Plaintiffs v Defendant

(1) a declaration that the defendant director breached his duty to prevent insolvent trading within the meaning of s 588G(2) of the Act in respect of failing to prevent the company from incurring the debts totalling at least $147,204.87;

(2) an order that the defendant pay to the plaintiff the sum of $147,204.87;

(3) an order pursuant to s 588M(2) of the Act that the defendant pay to the plaintiffs as a debt to the company an amount equal to the amount of loss or damage suffered by the company's creditors because of the insolvency of the company; and

(4) alternatively to (3) orders pursuant to s 1317H of the Act for compensation of $147,204.87.

The plaintiffs also seek interest pursuant to statute and costs. At the trial of this

proceeding the plaintiffs did not press for orders to be made pursuant to s1317H.

3 By order made 18 January 2018 J Forrest J ordered that the originating process be referred to an Associate Judge for hearing and determination pursuant to r 77.05 of the Supreme Court (General Civil Procedure) Rules 2015 ('Rules') and, if required, also pursuant to r 16.1(3) of the Supreme Court (Corporations) Rules 2013.

4 The defendant filed a notice of appearance on 4 January 2018.

5 In his affidavit sworn 3 April 2018, Jason Pomaroff of Mendelsons Lawyers, the plaintiffs' solicitors, deposes that on 17 January 2018 he emailed the defendant at the email address listed on the notice of appearance filed by the defendant and attached a letter proffering terms of an order for directions at the first hearing on 19 January 2018.

6 The matter came before me for directions on 19 January 2018. Mr Devanny of counsel appeared on behalf of the plaintiffs and the defendant appeared in person. I made orders that the proceeding was to proceed by way of pleadings and that the statement of claim exhibited to the affidavit of Gess Michael Rambaldi, one of the first plaintiffs, sworn on 7 December 2017 stand as the statement of claim. I also ordered that the defendant was to file and serve a defence to the plaintiffs' statement of claim on or before 4pm on Friday 16 February 2018. I also made orders in respect of service of affidavits of documents, inspection and mediation. Being a Chapter V proceeding, if the matter proceeded to trial affidavits would be required to be filed. The proceedings were adjourned to 27 April 2018 at 10am.

7 Mr Pomaroff deposes further that on 5 February 2018 a letter containing a sealed copy of the orders made at the directions hearing was sent by email to the defendant at the email address provided by him in his notice of appearance and by express post to his nominated physical address. That letter included the orders made by me on 19 January and the plaintiffs' statement of claim. Mr Pomaroff deposes that, according to the Australia Post tracking system, those documents were successfully delivered to the defendant on 8 February 2018.

8 The defendant did not file a defence as ordered by me or at all. The matter came before Associate Justice Randall in the Corporations List on Friday 27 April 2018. The defendant did not appear. Associate Justice Randall ordered that the matter be set down for hearing as an uncontested trial on 1 May 2018. The defendant was notified of the hearing date by an email from Associate Justice Randall's associate on 27 April 2018.

9 Mr Pomaroff deposes that on 15 March 2018 he caused a letter to be sent to the defendant by email and by express post. The letter is to the effect that the plaintiffs would proceed with an application for summary judgment in the event that the defendant failed to file and serve his defence by Monday 19 March 2018. Mr Pomaroff concludes by stating that no defence has been filed in the proceeding.

10 On 30 April 2018, the plaintiff filed written submissions and proposed orders by email with the court and circulated them by email to the defendant.

11 On the morning of 1 May 2018, the defendant sent two emails to the defendant and to my associate which extracted sections 47, 50 and 56 of the Bills of Exchange Act 1909 (Cth). The defendant did not appear at the hearing on 1 May 2018.

12 In the correspondence to the defendant the plaintiffs have described the process which it seeks to now bring as being an application for summary judgment but it is more apt to describe it as an undefended trial by reason of it being a Chapter V proceeding and not one commenced by writ under Chapter 1 of the Rules. I now turn to the affidavit material filed by the parties.

13 The plaintiffs rely principally on two affidavits of Gess Michael Rambaldi sworn 7 December 2017 and 29 March 2018.

14 In his first affidavit Mr Rambaldi deposes that he has been a liquidator since October 1993. He states that he is a Certified Practising Accountant and a member of the Australian Restructuring Insolvency and Turnaround Association. He states that he and Mr Vasudevan were appointed as joint and several liquidators of Rice Bar Restaurant Pty Ltd by order of the Federal Court of Australia on 10 May 2016 at which time the company was also ordered to be wound up in insolvency under the Act.

