Owen as Liquidator of Davey SG Pty Ltd (in liq) v Davey, in the matter of Davey SG Pty Ltd

Federal Court of Australia|2021-03-08|Before: Yates J, Stewart J

THE COURT ORDERS THAT THERE BE JUDGMENT FOR THE PLAINTIFFS:

In the amount of $931,024 plus pre-judgment interest in the amount of $70,718.32.
For costs on a party and party basis until 14 October 2020, and on an indemnity basis from 15 October 2020. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 By amended originating process dated 8 August 2019, the first and second plaintiffs - being the liquidator, Michael Andrew Owen, and the company respectively - seek an order for the payment of compensation pursuant to s 588M of the Corporations Act 2001 (Cth). 2 The defendant, Mr Davey, indicated by email from his solicitors on 3 March 2021 that he did not propose to appear at the substantive hearing commencing today. Mr Davey has been represented throughout these proceedings and is still represented, his solicitors not having withdrawn. There is, nevertheless, no appearance on his behalf today as foreshadowed in the email of 3 March 2021. His name has been called outside court. He has also been given notice of a remote link to this hearing and has not appeared by that remote link. 3 Mr Davey has not only failed to appear at the hearing today, but he has also failed to comply with pre-trial programming orders made by the Court on 8 December 2020. In the circumstances, there is no doubt that he is in default as contemplated by r 5.22 of the Federal Court Rules 2011 (Cth). 4 The plaintiffs seek default judgment pursuant to r 5.23(2)(b) or (c) or both. As the proceeding is for a debt or liquidated damages, and it is a proceeding that was started by an originating application supported by a concise statement, being "an alternative accompanying document" as referred to in r 8.05, both those paragraphs of the sub-rule apply. 5 I am satisfied that there should be judgment in the plaintiffs' favour for the following reasons.

Position of the parties 6 In terms of the matters relevant to the Court's power to give default judgment, Yates J in Chamberlain Group, Inc v Giant Alarm System Co, Ltd (No 2) [2019] FCA 1606 at [13] noted the following: The power to give judgment against a defaulting party is undoubtedly discretionary. The discretion must be exercised cautiously. Where the defaulting party is a respondent to a pleaded claim, the giving of judgment for final relief on the application will deliver complete success to the applicant without investigation of the merits of the pleaded claim: ACOHS Pty Ltd v Ucorp Pty Ltd [2009] FCA 577 at [27]. There is no requirement that the act or acts of default be intentional or amount to contumelious conduct. There is no requirement that the act or acts of default result in inordinate or inexcusable delay. That said, such features, if present, will be relevant to the exercise of the Court's discretion. So too will conduct that persuades the Court that the defaulting party is manifesting an inability or unwillingness to cooperate with the Court and the other party or parties to the proceeding. 7 By its nature, the plaintiffs' amended concise statement does not plead each material fact underlying their cause of action. The plaintiffs elected to adduce evidence of those facts to satisfy me of their entitlement to the relief claimed. 8 The plaintiffs rely on the following evidence: (1) an affidavit of Michael Andrew Owen dated 9 October 2019; (2) an affidavit of Scott Darren Pascoe dated 9 October 2019 and, annexed to it, an expert report authored by him; (3) an affidavit of Harrison Stanton dated 9 October 2019; (4) an affidavit of Julian Bret Williams dated 9 October 2019; and (5) an affidavit of Alexander Walford Lee dated 9 October 2019. 9 The plaintiffs have also tendered Mr Davey's affidavit in the proceeding, dated 20 December 2019, in order to show to the Court what defences Mr Davey had sought to raise in the proceeding. 10 The plaintiffs have also tendered correspondence which I will come to with regard to possible settlement of the claim, as well as the correspondence which I have referred to indicating that Mr Davey would not appear today, and an interest calculation which I will come to. 11 In short, the liquidator contends as follows: (1) Mr Davey was the sole director of the company during the period the subject of the claim, having been appointed on 28 June 2013, and acted in that position until the date of liquidation; (2) the company incurred certain debts during the relevant period; (3) at the time of incurring each of the debts, the company was insolvent or became insolvent by reason thereof, and there were reasonable grounds for so suspecting; and (4) Mr Davey was aware of such grounds, or reasonably ought to have been, and Mr Davey failed to prevent the company from incurring the debts. 12 Mr Davey had sought to defend the claim, as reflected both in his concise statement in response and in his brief affidavit, on the following grounds: (1) he was disqualified from acting as a director of the company by the Australian Securities and Investment Commission (ASIC) from 21 January 2017 up until and including the date of liquidation; and (2) the company was solvent because it enjoyed financial support from a third party, TRM Australia Pty Ltd.

