Yeo, in the matter of Bradi Transport Pty Ltd (in liq) v Sklenovski

[13]

The position of the defendants 9 At this juncture, the position of the defendants should be noted. On 30 March 2020, the solicitors for the second defendant, Strategic Law Partners, filed a notice of appearance for the second defendant, Mr Sklenovski. It is not apparent that a similar notice of appearance was also filed for the first defendant, Mrs Sklenovski. However, on 28 May 2020, Strategic Law Partners filed a defence on behalf of Mrs Sklenovski and a separate defence on behalf of Mr Sklenovski. 10 On 6 July 2020, I ordered that, by 17 July 2020, the defendants were to file and serve any amended defences. No amended defences were ever filed. The last documents filed by the defendants were each of the first and second defendant's defences dated 28 May 2020. Those defences essentially recorded bare denials of the allegations in the plaintiffs' statement of claim dated 7 April 2020. 11 On 8 October 2020, I held a pre-trial case management hearing in this matter. A solicitor of Strategic Law Partners, Ms Helen Mastos, attended that hearing as a courtesy to the Court. Ms Mastos informed the Court that Strategic Law Partners continued to act for the first and second defendants, but had not been in contact with the defendants for some time. Ms Mastos informed the Court that Strategic Law Partners had not, on behalf of the defendants, filed documents in accordance with the Court's Orders because Strategic Law Partners had not been put in funds. Ms Mastos informed the Court that the defendants were aware that this proceeding was listed for hearing on 19 October 2020. I directed Ms Mastos to make enquiries of the defendants and confirm to the Court whether or not Strategic Law Partners continued to act for the defendants in this proceeding. 12 On 19 October 2020, Ms Mastos again attended the hearing of this proceeding as a courtesy to the Court. Ms Mastos informed the Court that Strategic Law Partners had no instructions to appear at the hearing of this proceeding, and that Ms Mastos had not heard from the defendants. Ms Mastos informed the Court that the defendants were aware of the hearing of this proceeding on 19 October 2020. Ms Mastos also informed the Court that Strategic Law Partners was reluctant to file a notice of ceasing to act because there was a prospect that the defendants would eventually instruct Strategic Law Partners in relation to this proceeding. Ms Mastos ultimately sought to be excused from further participation in the hearing of this proceeding. I granted Ms Mastos leave to be excused from further attendance at the hearing on 19 October 2020. 13 Those matters leave the defendants in an atypical position. While the proceeding was in substance uncontested, the defendants in fact had legal representation on the record.

[16]

Principles 16 The principles upon which a person might be considered a director of a company, in accordance with s 9 of the Corporations Act, notwithstanding no formal appointment, are set out in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 (Grimaldi) at [62]-[76]. In Grimaldi, Finn, Stone and Perram JJ stated at [64]-[68]: For present purposes a director is a person who is not validly appointed as such if that person "act[s] in the position of a director": s 9 "director" (b)(i). The following emerges clearly enough from the wording of the definition in its context and from Australian case law. (i) A person may be a director even without any purported appointment of that person to that position at any time. The definition applies as much to a person who is a true usurper of the functions of a director in a company … (ii) The formula, "acts in the position of a director" … contemplates that in some degree at least the person concerned, though not appointed a director, has been "doing the work of a director" in that company … Or to put the matter more fully, the person concerned, though not a director de jure, has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances. (iii) The roles and functions so performed will vary with the commercial context, operations and governance structure (to the extent it is operative) … Their performance by that person may well be at variance with what is permitted by the Act or by the company's constitution. Nonetheless, whether they suffice in the circumstances to constitute the person a director for the Act's purposes will often be a question of degree having regard to "the nature of the functions or powers which are exercised and the extent of their exercise" … (iv) There is no reason why the relationship of a person with a company may not evolve over time into that of de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time … (v) Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company: see s 9 "director" (a). The fact that a person has been designated a "consultant" for the performance of functions for a company will not as of course mean that person cannot be found to be a director. Whether or not he or she will be a director will turn on the nature and extent of the functions to be performed (both in and beyond the consultancy) and on the constraints imposed thereon. A limited and specific consultancy is unlikely on its own to be caught by the s 9 definition. Not so, a general and unconstrained one which permitted taking an active part in directing the affairs of the company even if not necessarily on a full-time basis … Though we do not consider that the question actually requires determination in this case and thus we do not need to express a concluded view on it, we consider that if a consultant is a corporation and what it does through its own directors or officers results in "acting in the position of a director", then, and consistently with the policy of s 201B (which requires a director to be a natural person), it will be a question of fact as to which director (or officer) in the consultant company is (or are) the de facto director(s) of the corporation. (Citations omitted.)