15 Mr Rambaldi deposes that the company was incorporated on 24 April 2006. Immediately prior to the appointment of liquidators the company operated a restaurant which traded under the name 'Rice Bar Not Only Rice' from premises at 121 Grattan Street, Carlton. Since October 2013 the company had maintained a registered office at unit 22, 278 Church Street, Richmond.

16 Mr Rambaldi deposes that the defendant was appointed as the sole director and secretary of the company on 1 March 2013 and remained in that position to the date that the company was placed into liquidation. He states that the defendant was acting in a position of director within the meaning of s 9 of the Act prior to that from at least 17 October 2012. The defendant, also known as Phillip Tang, held one of the six ordinary shares in the company.

17 Mr Rambaldi deposes that he has examined the books and records of the company which are available and formed the opinion that the company incurred wholly unsecured debts in the sum of $147,204.87 which remain unpaid from when the defendant was acting as a director although not formally appointed (from 17 October 2012 to 28 February 2013), and when he was formally appointed director of the company (from 1 March 2013 until the winding up of the company on 10 May 2016).

18 Mr Rambaldi deposes that during the period 17 October 2012 to 10 May 2016 the company incurred wholly unsecured debts for the sum mentioned in respect of obligations to the Australian Taxation Office for taxation penalties and interest. These consisted of:

(a) $85,200.09 in respect of running balance account deficits from 17 October 2012 to 10 May 2016;

(b) $59,454.78 in respect of superannuation guarantee charge liabilities from 9 September 2014 to 10 May 2016; and

(c) $2,550 in respect of unpaid income tax incurred from 9 September 2014.

19 The running balance account and documentation in respect of the superannuation guarantee and income tax liability which set out these liabilities as well as other documents generated by the Australian Taxation Office are exhibited to Mr Rambaldi's affidavit and confirm the position as contended by Mr Rambaldi.

20 Mr Rambaldi deposes that at the date of his affidavit there were insufficient funds in the liquidation to pay any dividend to creditors.

21 Mr Rambaldi contends that the defendant was a director of the company from 1 March 2013 by virtue of the documents lodged with the Australian Securities and Investments Comission ('ASIC'). He states that his investigations reveal that the defendant acted as a director of the company from at least 17 October 2012 to 28 February 2013 by reason of the fact that he acted as a director of the company and was involved in the affairs of the company by reference to the following facts and circumstances:

(a) the Defendant caused or procured the lodgement of Income Tax Returns for the financial years ended 2010 and 2011;

(b) the Defendant's residential address is recorded as the Company's address in the Income Tax Return for the financial year ended 2010;

(c) for the financial years ended 2010 and 2011, the Defendant provided the Company's then tax agent (TCN Taxation Services) with an excel spreadsheet containing the Company's BAS and PAYG summaries;

(d) on 1 March 2011, the case notes of the Australian Tax Office (ATO) record that the Defendant called and requested the re-issue of BAS and the "suspension of action:"

(e) on 3 April 2012, the ATO issued an overdue activity statement letter to the Company care of the Defendant's residential address;

(f) ATO case notes record that the Defendant wrote to the ATO on 27 March 2012 and 22 June 2012 and raised "constitutional arguments" relating to the Company's tax affairs;

(g) ATO case notes record that by letter dated 9 September 2012 the Defendant asked the ATO to accept and process accounts, invoices and notices "noting accepted as endorsed and not applicable, account settled and closed";

(h) a former employee of the Company told the Liquidators' staff that at all times the Defendant controlled the financial affairs of the Company, collected mail, dealt with the ATO, dealt with the landlord of the premises and was responsible for paying the Company's bills;

(i) the Defendant was named as a guarantor to the Company's lease of the premises in a Lease of Real Estate dated 1 December 2012; and

(j) the landlord of the premises told the Liquidators' staff that the Defendant "was the Company's mouthpiece as he was the only Company representative who spoke fluent English".

22 Mr Rambaldi states that his investigations into the company's affairs have lead him to conclude that the company was likely insolvent from 24 April 2006, being the date of its incorporation, through to the date of it being wound up. His conclusion in this regard is based on the following facts:

(a) shortly after his appointment members of his staff attended the former business premises of the company at Grattan Street, Carlton. His staff sought to take possession of the books and records of the company on behalf of the liquidators but did not find any and were further advised by members of the company's staff present at the time that the company had to their knowledge never retained an external accountant or bookkeeper;

(b) within the assets and liabilities section of the company's report as to affairs dated 14 May 2016 and signed and completed by the defendant, he completed in handwriting the words 'unknown' and/or 'n/a' in each of the delineated response boxes concerned with identification of assets;

(c) the defendant also completed a Pitcher Partners questionnaire for directors and officers which was also dated 14 May 2016 and contained, amongst other things, a range of questions relating to the company's operation, its books and records and its historical compliance with taxation obligations. The defendant did not provide substantive answers to any of the pertinent questions and the responses that were provided in his handwriting included 'not known' 'not sure' 'n/a' or a '- ' in the delineated response boxes. Mr Rambaldi states that his staff members were informed by the employees of the company that other than the debt owed to the ATO, all the other trade creditors were paid on a cash on delivery basis from the cash register.

