Mableson v Tarbotton, in the matter of the bankrupt estate of Tarbotton

Federal Court of Australia|2022-11-14|Before: Smith J

Solicitor for the Applicants: Johnson Winter & Slattery

Counsel for the Respondents: The Respondents did not appear

ORDERS SAD 120 of 2022 IN THE MATTER OF THE BANKRUPT ESTATES OF IAN STANLEY TARBOTTON AND DOMENICO MARK VIECELI BETWEEN: TIMOTHY DAVID MABLESON First Applicant

AND: IAN STANLEY TARBOTTON First Respondent

GREGG ROBERTSON JOHNSON Third Respondent

order made by: BANKS-SMITH J DATE OF ORDER: 14 november 2022

Leave is granted pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) to commence and continue with a proceeding against the first respondent and the third respondent for breach of s 588G of the Corporations Act 2001 (Cth) (Corporations Act) and compensation under s 588M of the Corporations Act in respect of their roles as directors of ACN 050 019 960 Pty Ltd (In Liquidation) (formerly York Civil Pty Ltd ACN 050 019 960) (Company).
It is a condition of the leave granted pursuant to order 1 that the applicants not take any step to enforce any money judgment or money order made in their favour against the respondents in the proceeding without the prior leave of this Court first had and obtained.
Liberty to any interested party to apply on three days' notice to all parties.
The applicants' costs of and incidental to this application be costs incurred by the first applicant in the liquidation of the Company pursuant to s 556(1)(a) of the Corporations Act. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BANKS-SMITH J: 1 Timothy Mableson (liquidator) is the liquidator of ACN 050 019 960 Pty Ltd (in liq) (formerly York Civil Pty Ltd ACN 050 019 960) (company). 2 Ian Tarbotton and Domenico Vieceli were relevantly the directors of the company. Both have been declared bankrupt, although Mr Vieceli has been discharged from bankruptcy. Gregg Johnson is the trustee of their bankrupt estates. 3 Ordinarily a creditor proceeds against a debtor who has been made bankrupt by lodging a proof in the bankrupt estate. However, in certain circumstances leave may be granted to a creditor under s 58(3) of the Bankruptcy Act 1966 (Cth) permitting them to commence proceedings against a bankrupt. 4 In this case, the liquidator wishes to institute proceedings seeking a declaration that the directors caused the company to trade whilst insolvent and so breached s 588G of the Corporations Act 2001 (Cth). He also intends to seek a declaration that their bankrupt estates are liable under s 588M(2) of the Corporations Act. 5 The liquidator also intends to proceed against an insurer, Chubb Insurance Australia Limited. Leave is not required for that course. The liquidator's position is that if declarations are obtained against the directors or their bankrupt estates from the Court, a policy of insurance with Chubb will respond. The liquidator contends that, based on the wording of the policy, there must be an ascertainment of liability relevantly by a judgment, in order for the policy to respond. 6 Having heard submissions on 14 November 2022, I formed the view that these are not issues that should be determined through the proof of debt process in the directors' bankruptcies. Further, given the need for ascertainment of liability to trigger an insurance policy response, it may be that a proceeding is required. Accordingly, I made orders on that day and these are my reasons for doing so.

Leave to proceed 7 By this proceeding the liquidator seeks leave pursuant to s 58(3) of the Bankruptcy Act to commence and continue with a proceeding against Mr Tarbotton. He wishes to pursue this anticipated proceeding on the basis that if it is successful, there will be a debt due by Mr Tarbotton to the company under s 588M(2) of the Corporations Act, and as liquidator he can lodge a proof of debt in Mr Tarbotton's bankrupt estate. 8 The liquidator also seeks leave to proceed against the trustee on the basis that although Mr Vieceli has been personally released from any liability under s 588M(2), by operation of s 153 of the Bankruptcy Act, his bankrupt estate remains liable. As noted, the liquidator contends that establishment of liability against the bankrupt estate, represented by the trustee, will enliven the response of the insurance policy.

Evidence and service 9 In support of the application the liquidator has provided an amended proposed statement of claim naming Mr Tarbotton, the trustee and Chubb as respondents. 10 The liquidator also relies on an affidavit that he has affirmed, and two affidavits of service affirmed by Ben Renfrey, a partner of Johnson Winter & Slattery, the lawyers for the applicants. 11 The trustee informed the liquidator through his solicitor that he does not wish to be heard on this application for leave. I am satisfied that both Mr Tarbotton and Mr Vieceli have been served with the application and supporting affidavits. Mr Tarbotton indicated that he denied any liability and did not intend to be heard on the application. Mr Vieceli also refuted in a letter to the liquidator the allegations made against him as to insolvent trading. He asked that his letter be provided to the Court, and the liquidator complied with that request, although I do not give the letter the status of a submission. Mr Vieceli did not attend the hearing. In the end nothing rests on the content of Mr Vieceli's letter for the purpose of this application.

