Grant Baines Transport Pty Ltd v John Zappia

Grant Baines Transport Pty Ltd v John Zappia - [2009] NSWLC 28 - NSWLC 2009 case summary — Zoe

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The Defendant disputes the Plaintiff has established that Zaps failed to keep or retain the relevant financial records. Alternatively, he relies on the same material in relation to actual solvency to rebut any s5788E presumption. 8. It is necessary to set out the manner in which these proceedings were heard: The cause of action was first heard in this Court in August 2007. The decision was appealed. Following the Appeal, the proceedings were remitted from the Supreme Court for this Court to "redetermine the issue of the date of insolvency of Zaps and such other matters remain in issue, once that question is determined". On the first day of hearing on 2 December 2008, at the end of the day, it was agreed by the parties that the evidence tendered in the previous proceedings and the transcript of oral evidence in the previous proceedings would be tendered in these proceedings before me and the matter proceeded by way of submissions on 12 March 2009. It was agreed between the parties that no witnesses were to be cross-examined and that the Court would determine the weight to be placed on evidence that was put forward in this way. On the 12 March a few minor documents were tendered, including 2 letters from Mr Cook (Ex C1 and C2) the latter purporting to validate his Report (Ex C). A small bundle of documents being correspondence between solicitors in relation to Mr Cooks Report was also tendered on 12 March (Ex 8). 9. There are several unusual aspects about the evidence which require mention. The first is that the Defendant has not given any evidence in his case because he relies on his Affidavit and his witness Affidavits which were tendered in the Plaintiff's case, firstly through the Plaintiff's solicitor Ms Perry's Affidavit and then by the Plaintiff's expert witness, Mr Tolcher, because most of the Defendant's Affidavit is annexed to that report. There is a document "the Thornton Report" which the Defendant refers to in his affidavit - most but not all of that document is annexed to Mr Tolcher's Report. 10. As the Defendant has not tendered his evidence in his case he has not been called to give evidence and has not been cross-examined though the Plaintiff provided written notice that he was required for cross-examination at the first hearing. The Defendant's expert witness, Mr Cook, prepared a draft report which was neither signed nor served upon the Plaintiff in proper time or form. It was tendered over objection and without the Plaintiff being afforded the opportunity to cross-examine him. Shortly prior to the hearing in March 09, Mr Cook's report has been "adopted" as "final" and true and correct by way of letter by Mr Cook which again has been tendered over objection by the Plaintiff. The reason I have allowed the letter to be tendered is because the primary document already forms part of the evidence and the letter does not really progress or detract from the weight that I would giving the Report anyway. Mr Hall makes a primary submission, that the evidence of the Defendant, being uncontested and unchallenged has the effect that the Court must accept what the Defendant says about matters therein sworn. That is so only, in the absence of any evidence contradictory to that of the deponent. 11. The Defendant's Affidavit can be described as covering in the briefest of terms 3 topics. The first relates to persons in the employ of Zaps at the relevant time and the non-preparedness of two of them to assist the Defendant by giving evidence in the proceedings. The second is a disputation of the debt which the Plaintiff's claims was owing. The Defendant says that the Plaintiff was not paid for those services because of the deficiency of the service provided as opposed to Zaps having insufficient funds. Indeed, the Defendant claims that it was because of the Plaintiff's deficiencies that Zaps lost customers and did become insolvent (after a time when the Plaintiff's debts were incurred and fell due). This evidence is controversial and there is contradictory evidence from the Plaintiff about which he has been cross-examined. The Defendant also relies on this evidence to dispute the claim of insolvency. 12. The third topic is the solvency of Zaps. The Defendant says that the Company was not insolvent because at the time the debts were being incurred, the Company was receiving funding support from himself and had access to funds to meet its debts. He also points to the "Thornton Report" and Mr Cook's Report to demonstrate Zap's solvency. In terms of statutory defences, the Defendant says he believed that Zaps was solvent because he was informed by his competent and reliable employee Mr Morabillio that Zaps was solvent and based on this information he expected Zaps would be solvent and able to pay the debts and other debts it incurred at the time. This area is also controversial however it is not controversial that the Defendant's past employees were unprepared to assist him in the proceedings. 13. Where the Plaintiff puts forward evidence which contradicts the Defendant. the Defendant, is not in a position, by virtue of having not being cross-examined to say that the Court must, therefore, accept his evidence In relation to "uncontested" evidence, the Court has a discretion to determine the weight to place on the evidence as it does for any evidence. The Plaintiff carries the onus to prove on the balance of probabilities, consistent with the Briginshaw standard, the Zaps was insolvent at the relevant time. If such is proved, the Defendant has an evidentiary onus to rebut any s588E presumption of insolvency or prove any s588H defences. 14. The Exhibits Ex 1 Affidait of Kristen Perry, Solicitor for the Plaintiff, sworn 26 March 2007; Paragraphs 1-22 with Annexures KP-01 to KP-16. The thrust of this evidence sets out the attempts by the Plaintiff to recover the debts owed by Zaps prior to and subsequent to its entry into administration and subsequent liquidation. There is also evidence that relates to the Plaintiff obtaining the consent of the liquidator such interlocutory issue being dealt with on 2 December 08 and again on 26 February 2009.