Chronology of relevant events 13 The company was incorporated on 28 June 2013. It conducted a computer repair business. 14 Mr Davey was the sole director, secretary and shareholder of the company from the date of the company's registration. Until at least 21 January 2017, he remained the sole shareholder of the company. 15 On 24 March 2015, the company was placed into voluntary administration, pursuant to s 436A of the Act. 16 On 11 May 2015, a Deed of Company Arrangement (DOCA) was executed. On the same day, sole control of the company reverted to Mr Davey pursuant to cl 7.1 of the DOCA. 17 On 21 January 2017, Mr Davey was disqualified from managing any corporation by ASIC for a period of two and half years pursuant to s 206F of the Act. Following Mr Davey's disqualification, no director was appointed to replace Mr Davey. 18 In or about April 2017, the company purportedly sold its business and assets to a related entity, SG Corporate Services Pty Ltd. This entity subsequently entered voluntary administration on 19 July 2019. 19 On 18 May 2017, the DOCA terminated, having been fully effectuated. 20 On 15 September 2017, winding up proceedings were commenced by the Australian Taxation Office (ATO) in this Court in respect of outstanding taxation liabilities, and associated interest and penalties. On 13 October 2017, the company was wound up in insolvency and David Leigh was appointed as liquidator. The present liquidator was appointed on 28 February 2018 following Mr Leigh's resignation. 21 On 30 November 2018, the liquidator issued Mr Davey with an insolvent trading demand following investigations by him into the company's affairs. 22 On 18 July 2019, the liquidator brought the present proceeding against Mr Davey. 23 The relevant period of insolvency for which the plaintiffs contend and on which they rely is 11 May 2015, being the date of execution of the DOCA, to 30 October 2017, being the date that the company was wound up. This period is referred to as the relevant period or the insolvency period.

Applicable principles 24 Sections 588G and 588M of the Act combine to provide for a number of identified elements which must be established in an insolvent trading claim. These matters are identified by Barrett J in Edenden v Bignell [2008] NSWSC 666 at [16]. See also the discussion by Anderson J in Yeo, in the matter of Bradi Transport Pty Ltd (in liq) v Sklenovski [2020] FCA 1540 (and the authorities there cited). 25 Sections 588G(1) and (2) and 588M(1) and (2) relevantly provide: 588G Director's duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Act. … (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. 588M Recovery of compensation for loss resulting from insolvent trading (1) This section applies where: (a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and (b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and (c) the debt was wholly or partly unsecured when the loss or damage was suffered; and (d) the company is being wound up; whether or not: (e) the director has been convicted of an offence in relation to the contravention; or (f) a civil penalty order has been made against the director in relation to the contravention. … (2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage. 26 There is no need to further identify the applicable principles for present purposes. I will deal with each element in turn.

The debts 27 There are four debts, each of which was incurred in the contended-for period of insolvency. They total $931,024.01 as reflected in the following table as set out in the liquidator's affidavit: Date debts incurred Description Amount ($) 25 Aug 2015 to 23 Feb 2018 ATO - Running Balance Account 654,691.18 30 Jun 2015 to 12 Jun 2018 ATO - Superannuation Guarantee Charge 230,429.55 7 Jun 2016 to 7 Apr 2017 Office of State Revenue (Queensland) 36,543.53 1 Jul 2016 to 31 Mar 2017 Chief Commissioner of State Revenue (NSW) 9,359.75 Total 931,024.01

28 The company's debts to the ATO on its running balance account (RBA) and superannuation guarantee charge (SGC) are proved by the ATO's formal proof of debt dated 1 February 2019. The RBA statement, dated 31 January 2019, shows that the individual debts that make up the RBA debt were incurred in the period 25 August 2015 to 21 September 2015, which is to say within the period of insolvency. 29 The SGC statement by the ATO for the company, dated 5 February 2019, shows that the individual debts that make up the SGC debt were incurred on 14 October 2015, which is to say also within the insolvency period. 30 The debt to the Office of State Revenue Queensland is proved by a formal proof of debt, dated 9 January 2018. It is in respect of unpaid payroll tax that was incurred in the period May 2016 to March 2017. It was, thus, within the insolvency period. 31 The debt to the Chief Commissioner of State Revenue, New South Wales, is proved by a formal proof of debt, dated 19 January 2018. It is in respect of unpaid payroll tax in the period 1 July 2016 to 31 March 2017. It was, thus, also within the insolvency period.

