Hambleton (Liquidator), in the matter of China Cooking Group Aus Pty Ltd (in liq) v Zhang

Federal Court of Australia|2020-12-24|Before: Reeves J

The defendant contravened s 588G of the Corporations Act 2001 (Cth) by failing to prevent the second plaintiff from incurring debts in circumstances where, at the time each debt was incurred: (a) the defendant was a director of the second plaintiff; (b) the second plaintiff was insolvent and there were reasonable grounds for suspecting it was insolvent; (c) a reasonable person in the defendant's position would have been aware there were grounds for suspecting the second plaintiff was insolvent at that time.

Judgment be entered against the defendant in the sum of $198,249.63, comprising the following amounts: (a) $189,963.93 payable under s 588M of the Corporations Act 2001 (Cth), being the amount of loss and damage suffered by the creditors of the second plaintiff, as a debt due to the second plaintiff; and (b) $8,285.70 being the amount of pre-judgment interest calculated pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) from and including 9 September 2019 up to and including 31 July 2020.
The defendant pay the plaintiffs' costs fixed in the sum of $9,936.88. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REEVES J: 1 This is an application for summary judgment made under r 26.01 of the Federal Court Rules 2011 (Cth) (the Rules) and s 31A of the Federal Court of Australia Act 1976 (Cth) (the FCA). It is brought by Mr David Hambleton (the Liquidator) in his capacity as the liquidator of China Cooking Group Aus Pty Ltd (in liquidation) (the Company). The defendant, Ms Yanchun Zhang, is the sole director of the Company.

BACKGROUND 2 The Company was incorporated on 27 July 2011. Ms Zhang was its director from its incorporation to 17 June 2013 and again between 21 August 2013 and when it was wound up in early 2019. From 24 April 2014 until it was wound up, she was also the Company's secretary. Ms Zhang was at all times the Company's sole shareholder. 3 As a consequence of holding the above-mentioned positions, the Liquidator alleges Ms Zhang had access to all the relevant books and records of the Company, operated the Company's bank accounts and had full knowledge of its business affairs and financial position. 4 Between 1 October 2014 and 1 March 2019, the Company fell behind in its obligations to the Australian Taxation Office thereby incurring debts and penalties totalling approximately $545,891.07. The Liquidator alleges that this resulted in the Company becoming insolvent from 30 June 2016. 5 In early 2019, the Deputy Commission of Taxation made a successful application to this Court for orders winding up the Company on the basis of its failure to comply with a creditor's statutory demand in the sum of $481,519.64. Those orders were made on 1 March 2019 and, as already mentioned, Mr Hambleton was appointed as liquidator. 6 By originating application filed 9 September 2019, the Liquidator applied for various orders under the Corporations Act 2001 (Cth) (the Act) seeking to recover debts purportedly incurred by Ms Zhang in circumstances where the Company was insolvent, or likely to become insolvent. The Liquidator also sought various declarations and orders for compensation in respect of Ms Zhang's alleged breach of her director's duties. 7 On 19 December 2019, orders were made permitting substituted service on Ms Zhang. The originating application and supporting affidavits were served on her on 6 January 2020. Then, on 6 February 2020, orders were made requiring the plaintiffs to file and serve a statement of claim, which they did the following day. Those orders also required Ms Zhang to file any defence by 23 March 2020. That deadline was later extended to 15 June 2020. 8 On 13 June 2020, Ms Zhang filed a document titled "personal statement", and several bank statements. Those bank statements related, in part, to Ms Zhang's personal bank account and, in part, to a bank account held by the Company and operated by Ms Zhang. 9 By an amended interlocutory application filed 24 September 2020, the Liquidator sought the following declarations and orders: 1. A declaration that the defendant contravened s 588G of the Act by failing to prevent the Company from incurring the debts referred to in Annexure A to this Interlocutory Process in circumstances where, at the time each debt was incurred: (a) the defendant was a director of the Company; (b) the Company was insolvent and there were reasonable grounds for suspecting that the Company was insolvent; and (c) a reasonable person in a like position to the defendant in the Company and in the Company's circumstances would have been aware that there were grounds for suspecting that the Company was insolvent at that time. 2. Judgment against defendant in the sum of $198,249.63: (a) pursuant to s 588M of the Act, the sum of $189,963.93 being the amount of loss and damage suffered by the creditors as referred to in Annexure A, as a debt due to the Company; and (b) pre-judgment interest calculated pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth) from and including 9 September 2019 up to and including 31 July 2020 in the sum of $8,285.70. 3. The defendant to pay the plaintiffs costs fixed in the sum of $9,936.88 as set out in Annexure B to this Amended Interlocutory Process. 4. Such further or other orders as this Honourable Court deems fit. (Emphasis removed) 10 Annexure A to the application summarised the debts allegedly incurred by Ms Zhang while the Company was insolvent as follows: Debts incurred Debts incurred Description Amount $