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44 Ex 6: The third arch lever folder titled "Bendigo Transfers" contains receipts for transfers from Zaps to other accounts which are described as "once off" between 19 March 2004 and 24 August 2004. There are no similar e-banking records of any "once off" payments made after those dates though there are more than a dozen payments amounting to about $90,000 between 14 December 04 to 15 March 05 to Zaps Transport in the same terms and means as the payment of $13,500 paid to Zaps Transport on 24 August 04 - see the Bendigo Bank statements. There is no explanation for the absence of those receipts. There is no evidence as to why these amounts were being transferred to Zaps Transport - there are no invoices from Zaps Transport produced. 45 These documents together with the Overdraft Security documents tend to suggest that there are Intercompany Transactions but what they are I do not know. The Defendant says that he paid the Company's Overdraft facility which means he personally paid it. I note that the 30 June 04 Summary of Balance Sheet sets out the loans to and from related parties and sets out the names of Companies all of which the Defendant was sole director. $878,635 were loans to some of those companies and $511,511 were other loans. 46 The Defendant says at paragraph 85 of his Affidavit : "Over the period from November 2004 to about July 2005, I placed $2,657,877.57 into Zaps Logistics to assist the Company to pay its debts obtained through the facility at the Bendigo Bank as well as a Loan agreement over my wife's property ($406,250) The Defendant seems does not refer to any inter related company debts nor was there a company structure that supported Zaps during the relevant period. He identifies not a single business record or financial document to evidence the claim in his Affidavit as set out above and likewise there is not one document in Ex 6 that evidences his claim. The Administrator says that he was advised that the Defendant paid off Zaps Overdraft. I presume he was advised this by the Defendant personally. Compare what is written in the Statement of Defence to the Amended Statement of Claim says:

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?It has been authoritatively determined that s95A calls attention principally to the cash flow test of insolvency with subsidiary relevance afforded to the balance sheet test. That this is the correct approach was recognised by the Court of Appeal in Keith Smith East West Transport Pty Ltd v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501; see also Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711; Lewis (as Liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410; Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLR 471. These cases emphasise that solvency is to be determined primarily according to the company's cash flows: see Manpac Industries Pty Ltd v Ceccattini [2002] NSWSC 330; (2002) 20 ACLC 1304; Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. It is important to note, however, that the state of the balance sheet, although not the primary test, remains relevant to the separate question: Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC239 at [9.2.1] per Owen J. Section 95A requires a decision whether the company is suffering from a temporary lack of liquidity ( Bank of Australasia v Hall [1907] HCA 78; (1907) 4 CLR 1514; Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 670) or an "endemic shortage of working capital": Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321 at 328; 2 ACLR 559. In Hall v Poolman [2007] NSWSC 1330; 92007) 65 ACSR 123 at [266], Palmer J referred to this distinction and observed: "The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending the waves." The emphasis must be upon the extent of cash and other liquid assets compared with the quantum of debts due and payable and to become due and payable in the immediate future. Insufficiency of cash or liquid resources to pay those debts is indicative of insolvency. The insufficiency becomes determinative if it is shown that it is more than a temporary lack of liquidity. In essence, there is a question whether the inability to pay is purely temporary. In Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213; Palmer J, at 224-225, summarised the law as to the determination of solvency for the purposes of S95A by setting out the following principles: (i) whether or not a company is insolvent for the purposes of the Corporations Act (Cth), ss95A, 459B, 588FC or 588G(1)(b), is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole; (ii) in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable; (iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency; (iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand; (v) in assessing solvency, the court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the court's satisfaction, that: • there has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment; or • there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or • there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand: (vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence." (References omitted) Finally, any inquiry into whether insolvency existed at a particular time is generally assisted by searching for what Palmer J, in Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 at 191, described as the "usual indicia of insolvency":