Director when the debts were incurred 32 The Australian Securities and Investments Commission records show that Mr Davey is the only person who has ever been formally recorded as director of the company. He was appointed on 28 June 2013 and formally ceased being a director on 21 January 2017, that being the date of his disqualification. 33 Under the definition of "director" in s 9 of the Act, a person who acts in the position of a director is a director even if they do not have a valid or formal appointment as such. There are a number of factors which, taken together, establish that Mr Davey remained the director of the company after his disqualification to act as a director took effect. 34 First, no other director was appointed following Mr Davey's disqualification, yet the company continued to transact with third parties, as is evident from its general ledger, covering the relevant period. 35 Secondly, Mr Davey told members of the liquidator's staff in December 2018 that after he was disqualified to act as a director no one else was authorised by the company to act as director, yet he continued to transact for the company. These transactions included selling the company's motor vehicles, and using the proceeds to pay employees. 36 Thirdly, Mr Davey continued to correspond on behalf of the company, including in emails that reflected him to be the managing director. That is, emails sent by Mr Davey had a sign-off signature stating "Mick Davey | Managing Director". 37 I am, thus, satisfied that Mr Davey was not only a director, but the sole director, of the company throughout the period of insolvency.

Insolvency of the company 38 The plaintiffs tendered the expert insolvency report of Scott Darren Pascoe. Mr Pascoe is a chartered accountant, and has extensive experience in the field of corporate recovery and restructuring. 39 Mr Somerville of counsel, who appeared for the plaintiffs, quite properly drew to my attention the fact that Mr Pascoe states in his report that the report is prepared in accordance with the experts' code in Sch 7 to the Uniform Civil Procedure Rules 2005 (NSW) rather than in accordance with this Court's Expert Evidence Practice Note (GPN-EXPT). However, the two codes are the same, both being based on the Harmonised Expert Witness Code of Conduct. I am, therefore, satisfied that Mr Pascoe's error in this respect has no bearing on the Court's reliance on the opinions that he expresses in his report. 40 Mr Pascoe adopted an approach to determining the solvency of the company that has long been recognised as the proper and appropriate approach. He, first, undertook cash flow tests to assess the ability of the company to meet debts when they were due from available assets that could be realised within a short period of time. 41 In respect of the 2015 financial year, Mr Pascoe concluded as follows: (1) as at 30 June 2015, the company had a deficiency in working capital of close to $100,000 and that the company had traded at a loss in the period 11 May 2015 to 30 June 2015; (2) as at 30 June 2015, the company's working capital ratio was 0.57 where a ratio of less than 1 indicates that the company will have difficulties paying debts as and when they fall due; and (3) the company's cash flow was insufficient to pay its debts as they fell due in the 2015 financial year. 42 In respect of the 2016 financial year, Mr Pascoe concluded as follows: (1) the company's FY16 financial statements reported a net loss of $180,151 and a working capital deficiency of $428,516. Unprofitable trading and increasing deficiency in working capital indicated the company was not paying its debts as they fell due; (2) the company's working capital ratio, as at 30 June 2016, was 0.40 which had worsened since 30 June 2015. The deficiency in working capital was $332,590 more than the previous year; and (3) the company had a severe shortage of working capital as at 30 June 2016. The company did not have sufficient cash flow to pay its debts as they fell due in FY16. 43 In respect of the 2017 financial year, Mr Pascoe concluded as follows: (1) the company's working capital ratio as at 30 June 2017 was 0.27 which had worsened still further since the previous year. The deficiency in working capital as at 30 June 2017 was $691,673, being $263,157 more than the previous year; and (2) the company had a severe shortage of working capital as at 30 June 2017. The company did not have sufficient cash flow to pay its debts as they fell due in FY17. 44 Mr Pascoe then undertook balance sheet testing - i.e., total assets less total liabilities - to help distinguish insolvency from a temporary lack of liquidity. Mr Pascoe concluded that the company did not have sufficient total assets to discharge all liabilities as at 30 June 2015, 30 June 2016, 30 June 2017, and the date that the liquidator was appointed, or at any time between those dates. The company had a deficiency in net assets for each of those periods of $19,528, $428,516, $691,673 and $936,393 respectively. Mr Pascoe also analysed the company's ability to raise funds from other sources in order to pay its debts as they fell due, and concluded that it did not. 45 This included considering the position of TRM, a related company, because, as indicated, Mr Davey had alleged in his concise statement in response and in his affidavit that TRM provided financial support to the company so that it could meet its debts as and when they fell due. Mr Pascoe concluded that, in fact, in each relevant year TRM was a net borrower from the company. 46 Mr Davey's affidavit annexed documents which he described as annual financial statements of TRM which show the opposite, namely, that in each year, the company was a non-current receivable debtor of TRM. Those statements are, however, unsigned and enjoy no evidential value in the absence of any proof of what they are or how they were prepared. Mr Pascoe's analysis is, therefore, to be preferred. 47 Mr Pascoe ultimately concluded that the company remained insolvent at all times after 30 June 2015 and that by 30 June 2016 it was "hopelessly insolvent" and remains "hopelessly insolvent". 48 I am satisfied with the exercise undertaken by Mr Pascoe with regard to analysing the solvency of the company throughout the relevant period. I accept the opinions that he expresses. It follows that the company was insolvent throughout the insolvency period.