Australian Taxation Office Income Tax debt for the year ended 30 June 2017  8,055.23

Australian Taxation Office Running Balance Account deficit debt             175,984.56

Credit Corp Services debt                                                   826.99

Q & T Accountants debt                                                      4,906.00

Workcover Queensland debt                                                   191.15

TOTAL 189,963.93

11 Other than the material referred to at [8] above, Ms Zhang has not filed any other material either in the substantive proceeding, or in response to the present application for summary judgment.

RELEVANT PRINCIPLES 12 Section 31A of the FCA relevantly provides: (1) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if: (a) the first party is prosecuting the proceeding or that part of the proceeding; and (b) the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding. … (3) For the purposes of this section, a defence or a proceeding or part of a proceeding need not be: (a) hopeless; or (b) bound to fail; for it to have no reasonable prospect of success. … 13 With the exception that it does not contain a provision similar to s 31A(3), r 26.01(1)(e), under which this application is also brought, contains an identical test to that set out in s 31A(1) (see Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125 at [20] per Gordon J). 14 The principles applicable to an application of this kind are well-established (see Australian Securities and Investments Commission v Cassimatis (2013) 220 FCR 256; [2013] FCA 641 (Cassimatis) at [15]-[45] and the cases cited therein). Those principles were conveniently summarised by Perry J in Eliezer v University of Sydney (2015) 239 FCR 381; [2015] FCA 1045 at [35]-[39] (approved by the Full Court in Kimber v Owners of Strata Plan No 48216 (2017) 258 FCR 575; [2017] FCAFC 226 at [62]) as follows: 35 First, … the moving parties bear the onus of persuading the Court that the application has no reasonable prospects of succeeding ... 36 Secondly, … the intention behind the enactment of s 31A is "to lower the bar for obtaining summary judgment (including summary dismissal) below the level that had been fixed by such authorities as Dey v Victorian Railway Commissioners (1949) 78 CLR 62 at 91-92, and General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129-130 … 37 Thirdly, the assessment required by s 31A of whether a proceeding has no reasonable prospects of success necessitates the making of value judgments in the absence of a full and complete factual matrix and argument, with the result that the provision vests a discretion in the Court .... That discretion includes whether to deal with the motion at once or at some later stage in the proceedings when the legal and factual issues have been more clearly defined … 38 In the fourth place, despite the threshold for summary dismissal having been lowered, the discretion must still be exercised with caution … Consistently with this, the discretion is concerned "with the bringing and defending of proceedings, not just with pleadings; with substance, not just with form" … 39 Finally, …: … the determination of a summary dismissal application therefore does not require a mini-trial based upon incomplete evidence to decide whether the proceedings are likely to succeed or fail at trial. Instead, it requires a critical examination of the available materials to determine whether there is a real question of law or fact that should be decided at trial. Each application for summary judgment or summary dismissal has to be determined according to its particular circumstances. What is required is a practical judgment of the case at hand. The relevant circumstances will partly depend upon the stage which the proceedings have reached. Among other things, this will affect the materials available to the Court considering the application, for example, whether pleadings have been exchanged, or discovery of documents has occurred. (Citations omitted; emphasis removed) 15 As a general principle, the moving party is more likely to succeed if it is able to demonstrate that the other party's success relies upon a question of law that is confined, or based on settled authority such that the question can be resolved summarily without the necessity of a full trial. Conversely, the moving party is unlikely to succeed if success in the proceeding relies on a question of law that is serious, involves conflicting authority or novel arguments, or is otherwise difficult and therefore likely to require a lengthy trial (see Cassimatis at [48]). 16 The Court must ultimately consider whether there are any real, as opposed to fanciful, issues of fact or law that require proper determination at trial (see Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd [2009] FCA 499 at [37] per Sundberg J). Summary judgment may therefore be appropriate "where the evidence is all one way so that only one conclusion can be said to be reasonable" (see Australian Competition and Consumer Commission v Link Solutions Pty Ltd (No 2) (2010) 188 FCR 463; [2010] FCA 919 at 313 per Bennett J). It will not be appropriate where there is a triable issue of fact (see Keynes v Rural Directions Pty Ltd (No 2) (2009) 72 ACSR 264; [2009] FCA 567 at [47] per Besanko J). 17 While the Court has the power to make binding declarations, there is a long held view that, it being a judicial act, a declaration should only be made on evidence (see Australian Competition and Consumer Commission v Grove & Edgar Pty Ltd [2008] FCA 1956 at [18] and the cases cited therein).