[18]

Statutory provisions 20 In order to establish a claim pursuant to s 588M of the Corporations Act, the liquidators must satisfy the Court that s 588G of the Corporations Act applies (as per s 588G(1)), that s 588G has been contravened (as per s 588G(2)) and that s 588M applies (as per s 588M(1)). 21 Sections 588G(1) and (2) of the Corporations Act 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 [the Corporations 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. 22 Section 588M of the Corporations Act provides: 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. (1A) This section also applies if: (a) a person (the director) has contravened subsection 588GAB(1) or (2) or 588GAC(1) or (2) relating to disposition of property by a company; and (b) one or more creditors of the company have suffered loss or damage because of the disposition and the company's insolvency; and (c) the company is being wound up. This section applies whether or not the director has been convicted of an offence relating to the contravention or a civil penalty order has been made against the director for 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. 23 To enliven s 588G of the Corporations Act, the Company must have incurred a debt. The liquidators contend that, while there are minor differences in how courts have sought to define the incurring of a debt, it is generally accepted that a debt is incurred when the debtor does something that renders them liable to pay (whether now or in the future): Hawkins v Bank of China (1992) 26 NSWLR 562, 572 (Hawkins); Harrison v Lewis [2001] VSC 27 at [27]-[28]; Re Overgold Pty Ltd [2019] VSC 624 (Re Overgold) at [9]-[19]. 24 In Hawkins, Gleeson CJ stated at 572: The words "incurs" and "debt" are not words of precise and inflexible denotation. Where they appear in s 556 they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes. "Debt" is capable of including a contingent liability. The word was used in that sense in s 291 of the Companies Act 1961, which referred to "debt payable on a contingency". That expression did not involve a contradiction in terms. Dictionaries define "debt" as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute. In Williams v Harding (1866) LR 1 HL 9, there was an issue as to the effect of a statute dealing with insolvency which made a debt incurred by a non-trader insufficient to found an adjudication of bankruptcy unless it was contracted after a certain date. The debt in question in that case was a liability to pay calls made by a joint stock company. The question was whether the appellant's debt was contracted when he signed the deed of settlement making him a shareholder, or when the calls were made. It was held that the former was the case. Lord Cranworth LC said (at 21) that the date of the appellant's debt was when he executed the deed, and Lord Chelmsford (at 24) referred to the amount of the calls as a debt to which the appellant was "antecedentally liable". Similarly, the word "incurs" takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that "debt" may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time … 25 Kirby P stated at 576 and 578: The act of "incurring" happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt. The mere fact that such sum of money will only be paid upon a future contingency does not make the assumption of the obligation any less "incurring" a "debt". … I agree in the conclusion of Gleeson CJ that once it is accepted that a "debt" in s 556(1)(a) may include a contingent debt, there is no difficulty in the present facts, in holding that a "debt" may be taken to have been incurred when [a certain corporation] entered a contract by which it subjected itself to a conditional, but unavoidable, obligation to pay a sum of money at a future time. 26 Sheller JA stated at 578: Upon its execution the covenantor incurred a debt in the sense of an obligation to pay a liquidated amount contingent upon demand by the lender after the borrower's default in performance or observance of any of its obligations in respect of the financial accommodation. For the reasons given by the Chief Justice and the President I agree that in the expression "incurs a debt" in s 556(1)(a) of the Companies (New South Wales) Code "debt" includes a contingent debt. In my opinion on execution of this guarantee the covenantor incurred such a debt. 27 In Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717, Middleton J stated at [137]: … a company incurs a debt when, by act or omission, it is rendered liable for a debt, even one imposed by a statute: Standard Chartered Bank of Australia Ltd v Antico [Nos 1 and 2] (1995) 38 NSWLR 290 at 314, 317 (Hodgson J); Commissioner of State Taxation v Pollock (1993) 11 WAR 64 at 233-234 (Ipp J). A debt may include a contingent debt (Hawkins v Bank of China (1992) 26 NSWLR 562) … 28 The liquidators also contend that taxation liabilities are considered debts even if they are not yet the subject of determination - i.e. if the tax payer has performed such transactions that would give rise to a tax liability even if they have not yet disclosed it to the tax office and thereby been assessed for it: Commissioner of State Taxation v Pollock (1993) 11 WAR 64; Re Overgold at [12]-[16] (and the authorities there cited).