a history of dishonoured cheques;
suppliers insisting on COD terms;
the issue of post-dated or "rounded sum" cheques;
special arrangements with creditors;
inability to produce timely, audited accounts; 6) unpaid group tax, payroll tax, workers compensation premiums or superannuation contributions; 7) demands from bankers to reduce overdraft and other evidence of deteriorating relations with bankers;
receipt of letters of demand, statutory demands and court processes for debt". 66 Whilst Mr Tolcher's report did not identify cash flow analysis as the primary test as set out in Lewis v Doran , for which he was rightly criticised in cross-examination and by Mr Cook in his report, it is evident from reading his report that he did not consider the information provided by the Defendant not the review of documents in light of the absent ledgers and balance sheets, was sufficient for him to make a conclusion in relation to cash flow. He did correctly address the issues and indicia of insolvency though he relied on a balance sheet analysis. Given the absence of records, I think his conclusion based on the balance sheet analysis is relevant though the issue of third party support needs to be considered as a primary issue. 67 Mr Cook, says in his report that:

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71 Lewis v Doran, is authority for the proposition that where a company is paying its debts during a period, though such ability to pay is due to third party support, the company is solvent. Zaps was not paying its debts as they fell due that is the first and a significant difference in Lewis v Doran . The other difference in this case is that in Lewis v Doran the Company Group structure was such as to enable funding of the Company for a period of 3 years where the Company was not only able to but in fact did pay its debts. In this case, the Defendant does not refer to any Inter Related Company structure, though looking at the banking documents which I refer to later, there seems to have been one where Zaps both loaned money to and borrowed money from Companies run by the Defendant. Secondly, the Defendant says that he paid the Overdraft Facility off after he decided that the Company was no longer solvent in about May 2005. He does not mention having paid any other Companies debts or repaid any loans on behalf of Zaps, just that he paid the Overdraft off. He also refers to putting money into Zaps between November 04 and July 05. Apart from the apparent settlement of the Overdraft Facility after Zaps stopped trading, there in no evidence of when this other money was put into Zaps. Finally, the evidence points to that though there was some "third party support" it was not support where the Company was able to and did pay its debts. The question in that circumstance is to look at the commercial reality in relation to those debts. 72 As Justice Palmer said in Lewis v Doran (2004) NSWSC 908 (9 July 2004) at 108-116: "Where the question is retrospective insolvency, the Court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The Court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as a the date of insolvency. By reference to what actually happened, rather that to conflicting expert opinions as to the implications of balance sheets, the Court's task in assessing insolvency as at the alleged date should not be very difficult…So, where retrospective insolvency is in issue, the Court can take into account that as at and after the alleged date o insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The Court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor's "own monies. to look at what actually happened avoids the possibility that the Court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as matter of fact, the company clearly did those debts…s95A requires the Court to de decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party".

