Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq) v Mandalinic - [2024] FCA 164 - FCA 2024 case summary — Zoe

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Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq) v Mandalinic

[2024] FCA 164

Federal Court of Australia|2024-02-27|Before: Mr J, Halley J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2024-02-27

Before

Mr J, Halley J

Source

Original judgment source is linked above.

Judgment (14 paragraphs)

[1]

THE COURT ORDERS THAT:

Pursuant to s 588M(2) of the Corporations Act 2001 (Cth) (Act), the defendant is to pay to the first plaintiff, as a debt due to the second plaintiff, the amount of $2,489,187.38, being the amount equal to the loss or damage suffered by creditors of the second plaintiff as a result of the contravention by the defendant of s 588G(2) of the Act.
Pursuant to s 588FF(1) of the Act, the defendant is to pay to the first plaintiff the sum of $422,400.00 as an unreasonable director-related transaction pursuant to s 588FDA of the Act.
The defendant is to pay interest upon the aforesaid sums pursuant to s 51A of the Federal Court Act 1976 (Cth) in the amount of $672,930.75.
The defendant is to pay the plaintiffs' costs of the proceedings, as taxed or agreed, not already the subject of a cost order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[2]

A. Introduction 1 The first plaintiff, Richard Stone, is the liquidator of the second plaintiff, RIC Admin Pty Ltd (in liquidation) (Company). Mr Stone was appointed as the liquidator of the Company by an order of this Court made on 13 November 2019 on the application of the Deputy Commissioner of Taxation filed 27 August 2019. 2 The plaintiffs commenced these proceedings by an originating process filed on 4 September 2020, amended on 22 December 2022, supported by a further amended statement of claim filed on 22 December 2022. 3 The plaintiffs advanced two claims against the defendant, John Mandalinic, in the further amended statement of claim: (a) a claim for $2,014,386.38, or alternatively $2,489,187.38, or alternatively $474,801, pursuant to s 588M(2) of the Corporations Act 2001 (Cth) (Act), or alternatively s 1317H of the Act, for breach of s 588G(2) of the Act (insolvent trading claim), with an alternative claim for breach of director's duties in relation to that amount; and (b) a claim for $422,400.00 pursuant to s 588FF of the Act for breach of s 588FDA(1) of the Act (unreasonable director-related transaction). 4 I note for completeness that the Pay As You Go Withholding (PAYGW) sourced component of the insolvent trading claim was $2,014,386.38 whereas the amount sought by the ATO in its proof of debt was $2,014,386.18, a difference of only 20 cents. The discrepancy is not explained in the evidence. I am satisfied that the difference is immaterial. 5 The plaintiffs relied on affidavits of Mr Stone sworn on 1 July 2021 (first affidavit) and 23 February 2024 (second affidavit) together with two reports with respect to the solvency of the Company prepared by Mr Stone dated 12 April 2022 (first report) and 29 August 2022 (second report) with respect to the solvency of the Company. 6 Mr Mandalinic did not appear at the hearing of the proceedings on 27 February 2024. 7 On 23 November 2023, the day before the proceedings were originally listed for hearing, Mr Mandalinic filed a debtor's petition for bankruptcy with the Official Trustee. 8 On 24 November 2023, the hearing of the proceedings was stood over to a date to be fixed in February 2024 pending the outcome of Mr Mandalinic's debtor's petition. 9 On 4 January 2024, Mr Mandalinic's debtors petition for bankruptcy was accepted by the Official Trustee and Paul Weston was appointed trustee of his bankrupt estate. 10 By a letter dated 10 January 2024, the Trustee informed the plaintiffs' solicitors that he did not intend to take any further action in relation to these proceedings. 11 On 26 February 2024, the plaintiffs filed an interlocutory application seeking leave to proceed against Mr Mandalinic pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). 12 Immediately prior to the hearing of the proceedings on 27 February 2024, I made orders granting leave to the plaintiffs to proceed against Mr Mandalinic pursuant to s 58(3)(b) of the Bankruptcy Act and to file in Court a further amended originating process that corrected some minor errors in the amended originating process.

