FEDERAL COURT OF AUSTRALIA

Weston in his capacity as liquidator of Starcom Group Pty Ltd (in liq) v Rajan [2018] FCA 1737

ORDERS

THE COURT ORDERS THAT:

1.    The application of the second and third defendants filed 23 May 2018 for a permanent stay of the proceeding be dismissed with costs.

2.     The matter be listed for a case management hearing at 9.30am on 22 November 2018.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

LEE J:

A     Background and THE INTERLOCUTORY APPLICATION

1    This proceeding, initially commenced against four defendants against the tick-tock of a pending limitation tolling, has not been notable for the vigour and efficiency of its progression.

2    The first plaintiff, Mr Weston, is the liquidator of the second plaintiff (liquidator), Starcom Group Pty Ltd (Starcom) (together, the plaintiffs). Starcom, a business and IT solutions provider, was incorporated in 1981 and became a wholly owned subsidiary of Pisces Group Limited in the financial year ending 30 June 2007. Starcom was one of four subsidiary companies of Pisces Group Limited, which five entities collectively formed the Pisces Group. On 1 August 2011, Starcom was wound up by order of the Supreme Court of New South Wales and Mr Weston was appointed its liquidator.

3    On 8 November 2017, I ordered that the proceeding against the first defendant, Mr Williams, be dismissed. Similarly, on 16 May 2018, the proceeding was dismissed as against the fourth defendant, Mr Thirunavukarasu. The residuum of the case is being maintained against the second and third defendants.

4    The second defendant, Mr Rajan, was appointed as a director of Starcom on 23 October 2006 and was a director of companies within the Pisces Group from 1 July 2005 until it was deregistered; the third defendant, Mr Pathmanaban, was appointed as a director of Starcom on 11 August 2009 and was a director of companies within the Pisces Group from 11 August 2009 to 18 September 2014. The second and third defendants (to whom I will refer to jointly as the defendants) had not ceased being directors of Starcom at the time it went into liquidation.

5    By the current iteration of the application and pleading, the plaintiffs seek declarations that the defendants engaged in conduct in breach of their directors’ duties under ss 180, 181 and 588G of the Corporations Act 2001 (Cth) (Act) and compensation orders pursuant to: (a) s 588M(2) for loss resulting from insolvent trading; and (b) s 1317H for damage suffered as a result of identified contravening conduct. In the alternative, the plaintiffs seek equitable compensation or common law damages.

6    The four aspects of the plaintiffs’ allegations of present relevance are that: (a) Starcom was insolvent during the period 1 October 2009 to 1 August 2011 (insolvency period); (b) there were reasonable grounds for the directors to suspect that Starcom was insolvent or would become insolvent during the insolvency period; (c) Starcom incurred 23 debts (totalling $2,143,188.17) that were wholly or partly unsecured during the insolvency period; and (d) each of the defendants knew at the time that Starcom incurred these debts that there were reasonable grounds for suspecting that Starcom was insolvent or would become insolvent upon incurring those debts.

7    The defendants joined issue and, in the course of doing so, raised defences which place a positive onus on the defendants, that is: that the defendants had reasonable grounds to expect, and did expect, the company was solvent under s 588H(2); that the defendants had reasonable grounds to believe, and did believe, that a competent and reasonable person was responsible for providing adequate information as to solvency and that that person was fulfilling that responsibility and expected, based on information from that person, that the company was solvent under s 588H(3); and they acted honestly and having regard to the circumstances of the case (and accordingly ought to be relieved from any liability pursuant to s 1317S and s 1318 of the Act).

8    Shortly before a final hearing was to commence, the defendants foreshadowed and later filed, an interlocutory application (interlocutory application) by which they sought an order that the proceeding be permanently stayed. For reasons which are unnecessary to recount in detail, the hearing date was vacated and the interlocutory application was heard. The orders sought were as follows:

1.    An order that, pursuant to ss.37M, 37N, 37P(6) and 23 of the Federal Court of Australia Act 1976 and pursuant to the principles generally enunciated in Walton v Gardiner (1993) 177 CLR 378, the proceedings be permanently stayed.