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87 In terms of Indicia of Insolvency, aside from the "inability to produce timely, audited accounts " (because of a failure to keep the appropriate s286 documents ), there is evidence of overdue superannuation contributions and group tax, there were court process for unpaid debts arising from January and February 05 (Integrated Group obtained a default judgment), there were 2 dishonoured cheques (2 January) of which Mr Baines gave evidence that a Zaps employee explained was due to a difficulty with cash flow which is consistent with the Overdraft at that time. Mr cook does not dispute Zaps was incurring continuing trade losses of at least $107,000 per month. There is no evidence of post dated cheques but I note that the relevant period cheque butts weren't provided and there are no relevant ledgers or invoices to ascertain whether any were posted dated. There is no evidence of a deteriorating relationship between Zaps and the Bank but there is simply no evidence that there was a good relationship either, given that the Defendant says he decided in July 05 that the Company was insolvent, the last operations of the Bank Statements seem to be 31 May when the bank continued to dishonour E banking. This is s reasonably short time past the "relevant period" but certainly doesn't assist the Defendant's claim that it was in July that he decided Zaps was insolvent. Further the letter from Bendigo Bank dated 9 June 2005 suggests that it was an early time than July that the bank accounts were being paid out. There is evidence of rounded cheques during the relevant period as set out in Mr Tolchers Report at Annexure R. I do not agree with Mr Tolcher's summary of Zaps being above the Overdraft Limit as set out in his Report at 7.23 in that he has incorrectly recorded the OD being $1.35 million - though the bank statements vary about the Overdraft Limit, I accept that the Overdraft facility remained at $2.2 million from 2 December 04 until it was paid out in June 05. Zaps generally remained within the Overdraft during the relevant period. Creditors being paid outside trading terms was evident with even the late payments made to the Plaintiff in March- they related to pre 14 December accounts and were due and payable in January. Mr Cook accepts that the $150,000 trade creditors (RATA) was owing at the relevant time. Mr Cook also accepts that Zaps was unable to raise either debt or equity capital without support of the shareholders (that is the Defendant). I accept Mr Cook's evidence that a full analysis of the book value of assets and liabilities as at the date of RATA would be required before any reliable estimate of trading losses to that date could be made - however that cannot be done because Zaps did not keep the books as it should have.

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96 Mr Hall says that the Defendant should be entitled to rely on the report in circumstances where the Report did not suggest to the Bank they should not support Zaps. The Report gives the reader no basis whatsoever to think that all was well with the Company or that the Company had set itself some achievable goals. The fact that the Bank did not increase the Overdraft even though the Report indicated how much more available support Zaps needed to achieve (the, in my view, unachievable) goals set out in the forecasts, may well be due to the adverse comments in the Report. The Defendant's evidence is absent in relation to this aspect of his reliance on the Report. 97 The only person who had some knowledge about the accounting and office system was Zap's Commerical Manager Mr Morabillio. The Defendant says in his Affidavit, the reason for terminating Mr Morabillio was because he, the Defendant, was following the recommendation in the Thornton Report. The report made it very clear that Mr Morabillio was the only person who knew the accounting system and it was clear that he needed to pass that information on to someone more able than he. Further, the Report said that an accountant needed to be appointed. The Defendant is silent about such an appointment and from what I have read, one was not appointed. This suggests that by the time the Overdraft facility was increased to $2.2million, Zaps was in worse trouble than it had been prior to the Thornton Report. The Defendant well knew this and accordingly, he has no reasonable grounds to think the company was solvent. Indeed, if he thought otherwise his eyes were deliberately turned away from the stark reality. 98 The Defendant did not have reasonable grounds to expect and I do not think he did expect, that at that time the company was solvent or would remain solvent even if it incurred that debt and any other debts that it incurred at that time. Nor did he have had reasonable grounds to believer, and did believe, that a competent and reliable person was providing adequate information about whether the company was solvent, and on the basis of that information, expected that the company was solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that time that person was fulfilling that responsibility, and keeping the director informed. I am not even satisfied that Mr Morabillio ever gave the Defendant any information for the Defendant to expect that Zaps was solvent or would remain solvent. The Defendant has not made good his defence in relation to either s588H(2) or (3) (nor incidentally has he rebutted the s 588E presumption of insolvency). 99 I am satisfied that Zaps was insolvent at least from the time the Plaintiff provided the services relevant to the invoice dated 20 December 2004 and remained insolvent thereafter. There were reasonable grounds for suspecting that Zaps was insolvent and the Defendant was aware that there were grounds to suspect such insolvency. He is in breach of his duty as a Director because he failed to prevent Zaps from incurring the relevant debts when the debts fell due and payable there were reasonable grounds. 100 I enter judgment for the Plaintiff, for sum of $53,504.58, with the addition of filing costs and interest to be calculated on the usual basis. As to the issue of Costs, I will take short submissions in writing. Those submissions to be filed 14 days hence.

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