Proposed proceeding 12 The company operated a substantial construction and civil engineering business with headquarters in South Australia from about 1990. 13 The liquidator's evidence as to the insolvency of the company and the position of the directors is summarised in his affidavit as follows: 19.1 The Company became insolvent by no later than 20 June 2018 but most likely by 31 March 2018. Among other things, I have formed those opinions as to the solvency of the Company because: (a) the Company can be presumed to be insolvent because it did not keep financial records in the form required by sub-section 286(1) of the Act. The Company operated the joint ventures referred to in paragraph 8 above in its own name, owed all of the debts of those joint ventures, and was required to record that information in its own profit and loss statements. It did not do so, and so its financial records did not correctly explain its financial position, among other things. The Company also failed to regularly obtain accurate financial information from its joint venture partners in respect of two of six of those joint venture partners and so was not aware of their precarious financial positions for much of 2018 prior to my appointment as Administrator; (b) the Company had significant (and deteriorating) aged creditors from 31 March 2018. That was the case even if it is generously assumed that those creditors had 60 day trading terms; (c) even allowing for the benefit of a $10 million overdraft to the Company, the Company had material cash deficiencies from April 2018 onwards; (d) the Company had been the subject of three cash calls from its joint venture partners during June 2018 and July 2018 which it was legally obliged to pay. Most significantly, a cash call of $5,008 million was made on 20 June 2018 in respect of the Eastlink Tram Extension project. The Company advised its joint venture partner on 26 June 2018 that it could not pay these cash calls, and it did not pay those cash calls; (e) the Company's own cash flow forecasts during 2018 showed consistently net negative cash flow from February 2018 until its entry into voluntary administration on 6 August 2018; (f) by 31 March 2018, the Company had a net working capital deficiency of $14.1 million; (g) on and after 31 March 2018, the Company's Current Ratio was materially under 1.0; (h) at 31 March 2018, the Company's Quick Assets Ratio (excluding stock and work in progress on the assets side and the overdraft on liabilities side) was at 0.7; (i) at 31 March 2018, the Company showed a net asset deficiency of $6.6 million; (j) to 31 March 2018, the Company reported a $17.2 million loss for the preceding nine months and a $11.54 million loss for FY18 having regard to the Company's management accounts; and (k) the Company was not able to avail itself of additional financial support. 19.2 The Directors had reasonable grounds for suspecting the Company was insolvent from at least 20 June 2018, primarily because the Company was not capable of meeting the cash calls referred to at paragraph 19.1(d) above. The Company disclosed as much to Downer EDI, its joint venture partner in respect of the Eastlink Tram Extension project on 26 June 2018. There were further grounds to indicate that the Company was insolvent by no later than 20 June 2018, including: (a) the weekly cash flow statements provided to the Directors; (b) the Directors were aware that a number of the joint venture projects were not profitable; (c) the Directors were aware that by March 2018, BankSA (the Company's financier) had informed the Company of significant covenant breaches of its banking facilities; (d) the Company had effected two rounds of redundancies after April 2018 in an attempt to cut overheads; (e) the Directors were aware, and involved in, debate about which creditors needed to be paid from time to time; and (f) the quantum of unsecured debts incurred after 20 June 2018, including the cash calls referred to at paragraph 19.1(d) above, the joint venture partners' proofs of debt lodged in the Administration and other outstanding unsecured trade debts incurred after 20 June 2018, exceeds $40 million. 14 The $40 million referred to in the above evidence comprises the quantum of the proposed insolvent trading claim. According to the liquidator, his inquiries have revealed no obvious applicable defences that might apply in respect of the proposed insolvent trading claim.