[3]

B. Factual Background 13 The following factual background to the relief sought by the plaintiffs is provided by Mr Stone in his first affidavit and his first report. 14 Mr Mandalinic was the sole director of the Company from its incorporation on 17 December 2014 until its liquidation. The Company carried on business as a construction consulting service company providing administrative services. 15 On 1 January 2017, the Company registered for GST on a quarterly lodgment cycle and reporting on a cash basis. 16 On 3 September 2018, the Australian Taxation Office (ATO) issued a notice to the Company regarding its failure to lodge its Business Activity Statement (BAS) for the quarter ended 30 June 2017. 17 On 1 November 2018, the ATO issued a letter to the Company advising that its income tax return for the financial year ended 30 June 2017 was overdue. 18 On 8 February 2019, the ATO issued a notice to the Company in relation to its failure to lodge its BAS for the quarter ended 30 September 2017. 19 On 13 March 2019, the ATO issued a demand for payment to the Company in the sum of $552.77. 20 In the period between 1 July 2016 and 29 March 2019 the defendant caused the Company to pay him amounts totalling $422,400.00 by way of weekly amounts, each in the sum of $4,400.00. 21 On 2 April 2019, the ATO notified the Company it had completed a review (ATO Audit) of the Company's tax affairs for the period 1 September 2017 to 31 December 2017. The ATO Audit found that the Company did not report or remit PAYGW for this period. 22 On 2 April 2019, the ATO issued a PAYGW estimate to the Company in the amount of $2,033,381.58 in respect of the period 1 September 2017 to 31 December 2017 and issued a garnishee notice in the sum of $2,033,938.22 over the Company's bank account, pursuant to which it recovered the sum of $374,731. 23 The Company took no steps under s 268-40 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA) within the prescribed period to contest the PAYGW estimate. 24 As at 6 June 2019, the Company had a deficit debt on its Running Balance Account (RB Account) with the ATO of $1,941,100.91. 25 On 6 June 2019, the ATO served a creditor's statutory demand on the Company for the amount of $1,941,100.91, including for the balance of the PAYGW estimate (Statutory Demand). 26 No application was made by the Company to set aside the Statutory Demand. 27 On 27 August 2019, the ATO commenced proceedings to wind up the Company pursuant to s 459P of the Act. 28 As at 13 November 2019, the Company's indebtedness on its RB Account to the ATO was $2,014,386.18. 29 On 13 November 2019, the Company was wound up by an order of this Court. 30 On 21 November 2019, the ATO lodged a proof of debt in the winding up of the Company in the sum of $2,014,386.18.

[4]