[20]

The Company's insolvency 33 The decision in Re Overgold at [24]-[27] provides a useful summary of the notion of insolvency for the purposes of a claim pursuant to ss 588G and 588M of the Corporations Act. 34 The liquidators rely upon the solvency assessment set out in exhibit "ARY-14" to the second Yeo affidavit in respect of the legal principles and the factual circumstances of the Company. 35 The solvency assessment and an analysis of the bank statements of the Company reveal that, at all times, Mr and Mrs Sklenovski's practice was to withdraw whatever funds were available in the Company with no intention to repay. This was done while the Company's liability to the ATO, which was primarily the only creditor of the Company, was ever increasing. 36 It is clear from an analysis of the payments to Mr and Mrs Sklenovski identified in the Schedule of Payments (when considering the bank statements of the Company) that withdrawals by Mr and Mrs Sklenovski were almost universally made on the day funds were paid to the Company by Boral, leaving only nominal money in the Company's bank account. 37 The proof of debt submitted by the ATO to the liquidators in respect of the Company summarises the Debts in respect of the ATO. For the purpose of a solvency analysis, it should be noted that it includes sums in respect of: (1) unpaid income tax; (2) an unpaid running balance account in respect of BAS (including non-payment of tax withheld from employee wages); (3) superannuation guarantee charges from 1 July 2014 in respect of unpaid superannuation of staff; (4) penalties and interest. 38 The fact that the Company was able to continue trading for several years notwithstanding the liquidators' assessment of insolvency is exemplified by the Company's failure to comply with a creditor's statutory demand, issued by the ATO on 24 March 2015. Notwithstanding the act of insolvency committed by failing to comply with the demand, the Company was able to delay winding up proceedings for a further 2.5 years.

[25]

Overpayment of Mr Sklenovski 50 The Company completed PAYG payment summary - individual non-business forms for Mr Sklenovski's wages for the financial years ending 30 June 2016, 2017 and 2018. They reveal that Mr Sklenovski was entitled to gross payments totalling $178,815. They also reveal that, of those gross payments, the Company retained $36,439 on account of tax withheld. 51 Between 1 July 2015 and 30 June 2018, the Company made payments to an account ending "6958". The payments total $503,750. 52 On 7 December 2018, being the date of liquidation, a transfer of $12,000 was made from the Company's bank account to an account ending in "6958", and those payments had an identical reference to each of the other payments to that account. When the liquidators referred Mr Sklenovski to this payment, Mr Sklenovski admitted that this bank account ending "6958" is his personal bank account, and I find that this was Mr Sklenovski's bank account. 53 The difference between the amount paid to Mr Sklenovski between 1 July 2016 and 30 June 2018 (being $503,750) and the amount payable to Mr Sklenovski for wages (being $178,815 less $36,439 in tax withheld) is $361,174 (the overpayment). 54 The overpayment is not accounted for in the books of the Company and therefore the liquidators contend that the Court should find the overpayments constitute payments by mistake. 55 In Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662, Mason CJ, Wilson, Deane, Toohey and Gaudron JJ stated at 673: … receipt of a payment which has been made under a fundamental mistake is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution, in the sense of compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment … However, notwithstanding that the grounds of the action for recovery are framed in the traditional words of trust or use and that contemporary legal principles of restitution or unjust enrichment can be equated with seminal equitable notions of good conscience, the action itself is not for the enforcement of a trust or for tracing or the recovery of specific money or property. It is a common law action for recovery of the value of the unjust enrichment and the fact that specific money or property received can no longer be identified in the hands of the recipient or traced into other specific property which he holds does not of itself constitute an answer in a category of case in which the law imposes a prima facie liability to make restitution. Before that prima facie liability will be displaced, there must be circumstances (e.g., that the payment was made for good consideration such as the discharge of an existing debt or, arguably, that there has been some adverse change of position by the recipient in good faith and in reliance on the payment) which the law recognizes would make an order for restitution unjust. The prima facie liability to make restitution is imposed by the law on the person who has been unjustly enriched. In the ordinary case of a payment of money, that person will be the payee. (Citations omitted.) 56 The liquidators contend, and I accept that, even if the overpayments were not payments made by mistake, then they are properly characterised as: (1) loans to Mr Sklenovski, repayable at will; or (2) as there is no identifiable purpose for the overpayments, unreasonable director related transactions within the meaning of s 588FDA of the Corporations Act and voidable transactions within the meaning of s 588FE of the Corporations Act.

Yeo, in the matter of Bradi Transport Pty Ltd (in liq) v Sklenovski - [2020] FCA 1540 - FCA 2020 case summary — Zoe

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