The policy with Chubb 15 According to the liquidator, each of the directors and the trustee are insured for their liability for the insolvent trading claim pursuant to a policy of insurance issued by Chubb. 16 According to the liquidator, to trigger the policy for the benefit of unsecured creditors of the company, there needs to be 'ascertainment' of the liability to which the insurance responds, which means that the liability needs to be 'established by judgment, arbitration award or binding agreement': Commonwealth of Australia v Vero Insurance Limited [2012] FCA 826 at [84] (Yates J); and Taylor (liquidator), in the matter of Heading Contractors Pty Ltd (in liq) v Heading [2021] FCA 770 at [70]-[72] (Charlesworth J). The liquidator contends that absent leave to proceed, there can be no judgment which ascertains the insured liability and therefore no recovery under the policy. 17 The liquidator also relies upon the terms of the policy, which define 'Loss' in cl 3.31 to mean 'all amounts an Insured Person is legally and personally obligated to pay, including but not limited to … (a) any statutory awards, damages, compensation or interest awarded, judgments entered, settlements reached including plaintiff's legal costs …'. It is contended that when combined with the common law requirement that the liability needs to be established by judgment, arbitration award or binding agreement, a judgment therefore needs to be entered to trigger 'Loss'. 18 The evidence indicates that in May 2022, the trustee assigned the directors' rights in the Chubb policy to the liquidator and the company by a deed of assignment. 19 The liquidator also asserts that Chubb has constructively denied liability to indemnify the directors and the trustee in respect of the proposed insolvent trading claim by declining to confirm its position on policy coverage despite various communications. 20 Relevantly, the liquidator's lawyers informed Chubb in writing that they considered that the insurance policy responds to the claim against the directors, and asked Chubb to confirm that the policy responds. It was noted that Chubb had not responded to previous requests for a reply. 21 By way of reply, Chubb by its lawyers stated that it was not obliged to respond to the liquidator's contentions about the likely coverage position under the policy, and said that it would not confirm any position. Chubb also pointed to a non-assignment clause in the policy and stated that the assignment was invalid and of no legal effect. 22 The liquidator's lawyers then informed Chubb's solicitors that the liquidator and the company take the letter of 23 June 2022 as Chubb's denial of liability to indemnify the directors and the trustee, and foreshadowed that Chubb would likely be joined as a respondent to the claim against the directors.

Relevant Bankruptcy Act provisions 23 Section 58(3) of the Bankruptcy Act provides a moratorium on claims in respect of provable debts, and relevantly provides that except with the leave of the Court and on such terms as the Court thinks fit, it is not competent for a creditor to commence any legal proceeding in respect of a provable debt. 24 Section 82 of the Bankruptcy Act defines the concept of a 'provable debt' broadly. It has been held in a number of decisions that a claim for breach of s 588G of the Corporations Act and compensation under s 588M of the Corporations Act is a claim in respect of a provable debt: Taylor v Rudaks [2007] FCA 1962; (2007) 166 FCR 451 at [34], [36] (Mansfield J), subsequently cited in Williamson v Michell (Trustee) [2019] FCA 481 at [18] (Moshinsky J); Free v Ma [2020] FCA 226 at [12] (Abraham J); Taylor (liquidator) at [50]; and Markel Syndicate Management Limited v Taylor as Liquidator of Heading Contractors Pty Ltd (in liq) [2021] FCAFC 198 at [7(6)] (Allsop CJ, Lee and Anastassiou JJ). Although some doubt as to this issue was raised by Black CJ in In the matter of Galtari Pty Ltd (in liq) [2018] NSWSC 2037 at [13] (obiter), I am bound by the Full Court decision in Markel Syndicate Management Limited and in any event would not seek to depart from it. 25 Regardless of the doubt express by Black CJ, the applicants in this proceeding accept that any s 588M(2) debt is provable in the directors' bankruptcies. Furthermore, in a case such as this it is open to the Court to proceed on the assumption that leave is required: Allanson v Midland Credit Ltd (1977) 16 ALR 43 at 49; and Yan v Spyrakis as trustee in bankruptcy for Liu [2022] FCA 872 at [8] (Katzmann J). 26 Finally, s 117 of the Bankruptcy Act provides to the effect that the right of a bankrupt under a policy of insurance vests in the trustee in bankruptcy, and any amount received by the trustee in respect of a liability indemnified under the policy is to be paid in full to the third party to whom the insured liability has been incurred.