C.1. Statutory provisions and legal principles 31 The following provisions of the Act are relevant to the liability of directors for insolvent trading. 32 Section 588G(1) of the Act provides: (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. 33 Section 588G(1A), item 7 of the Act, provides that a company incurs a debt at the time that it enters into an uncommercial transaction, within the meaning of s 588FB. 34 Section 588FB of the Act provides: (1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter. (2) A transaction may be an uncommercial transaction of a company because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. 35 Section 588G(2) of the Act provides: (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 section 1317E). 36 Incurring a debt extends to any "act, omission or other circumstance which causes the company to owe the debt": Australian Securities and Investments Commission v Edwards (2005) 54 ACSR 583; [2005] NSWSC 831 at [81] (Barrett J). 37 Further, it is not necessary to demonstrate that the company chose to incur the debt to enliven s 588G(2): Shepherd v Australia and New Zealand Banking Group Ltd (1996) 20 ACSR 81 at 88-89 (Bryson J). The incurring a debt in a taxation context was addressed by Mandie J in Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124; [2003] VSC 123 at [515], referring to the statements by Bryson J in Shepherd, in the following terms: I would respectfully agree with Bryson J that the relevant section does not express an element of choice, but nevertheless, in my opinion, the exercise of choice will often be relevant to the question as to when a company has incurred a debt. For example, in the case of obligations imposed by revenue law, the choice will of course not be exercised in relation to incurring the taxation liability, but there will still be a choice exercised, namely, the decision to continue trading or the decision to proceed with whatever activity is likely to attract or involve the attraction of the relevant impost. 38 Section 95A(1) of the Act provides: A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. 39 Relatedly, s 588E relevantly provides: … (3) If: (a) the company is being wound up; and (b) it is proved, or because of subsection (4) or (8) it must be presumed, that the company was insolvent at a particular time during the 12 months ending on the relation‑back day; it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day. (4) Subject to subsections (5) to (7), if it is proved that the company: (a) has failed to keep financial records in relation to a period as required by subsection 286(1); or (b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2); the company is to be presumed to have been insolvent throughout the period. (5) Paragraphs (4)(a) and (4A)(a) do not apply in relation to a contravention of subsection 286(1) that is only minor or technical. (6) A presumption under subsection (4) or (4A) of this section, applying because of a contravention of subsection 286(2), does not have effect so far as it would prejudice a right or interest of a person, if it is proved that: (a) the contravention was due solely to someone destroying, concealing or removing financial records of the company; and (b) none of those financial records was destroyed, concealed or removed by the first‑mentioned person; and (c) the person was not in any way, by act or omission, directly or indirectly, knowingly or recklessly, concerned in, or party to, destroying, concealing or removing any of those financial records. (7) If the recovery proceeding is an application under section 588FF, subsection (4) of this section does not have effect for the purposes of proving, for the purposes of the application, that an unfair preference given by the company to a creditor of the company is an insolvent transaction, unless it is proved, for the purposes of the application, that a related entity of the company was a party to the unfair preference. … (9) A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the proceeding concerned. 40 Section 268-25 of Sch 1 to the TAA provides that a company is liable to pay a PAYGW estimate even if the underlying liability never existed or was discharged in full, or the unpaid amount of the underlying liability was less than the unpaid amount of the estimate.

[11]

C.3. Liability for insolvent trading 63 I am satisfied that Mr Mandalinic has contravened s 588G(2) of the Act and the plaintiffs can recover from Mr Mandalinic as a debt due to the Company the sum of $2,489,187.38 being the amount equal to the loss or damage suffered by the creditors of the Company as a result of Mandalinic's contravention, for the following reasons. 64 First, I am satisfied, for the reasons set forth at [41] to [57] above, that the Company was insolvent on a cashflow basis from 25 August 2017 to 13 November 2019 (Relevant Period) and is to be presumed to have been insolvent by reason of a failure to keep proper books and records at all times between 2014 and 13 November 2019, including during the Relevant Period. 65 Second, at all times during the Relevant Period, Mr Mandalinic was the sole director of the Company. 66 Third, on 2 April 2019 the Company incurred the PAYGW Tax Liability debt to the ATO in the sum of $2,033,381.52 for a PAYGW estimate. 67 Fourth, the Company did not take any steps to contest the PAYGW Tax Liability or seek to set aside the statutory demand issued by the ATO on 6 June 2019. 68 Fifth, as a result of the audit undertaken by the ATO of the Company's BAS for the period 1 September 2017 to 31 December 2017, on 23 August 2022 the ATO determined that the Company was not entitled to input tax credits that gave rise to the GST Liability. 69 Sixth, Mr Mandalinic was a director of the Company in the periods in which the PAYGW Tax Liability arose and in the period the subject of the GST Liability and by making the decision to continue trading the Company in those periods caused it to incur those liabilities. 70 Seventh, by failing to prevent the Company from incurring the PAYGW Liability and the GST Liability, Mr Mandalinic contravened s 588G(2) of the Act because a reasonable person in a like position in a company in the same circumstances of the Company would be aware that there were reasonable grounds for suspecting that at the times those liabilities were incurred, the Company was insolvent by reason of the matters identified in [41] to [57] above. 71 Eighth, by reason of Mr Mandalinic's contravention of s 588G(2), Mr Stone may recover as a debt due to the Company, an amount equal to the amounts of the Company's loss or damage, being $2,014,386.38, the amount outstanding on the RB Account arising from the PAYGW Liability, and $474,801 with respect to the GST Liability, pursuant to s 588M(2) of the Act.