(d) Mr Rambaldi states that based on his review of the available information it is apparent that the company did not maintain adequate books and records. In particular, the liquidators do not have in their possession or control any documents which would explain the nature and effect of the company's transactions including its superannuation guarantee charge liabilities. He concludes that in these circumstances the liquidators are of the opinion that the company failed to keep written records that correctly record and explain its transactions and financial position and performance and which would enable the true and fair financial statements to be prepared in contravention of s 286 of the Act and accordingly the company is presumed to have been insolvent from the date of its incorporation.

23 Mr Rambaldi opines that the defendant had at all material times reasonable grounds for suspecting that the company was insolvent or alternatively would become insolvent by incurring the debts or any of them. His opinion in this regard is founded on the absence of books and records, the company's failure to pay its tax debts, failure to lodge an income tax return in 2012 or BAS since 2013, in addition to the responses provided to the defendant in the report as to affairs and the questionnaire referred to above. Mr Rambaldi is of the further opinion that a reasonable director in the position of the defendant in the company's circumstances would have suspected that the company was insolvent.

24 On 19 September 2016 Mr Rambaldi caused a letter to be sent to the defendant particularising the allegation that he had breached his duty to prevent insolvent trading but there was no response.

25 In his affidavit filed on 24 April 2018 Mr Rambaldi recites the terms of the orders made by me on 19 January 2018 which provided inter alia that the defendant was required to file and serve a defence by 16 February 2018. He states that on 23 February 2018 he was informed and believes that the defendant had delivered documents to the offices of the plaintiffs' solicitors entitled 'Writ of Error Facts Finding' and 'Judicial Notice'. These are the documents that I will refer to below which were rejected by the Court registry.

26 Mr Rambaldi deposes that no defence has been served, and that the only documents that have been filed with the court are, firstly, documents containing assertions by the defendant that the Court lacks jurisdiction to hear and determine the matter on a number of constitutional bases and, secondly, that the company's debts to the ATO are extinguished by reason of the issue of instruments described as 'BOE' made payable to the Deputy Commissioner of Taxation pursuant to the Bills of Exchange Act 1909 (Cth). He exhibits correspondence from the Australian Taxation Office to the defendant in which the Commissioner states that he "does not consider there is a basis upon which he is required to accept and proceed the account invoices and/or notices. [and ] accordingly your correspondence does not reduce any tax obligations that you may have."

27 On 4 January 2018 the defendant filed an affidavit sworn by him on 28 December 2017. The affidavit is rambling, nonsensical and, aside from the occasional assertion in respect of matters the subject of this claim, is unresponsive to Mr Rambaldi's affidavit of 7 December 2017. By way of example in this regard, an extract of the defendant's affidavit (paragraphs [1] to [15]) reads as follows:

