to accept or acknowledge responsibility at all for the loan despite executing the accounts on behalf of the respondents."
145 In cross-examination, Mr Parkinson was taken to the accounts prepared by the liquidator of the old Institute, which reflected the situation in June 2004. Those accounts showed that in fact the old Institute owed Mrs Gorman's company, CIC, the sum of approximately $57,000. This is a fact that would have been well known to Mr Parkinson when he swore to the truth of the reply document.
146 Although taken to the matter in some detail in cross-examination, Mr Parkinson was at first reluctant to concede that his sworn reply document was incorrect. He endeavoured to explain what he had put in the sworn document as being referable to the allocation of the beneficiary loan in the accounts of the business previously conducted by Mrs Gorman and Mr Matthews. However, such an explanation is not credible given the clear language used in the reply document.
147 Looked at in terms most favourable to Mr Parkinson, this indicates that he was content to be loose with the truth. It is also indicative that he misled those present at the meeting on 22 June 2004.
148 I should add that Mr Parkinson continued to maintain that disputed unallocated payments to Mrs Gorman and Mr Matthews, which were a hangover of the period to 30 June 2003, in some way impacted upon the profitability of the company. Even assuming that this were correct, Mr Parkinson agreed that as at 22 June 2004 the profit of $111,196 would have been reduced to something like $63,000.
149 Mr Parkinson said that in creating the cash flow figures for presentation to the directors at the meeting, he did not take into account the totality of the value of work in progress but only that which related to invoices which were likely to be raised within the time periods referred to in the documents. This would, in my opinion, have skewed the resulting figures so as to concentrate on what Mr Parkinson described as the immediate cash flow problem and upon which he was asking everyone to focus, but would not have allowed a countervailing approach to be taken on the basis that there was, in reality, an amount of revenue which might confidently be taken into account as work in progress which might provide some comfort as to the financial viability of the company.
150 I agree also with submissions made on behalf of the applicants that the cash flow documentation prepared by Mr Parkinson showed that of the expenses about 70 per cent of them were monies payable to the directors or their companies.
151 As it transpired, the documents which were prepared at Mr Parkinson's instigation and which were relied upon by him in asserting a case for the appointment of an administrator and relied upon by the others at the meeting (save for Mrs Gorman) in accepting the assertion were significantly inaccurate.
152 I set out below a table that compares the predictions of Mr Parkinson as contained in the documents as to the receivables with actual receivables as recorded in documents that became evidence in the proceedings. Date Mr Parkinson's prediction of receivables Actual receivables received
18 06 04 $11,936 $5,808.69
01 07 04 $57,560 $27,524.34
15 07 04 $4,050 $144,631.57
01 08 04 $84,592 $68,654.43
15 08 04 $15,950 $127,924.09
01 09 04 $133,321 $128,698.38