[12]

D.1. Statutory provisions and legal principles 72 The following provisions of the Act are relevant to the liability of directors for unreasonable director-related transactions. 73 Section 588FDA(1) provides that a transaction of a company is relevantly an unreasonable director-related transaction of the Company if (a) the transaction is a payment by the company, (b) the payment is to a director of the company, and (c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the benefits, if any, and the detriments of entering into the transaction. 74 In Vasudevan v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14 at [23] and [24] (Nettle JA, Beach JJA and McMillan AJA agreeing), the Court of Appeal of the Victorian Supreme Court stated with respect to the words "for the benefit of" in s 588FDA(1)(b)(ii) that: The natural and ordinary meaning of a requirement that something be for "for the benefit of" a person is that it be "for the advantage, profit or good" of the person"… … The natural and ordinary meaning of "for the benefit of" accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage. Conversely, given this ease with which an errant director might channel benefits from a company under his charge to another company in which he is financially although not legally or equitably interested, there is every reason to suppose that Parliament intended not to confine the meaning of the expression to something in the nature of an equitable interest. 75 Section 588FE(6A) provides: (6A) The transaction is voidable if: (a) it is an unreasonable director‑related transaction of the company; and (b) it was entered into, or an act was done for the purposes of giving effect to it: (i) during the 4 years ending on the relation‑back day; or (ii) after that day but on or before the day when the winding up began. 76 Section 588FF(4) provides: (4) If the transaction is a voidable transaction solely because it is an unreasonable director‑related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between: (a) the total value of the benefits provided by the company under the transaction; and (b) the value (if any) that it may be expected that a reasonable person in the company's circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).

[13]

D.2. Consideration 77 In his defence to the amended statement of claim, Mr Mandalinic admitted that he received weekly payments of $4,400 from the Company in the period between 1 July 2016 and 29 March 2019 but asserts by way of particulars that they were payments for director's fees and for services to the Company as a director and supervisor of the operations and transactions undertaken by the Company. 78 I am satisfied that Mr Mandalinic contravened s 588FDA of the Act by making the payments of $422,400.00 from the Company to himself in the period between 1 July 2016 and 29 March 2019. 79 First, the books and records of the Company provided to Mr Stone do not provide source documents to support the underlying amounts disclosed in the MYOB records of the Company and the payments in the Company's Westpac bank statements are simply recorded as "Withdrawal Online [a 7 digit number] Pymt John Manda Payment $4,400". 80 Second, the books and of records of the Company provided to Mr Stone do not include a copy of any agreement between the Company and the defendant for the Company to pay him director's fees. 81 Third, there is no evidence that any amounts for tax were deducted by the Company and remitted to the ATO in respect of these payments or that Mr Mandalinic declared them as income in his personal tax returns for that period. 82 Fourth, the payments were being made to Mr Mandalinic in a period, at least from 25 August 2017, in which the Company had insufficient funds to meet its PAYGW taxation obligations. Had the Company complied with its PAYGW obligations it would not have had the funds available to make the payments to Mr Mandalinic. 83 I am satisfied for these reasons that a reasonable person in the circumstances of the Company would not have made these payments to Mr Mandalinic having regard to the detriment to the Company of entering into the transactions and their benefit to Mr Mandalinic. In the absence of any documents in the books and records of the Company recording the basis on which the payments were made or other evidence that the payments were received by Mr Mandalinic as director's fees or payments for services that he provided to the Company, I am prepared to infer, that the payments were made by Mr Mandalinic with reckless disregard to the financial position of the Company and could fairly be characterised as conduct by a director of a company that amounted to "stripping benefits out of companies to their own advantage": Vasudevan at [24].