THE PLEADINGS 18 In his statement of claim, the Liquidator alleges that the Company engaged in insolvent trading in breach of s 588G of the Act and that, by allowing it to do so, Ms Zhang breached her various director's duties under the Act. 19 The insolvent trading claim is pleaded at [8]-[12] of the statement of claim as follows: 8. [The Company] was unable to pay its debts as and when they became due and payable, and accordingly [the Company] was insolvent within the meaning of section 95A of the Act on 30 June 2016 and all times thereafter. Particulars The Plaintiffs rely on, inter alia, the following particulars of insolvency: (a) [The Company] suffered trading losses in the 2016 financial year; (b) [The Company] operated with a net asset deficiency in the 2016 financial year; (c) [The Company's] working capital ratio was below one for the 2015 and 2016 financial years; (d) [The Company's] liquidity ratio was below one for the 2015 and 2016 financial years; (e) [The Company] had overdue Commonwealth taxes, namely; (i) [The Company] had an Running Balance Account deficit debt as at 30 June 2016 in the sum of $234,479.04 which it had no ability to pay; (ii) [The Company] had an Income Tax debt as at 30 June 2016 which it had no ability to pay. (f) [The Company] failed to maintain its taxation obligations as: (i) [The Company] was indebted to the Commissioner of Taxation from at least 30 June 2016 onwards; (ii) [The Company] had outstanding income tax returns for the years ended 30 June 2018 and 30 June 2019; and (iii) [The Company] had outstanding annual GST returns for the years ended 30 June 2017 and 30 June 2018. (g) [The Company] negotiated payment arrangements with the Commissioner of Taxation on 8 March 2017 and 13 March 2017; (h) On 18 June 2018, the Commissioner of Taxation issued a garnishee notice to [the Company's] bank account due to the company's unpaid taxation debt of $461,770.03; (i) The Commissioner of Taxation issued a Creditor's Statutory Demand on 30 November 2018, pursuant to s459E of the Corporations Act 2001 (Cth), to [the Company] which [the Company] did not comply with; (j) [The Company] was unable to produce timely and accurate financial information to display its trading performance and financial position and make relevant forecasts; and (k) Further particulars will be provided prior to hearing. 9. Between 1 July 2016 and 1 March 2019 (inclusive), [the Company] incurred debts as follows (Debts): (a) ATO Income Tax debt for the year ended 30 June 2017 totalling $16,378.75; (b) ATO Running Balance Account ("RBA") deficit debt totalling $153,096.19; (c) Credit Corp Services debt totalling $826.99; (d) Q & T Accountants debt totalling $7,601.00; and (e) Workcover Queensland debt totalling $191.15. 10. The Debts totalled the amount of $178,094.08. 11. Each of the Debts were and are unsecured and remain unpaid. 12. When each of the Debts were incurred, there were reasonable grounds for suspecting that: (a) [The Company] was insolvent; or (b) [The Company] would become insolvent by incurring each of the Debts. … (Emphasis and errors in original) 20 Further, the breach of duty to prevent insolvent trading claim is pleaded at [13]-[19] of the statement of claim as follows: 13. Ms Zhang permitted [the Company] to incur, or alternatively failed to prevent [the Company] from incurring, each of the Debts. Particulars Ms Zhang was the controlling mind of [the Company] in that: (a) Ms Zhang was the sole director of [the Company] at all relevant times …; (b) From [the Company's] inception Ms Zhang was also the sole shareholder; and (c) [The Company's] business operated under the direction and control of Ms Zhang; and … 14. A reasonable person in the position of a director of [the Company] would have been aware, when each of the Debts were incurred, that there were reasonable grounds for suspecting that: (a) [The Company] was insolvent; or (b) [The Company] would become insolvent by incurring each of the Debts. The Plaintiffs repeat and rely on the particulars provided at paragraph 8 above; and (c) further, or in the alternative, that there were reasonable grounds for suspecting that [the Company] was insolvent, or would become insolvent by reason of incurring each of the Debts. [Particulars omitted] 15. Further, or in the alternative, Ms Zhang was aware, or ought to have been aware, when each of the Debts were incurred that: (a) [The Company] was insolvent; or (b) [The Company] would become insolvent by incurring each of the Debts. The Plaintiffs repeat and rely on the particulars provided at paragraph 8 above; and (c) further, or in the alternative, that there were reasonable grounds for suspecting the [the Company] was insolvent, or would become insolvent by reason of incurring each of the Debts. [Particulars omitted] 16. In the premises, Ms Zhang has contravened section 588G of the Act in that she failed to prevent [the Company] from incurring each of the Debts. 17. By reason of the said contraventions of section 588G of the Act, [the Company] has suffered loss and damage. Particulars The incurring of the Debts in the sum of $178,094.08, which debt remains unpaid. 18. Each of the creditors of [the Company] set out in paragraph 9 above have suffered loss or damage because of [the Company's] insolvency. Particulars A. The creditors extended credit to [the Company] in the amounts set out in paragraph 9 above for the provision of goods and services and remain unpaid. B. [The Company] incurred taxation labilities due to the Commissioner of Taxation which remain unpaid. C. Leaving aside any monies recovered by this litigation, the creditors in the winding up are unlikely to receive any dividend. 19. In the premises the Plaintiffs seek an order for the recovery as a debt due to [the Company] from Ms Zhang for the said loss and damage, pursuant to the provisions of sections 588M(2) and 1317H of the Act. (Errors in original) 21 Finally, at [20]-[25] of the statement of claim, the Liquidator alleges that Ms Zhang breached her duty of care and diligence and duty to act in good faith as the director of the Company. However, I do not consider it necessary to set out those claims or consider them further as no relief is sought in respect of them. 22 As already mentioned above, Ms Zhang did not file a defence.