The amount recoverable 49 The amount recoverable under s 588M is expressed as the loss suffered by the creditors as a result of the debts being incurred. Any credit that the creditors would receive by way of dividend in insolvency would serve to decrease the losses otherwise suffered. On the evidence, however, no dividend is likely to be paid, that is, other than as a consequence of success in this action. 50 The result is that the recoverable amount is the sum of the relevant debts. That is the sum of $931,024.

Mr Davey's awareness 51 The question is whether Mr Davey was aware, at the times that the debts were incurred, that there were grounds for suspecting that the company was not solvent, or that by incurring the debt in each case, the company would become insolvent. There are a number of factors which, taken together, establish that Mr Davey was so aware. 52 First, he was the only director throughout the insolvency period, and throughout that period the company was unable to pay its debts as and when they fell due. Moreover, by financial year 2017, the company was hopelessly insolvent. 53 Secondly, on 24 March 2015, Mr Davey signed the resolution to appoint administrators, thereby stating that the company was insolvent or likely to become insolvent. 54 Thirdly, on execution of the DOCA, of which Mr Davey was the proponent, the company returned to his control, yet its financial position never improved. In December 2018, Mr Davey explained to the liquidator's staff that the company struggled to break even after the DOCA, and that even paying weekly wages was a struggle. 55 Fourthly, not only has Mr Davey not appeared to contest his awareness of the relevant matters, but his concise statement in response and affidavit do not materially contest them. His concise statement in response and his affidavit state that TRM "provided financial support to the Company so that it could meet its debts as they fell due", yet no detail is given to support that bald assertion. 56 Moreover, the assertion is contradicted by what Mr Davey told the liquidator's staff in December 2018, and it is not supported by the books of the company. I infer from Mr Davey's failure to appear and give evidence in support of the assertion that he was not aware of the company's insolvency throughout the insolvency period, that he was so aware. I infer from his failure to appear that he is not able to give honest evidence in support of this defence.

Conclusion 57 In the circumstances, the plaintiffs have satisfied me, on each element of their claim, that they should have judgment in the sum claimed. 58 The plaintiffs have prepared pre-judgment interest calculations. They have done those from the date that this proceeding was commenced, thereby avoiding the complexity of working out any interest payable before that date. That is an approach that favours the defendant. The calculations establish interest payable to the plaintiffs on the judgment sum in the sum of $70,718.32. 59 After I had indicated to counsel that I was satisfied and would enter judgment in the plaintiffs' favour for the sum claimed, on the question of costs counsel tendered a notice of offer of compromise that had been given by the plaintiffs to the defendant under r 25.01 of the Rules. That offer was served by email between the solicitors on 12 October 2020. 60 The terms of the offer were as follows: the plaintiffs are willing to accept the amount of $350,000 in respect of the claim; the offer is inclusive of costs; and, the offer of compromise is open to be accepted 28 days after service of this offer of compromise. Needless to say, the offer was not accepted. That has proved to be a costly omission. 61 I am satisfied that r 25.14(3) applies with the result that the plaintiffs should have indemnity costs from 11.00 am on 14 October 2020, being the second business day after the offer was served. For simplicity, the plaintiffs have sought those costs only from 15 October 2020. 62 In the result, I make the following orders: The Court orders that there be judgment for the plaintiffs: (1) In the amount of $931,024 plus pre-judgment interest in the amount of $70,718.32. (2) For costs on a party and party basis until 14 October 2020, and on an indemnity basis from 15 October 2020. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Corporations Act 2001(Cth)ss 9, 206F, 436A, 588G, 588M

Federal Court Rules 2011(Cth)rr 5.22, 5.23(2)(b)-(c), 8.05, 16.13, 25.01, 25.14(3)

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