1. Kim Huit is consciously aware, that He is "Living Spirit" living as "Servant to Al Might Creator" in the "Greater Universe Continuum". We are integrally interlocked to the immutable1 laws of this "Natural Element" wherein our inalienable "Spirit" is constituted in interlocutory law without been holder or occupier of "PERSON" Office.
2. Therefore the Man called Kim Huit of the House Tang, with the Grace of God as living breathing soul force of man, whereas one of the people of the land called Australia, and sincerely avow that in Kim Huit's correct and proper public capacity exclusively as the beneficiary to the Original Jurisdiction, being of majority age, competent to testify, a selfrealised man upon the land, that My yes be yes, My no, no, My word be true, and that do avow the truths and facts contained herein, are of Kim Huit first hand, sincere belief and knowledge as being, true, correct, complete, certain and not misleading; and grateful to the Blessing of Almighty God to allow Kim Huit to write this affidavit:
3. In the State of Victoria, the "Constitution Act 1975 - SECT 76, state that the Supreme Court of Victoria "to be a court of record and to have a seal. The Court shall be a court of record, and shall have and use as occasion may require a seal bearing an impression of the Royal Arms having inscribed thereon the words "The seal of the Supreme Court of the State of Victoria"; and such seal shall be kept in the custody of the Chief Justice of The Court".
4. THAT We make this "special appearance" before this honourable court, to assist the court in distinguishing between ourselves: Kim Huit living spirit of the House Tang and KIM HUIT TANG (and all the derivatives and variation in the spelling of the said name (CORPORATION SOLE), in DOG-LATIN of the grammatical fact stating that such NAME written in DOG-LATIN-GLOSSA style in any of your documents are Corrupt and Criminal, our appearance before the court must not be construed as volunteering or consenting to the Plaintiff or the court jurisdiction.
5. That We have not engaged the services of licenced legal counsel and, thereby rebut any assumed "consent to contract" or "consent to jurisdiction".
6. That We are "Kim Huit" with the initial letter capitalized as required by the rules of English Grammar when writing the description of living Spirit man. With the blessing of Al Mighty Creator of All Things We become the son of a man and a woman that was born in our mother womb with rights of inheritance and issue from the house of Tang" with the initial capitalized.
7. That We are not a life-less, dead-in-law-artificial-legal-entity-person-natural-person-human being.
8. That We are who we are, not, who the imagination, devices or records of men, say that we are.
9. That it is the responsibility of the plaintiff and court registrar to bring the correct party before the court, we are not that party.
10. ". .And the LORD-GOD formed man of the dust of the ground and breathed into his nostrils the breath of life: and man become a living soul" Genesis Chapter 2:7
11. That consistent with the God's scriptures laws unless we have wilfully harmed someone or damaged their property, we have not committed any wrongdoing; and therefore we are not liable to answer or enter to any contract without consent or be liable for any damage/penalty(s) but the court should consider a remedy to the benefit of the Living Man Kim Huit of the House Tang.
12. We truly believe and say that we had fulfilled our obligation lawfully with the A.T.O, we had tendered 7 payments in total in our good faith and accordance with Bill of Exchange 1909, as amended in2011 and administered by the Treasury;

A] 05/06/2012 B.O.E no: 506482105016 Amount $20,000 to Robert Ravenello Deputy Commissioner of ATO

B] 05/09/2012 B.O.E no: 506482110010 Amount: $20,000 to Robert Ravenello Deputy Commissioner of ATO

C] 08/06/2012 B.O.E no: 506482111017 Amount $17,839.73 to ATO Albury

D] 01/2012 B.O.E no: 506382112014 Amount: 11$50,000 to Robert Ravenello Deputy Commissioner of ATO

E] 19/07/2012 B.O.E no: 506482109014 Amount: $50,000 to Robert Ravenello Deputy Commissioner of ATO

F] 21/09/2015 B.O.E no: 941788589014 Amount: $50,000

G] 19/06/2012 B.O.E no: 506482107010 Amount; $10,000 to Robert Ravenello Deputy Commissioner of ATO.

1. ATO as a Government entity are well verse in financial instruments and the laws and obligations that must be followed, the Commissioner or his/her deputies know that they had the right to protest at the time stipulated in the instruments; however they chose not to show up at the time of the meeting and they failed or refused to protest and the ATO had never returned the tendered instruments.
2. Awe (sic) demand that PITCHER PARTNERS and GESS MICHAEL RAMBALDI verify in writing that the A.T.O had never received any payment in a way of Bill of Exchange, and what firsthand knowledge do they have regarding the tendered Bill of Exchange to the ATO, or did ATO mislead them by not disclosing the true facts of the payments they received by BOE, or are they both colluding to deceive us and the Honorable Court to benefit financially.
3. Notwithstanding we attached A.T.O's Department inchoate instruments including what have been begun but apparently not completed (missing several material particulars, including some or all of the Parties being expressed in a representative capacity as part of our presentments that having been all accepted for valuable consideration as per the tenor of such terms, provisions and endorsements so expressed (subsequently issued complete with any negativing or limiting one's liability by such endorsements), as being an "unqualified offer to Contract between the Parties" so named thereon.

28 The affidavit continues for another 15 paragraphs in the same vein. If one were attempting an analysis of its substance, the defendant appears to contend that the court lacks jurisdiction to hear the claim and that by the proffering of bills of exchange the Commissioner's claim (which constitutes the entirety of the plaintiffs' claim in this proceeding) has been discharged.

29 On 23 February 2018, the defendant sought to file several additional documents, headed 'Writ of Error', 'Facts-Finding', and 'Judicial-Notice', which were in the same vein as the affidavit to which I have referred. On 27 February 2018 Ms Helena Konstanopoulos, an Assistant Registrar (Legal) and Deputy Prothonotary of the Court wrote to the defendant advising him that the documents had been rejected for filing as they had not been prepared in accordance with the rules of Court and were not in the correct form. The defendant responded on 14 March 2018 in argumentative terms.