CONTENTIONS 23 In his written submissions, the Liquidator contended that Ms Zhang had failed to identify, by affidavit evidence or otherwise, any triable issue of fact or law. He further contended that Ms Zhang's "personal statement" was deficient in that it contained a number of assertions without any supporting facts. As for the bank statements Ms Zhang had filed, the Liquidator objected to their admission as evidence on the basis that they were not relevant to any factual issue in dispute and related neither to the period in which the debts the subject of his claims were incurred, nor the period the Company was insolvent. 24 In support of his claims that the Company engaged in insolvent trading, the Liquidator relied on a solvency report prepared by him and dated 30 July 2020. He contended that report, and the various documents and bank statements annexed to it, established the Company was insolvent within the meaning of s 95A of the Act on, and from, 30 June 2016. Further, he contended that the Company continued to incur debts from that time and that, as its sole director, Ms Zhang knew, or ought to have known, the Company was insolvent, and either permitted the Company to incur those debts, or failed to prevent it from doing so. 25 For her part, in her "personal statement", Ms Zhang accepted that the Company accumulated significant taxation debts, stating that it had paid its taxation and superannuation liabilities until 2016. Nonetheless, she asserted that she had managed the Company "with due diligence". Finally, she contended that she had paid in excess of $2 million into the Company from her personal savings and she claimed that amount was owing to her.

CONSIDERATION 26 Without repeating the assertions made above, I am satisfied on a review of the material before me that Ms Zhang has no reasonable prosects of defending the Liquidator's application in this proceeding and that the orders sought by him ought to be made. In coming to this conclusion, I have had regard to the caution that should attend it (see at [13(38)] above). 27 Ms Zhang was given numerous opportunities to file evidence to address the Liquidator's claims and she has failed to do so. The "personal statement", being the only material of substance she filed, fails to disclose any real disputed issue of fact. Instead, that statement appears to accept, at least in part, the allegations made against her. In this respect, I also agree with the Liquidator that, since the bank statements filed by Ms Zhang do not overlap the same time period, they have little, if any, bearing on this application. 28 The solvency report mentioned above (see at [24]) discloses that the Company returned a trading loss in the 2015/2016 financial year and operated with a net asset deficiency as at 30 June 2016. Although it failed to produce any externally prepared financial statements from that point and appears to have ceased trading on or about 1 August 2017, it continued to accrue debts until the Liquidator's appointment in March 2019, the majority of which related to unpaid taxation liabilities. I am therefore satisfied that the Company was, in fact, insolvent from 30 June 2016 and engaged in insolvent trading from that point. 29 For these reasons, I am satisfied that the Liquidator has demonstrated Ms Zhang cannot succeed in defending this application and I will make orders consistent with those set out above. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Reeves.

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