Principles on leave applications 27 In Commonwealth Bank of Australia v Prentice (Trustee), in the matter of Shannon (Bankrupt) [2016] FCA 53, Gleeson J referred to the purpose to be advanced, as identified in the decided cases to which her Honour referred, when considering whether to exercise the power to grant leave. On the one hand there is the freedom from future claims to be afforded to the bankrupt and the need to ensure that the trustee is not put to unnecessary expense in defending court proceedings. On the other hand there is the need to allow appropriate cases to proceed to a hearing rather than to be dealt with according to the proof of debt process (at [44]-[46]). 28 The Bankruptcy Act does not specify any factors that should be taken into account in considering whether leave should be granted. The discretion is unfettered: Health Services Union v Jackson (No 3) [2015] FCA 694 at [17] (Tracey J); and Kitay (Liquidator) v Trenfield (Trustee) [2021] FCA 508 at [22] (Jackson J). 29 However, relevant factors have been collected in a number of cases, including by Wigney J in Hillig, in the matter of Battaglia [2019] FCA 2191: [7] … It will generally be appropriate for leave to be granted in cases where the issues would be better and more comprehensively dealt with by a contested trial of the action in a court proceeding than would be the case if the creditor was required to lodge a proof of debt in the debtor's bankruptcy: see Allanson v Midland Credit Ltd (1977) 30 FLR 108; [1977] FCA 66. That would particularly be the case where the creditor's claims involve other parties. [8] The relevant factors to be taken into account cannot be stated exhaustively and will vary from case to case: see Burkitt at [15]. Nevertheless, the factors generally considered to be relevant to such applications include: the amount and seriousness of the claims; the degree and complexity of the legal and factual issues involved; the stage to which the proceedings have progressed; the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt; whether the claim has arguable merit; whether proceedings are already in motion at the time of the bankruptcy; whether the proceedings will result in prejudice to creditors; whether the claim is in the nature of a test case for the interest or large class of potential claimants; whether the grant of leave will result in further litigation; whether the cost of the hearing will be disproportionate to the size of the bankrupt estate; the risk of delay; and whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial: see Cassegrain v Gerard Cassegrain & Co Pty Limited (in liq) [2012] NSWCA 435 at [33]. 30 One highly relevant factor in favour of a grant of leave is that of insurance. Section 471B of the Corporations Act corresponds to s 58(3) of the Bankruptcy Act. It has been held in the context of s 471B that leave is likely to be granted where there is an insurance company standing behind the insolvent company to pay any judgment which the plaintiff may obtain: Bucovaz v OT Markets Pty Ltd [2021] FCA 351 at [16] (Kenny J), citing amongst other cases Re Sydney Formworks Pty Ltd (in liq) [1965] NSWR 646 at 651 (McLelland CJ in Eq).

Relevance of Mr Vieceli's discharge from bankruptcy 31 The discharge of a debtor from bankruptcy does not impact on an applicant's claim against the bankrupt estate of that debtor. A debt to be provable need only be one to which the bankrupt was subject at the date of the bankruptcy: s 82(1). The release effected by s 153(1) of the Bankruptcy Act operates only to release the former bankrupt and does not operate to release the bankrupt estate: see generally Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93 at 99, cited recently in Markel Syndicate Management Limited at [23].

Consideration 32 I consider that the following matters favour the exercise of discretion to grant leave as sought by the liquidator. 33 As a result of the respective bankruptcies of the directors, the trustee is the respondent with a clear interest in the question of leave, and he does not oppose the application or propose to be heard in respect of it. 34 Whilst the matter may be open to some debate in the future as to the construction of the policy and any relevant legislation, there is substance to the liquidator's submission that it will be necessary to obtain a judgment against Chubb in order for the policy to respond. Therefore, it seems that proceedings are necessary in any event. 35 The question of whether there was insolvent trading within the meaning of the legislation can be dealt with appropriately by proceedings. There are factual and legal issues in relation to: the insolvency of the company; whether the directors suspected that the company was insolvent when debts were incurred between 20 June 2018 and 6 August 2018; the applicability of any statutory defences to the claim; and the interpretation of the policy and its application to the facts. These are not issues that can be dealt with quickly and readily through the proof of debt process in the directors' bankruptcies. 36 Unsecured creditors in the liquidation of the company are owed over $40 million, and a successful claim enlivening a policy response would (apparently) provide for recoveries of $7 million, so providing for a meaningful return to creditors in the liquidation. 37 The liquidator does not seek to enforce the claims, or any judgment obtained in respect of them, against the directors personally, but rather limits their enforcement of any judgment to the policy. The liquidator (and company) proffer the usual undertaking that they will not take any step to enforce any money judgment or money order made in their favour against the respondents in the proceeding without the prior leave of this Court. 38 The claim has been investigated by the liquidator, who deposes to the fact that he considers that it has merit. The amended proposed statement of claim indicates that the insolvent trading claim is arguable. 39 The discharge of Mr Vieceli from bankruptcy and the future discharge of Mr Tarbotton do not impact on claims against their bankrupt estates. The claims for breach of s 588G remain claims against their bankrupt estates even though any judgment in the liquidator or company's favour cannot be enforced against them personally. 40 Acknowledging that there may be debate in due course about the effect of the deed of assignment, on its face the right to indemnity under the policy has vested in the trustee under s 117(1) of the Bankruptcy Act, and the trustee, having regard to s 117(2), is obliged to pass on funds received in respect of the policy to the relevant third parties, being the liquidator and company.

Leave granted 41 Taking all of the above matters into account I was satisfied that the leave sought should be granted. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.

Bankruptcy Act 1966(Cth)ss 58, 82, 117, 153

Corporations Act 2001(Cth)ss 471B, 588G, 588M

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