30 The defendant has not sought to contradict Mr Rambaldi's evidence in relation to the state of the books and records of the company or indeed in respect of the other matters deposed to in his affidavit.

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.

...[note relevant for current purposes]

(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.

Note: This subsection is a civil penalty provision (see subsection 1317E(1)).

(3) A person commits an offence if:

(a) a company incurs a debt at a particular time; and

(aa) at that time, a person is a director of the company; 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) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and

(d) the person's failure to prevent the company incurring the debt was dishonest.

(3A) For the purposes of an offence based on subsection (3), absolute liability applies to paragraph (3)(a).

Note: For absolute liability, see section 6.2 of the Criminal Code.

(3B) For the purposes of an offence based on subsection (3), strict liability applies to paragraphs (3)(aa) and (b).

Note: For strict liability, see section 6.1 of the Criminal Code.

(4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section.

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.

(3) The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

(4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

The operation of these statutory provisions is described by the Full Court of the Supreme Court of South Australia in Powell & Anor (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer & Anor (2001) 37 ACSR 589 ('Powell') at paragraphs [56] to [66] (inclusive). At paragraphs [64] to [66], Olsson J speaking for the Court stated:

In speaking of the concept of incurring a debt, in the setting under consideration in Hawkins, Gleeson CJ made the point that the words "incur" and "debt" are not words of precise and inflexible denotation . . . they are to be applied in a practical and common sense fashion, consistent with the context and with the statutory purposes. That dictum is no less apposite to the construction of s 588G.

In Commissioner of State Taxation (WA) v Pollock (1993) 11 WAR 64; 12 ACSR 217; 12 ACLC 28 at 41 (Pollock) Ipp J, as a member of the Full Court, took, as his commencement point, that the normal meaning of the word "incur" is to become liable to, or subject to, through one's own action. He stressed that this did not exclude rendering oneself liable through acts of omission. Wallwork J agreed.

So it was that that Full Court held that it was fairly arguable that a liability to pay tax was a "debt" and that a company could, in various circumstances, "incur" such a debt. Thus, for example, the engaging of a person at a time when there were reasonable grounds to expect that the company would be unable to pay its debts, or in circumstances in which the company knew that it could not pay future wages or payroll tax, was "incurring a debt" in the relevant sense. (See also Charles JA in Sands & McDougall Wholesale Pty Ltd (in liq) v FCT (Cth) [1998] VSCA 76; [1999] 1 VR 489 at 504; [1998] VSCA 76; (1998) 40 ATR 322 (Sands). He there concurred in the view that a tax liability constituted a "debt" in the relevant statutory sense and, by inference, that it could be incurred.

33 In my opinion there is no doubt that tax debts are 'debts' for the purposes of the insolvent trading provisions. This is confirmed by the above passage from Powell. It is also confirmed by the Court of Appeal in this state in Sands & McDougall Wholesale Pty Ltd (in liq) v FCT (Cth) [1998] VSCA 76; [1999] 1 VR 489 at 504_,_ at paragraphs [36] to [37] per Charles JA who spoke for the Court_._

34 In my view Mr Rambaldi has established each of the elements of s 588G(1). I am satisfied that the defendant was a director of the company at all relevant times when the taxation liabilities the subject of this proceeding were incurred and that at those times the company was insolvent by reason of the presumption arising from the failure to keep proper books or indeed any books of account. I also consider by reason of the matters referred to that there are reasonable grounds for suspecting that the company was insolvent at the times that the debts were incurred and that these times were after the commencement of s 588G. The defendant has not raised any of the statutory defences mentioned in s 588H.

35 In this regard, he running balance account deficits which are sought to be recovered were incurred from 17 October 2012 at which point in time I am satisfied that the defendant was a de facto director and then a formally appointed director until 10 May 2016 when the company was ordered to be wound up. The superannuation guarantee charge liability was incurred from 9 September 2014 to the day of winding up and at a time when the defendant was a formally appointed director. The same situation applies in respect of the company's income tax liability which was incurred on and from October 2014. As such all the debts the subject of this proceeding were clearly incurred at a time when the defendant was either acting as a director or was noted on the ASIC records as being a director of the company.

36 As such I am satisfied that the liquidators are entitled to recover from the defendant as a debt due to the company an amount equal to the amount of the loss and damage i.e. the total of the taxation debts. It follows that the plaintiffs are also entitled to interest on that sum from the date of commencement of this proceeding together with costs and I will so order.