2.    An order that, the plaintiffs are to pay the second and third defendants costs on the indemnity basis.

…

9    In order to give specificity to the matters to be argued on the stay application, I ordered the defendants (as the moving parties) to file points of claim and for the plaintiffs to file points of defence in response.

10    In the points of claim at [1]–[64], the defendants set out various material facts and, at [65], averred that there are 11 grounds upon which the they are entitled to a permanent stay as follows:

a.    the lapse of time since the material events occurred the subject of the amended statement of claim, being events from 1 October 2009;

b.    the unavailability since 2012 or 2013 of objective external sources of evidence due to death, liquidation or deregistration, notably Ken Crossman, BDO, Pisces Group Ltd and the 3 other companies in the Group;

c.    the unavailability of many of Starcom’s and the Groups’ books and records due to destruction, disposal or other loss;

d.    the failure of the Liquidator to recover and secure all of Starcom’s books and records;

e.    the failure of the Liquidator to commence these proceedings in 2012;

f.    the commencement of these proceedings in 2017 based on the same records available to the Liquidator as he had in 2012;

g.    the prejudice caused to the second and third defendants in their defence of these proceedings;

h.    the continuation of these proceedings would be manifestly unfair to the second and third defendants;

i.    the continuation of these proceedings would bring the administration of justice into disrepute among right-thinking people;

j.    the plaintiffs’ failure to facilitate the just resolution of the dispute as quickly, inexpensively and efficiently as possible; and

k.    the casual approach of the Liquidator to the prosecution of his claim before and after the commencement of the proceedings and in disregard of Part VB of the Federal Court of Australia Act 1976 and the overarching purpose of civil litigation in the Court.

11    As might be expected, the plaintiffs deny these matters justify a stay and add that the defendants ought to be prevented from taking advantage of their own failure to comply with their statutory obligations “pursuant to s 530” of the Act (this appears to be a typographical error referring to the obligation in s 530A of the Act, for officers to help the liquidator by delivering all books or telling the liquidator the location of the relevant books of the company).

12    It is fair to say that the relevant issues did not emerge with clarity from the defendants’ written submissions filed prior to the hearing and, at the conclusion of the oral hearing, I ordered that the plaintiffs and defendants file further submissions in relation to a number of Relevant Topics and ordered that the application be adjourned part-heard for further oral argument. The Relevant Topics were:

(a)    the identification, with precision, of the issues of fact and law that will arise for determination if the proceeding were to continue to trial;

(b)    the identification of documents or classes of documents that are relevant to the determination of those issues of fact and law and identification by reference to the evidence as to whether those documents or classes of documents remain in existence; and

(c)    whether authority exists as to the principled approach to permanent stays in circumstances where the defendant relies on affirmative defences or bears an evidentiary or persuasive onus on a topic, the determination of which is affected by documents which have been destroyed.

13    Upon the filing of further submissions on the Relevant Topics, the parties indicated to my Associate that no party wished to be heard further orally, and I reserved my decision.

B     Defendants’ submissions

14    As can be seen from [65] of the points of claim, there is considerable overlap in the grounds relied on by the defendants. Shorn of unnecessary repetition and duplication, two “core” contentions recur in the various written and oral submissions to make out the assertion (see grounds (g), (h) and (i)) that the defendants will suffer prejudice by the continuation of a proceeding which is unfair and, for this reason, would bring the administration of justice into disrepute. They are:

(1)    the delay contention – grounds (a), (e), (f), (j) and (k); and

(2)    the absence of records contention – grounds (b), (c) and (d), (noting that ground (b) relates to external evidence whilst grounds (c) and (d) relate to records internal to Starcom and the Pisces Group);

15    Although, for reasons I will explain, these two core contentions are themselves overlapping, it is convenient initially to deal with them separately.

B.1    Delay Contention

16    As to delay, the defendants rely upon the three factors to demonstrate relevant delay both before and after commencement of the proceeding. First, it is said that the plaintiffs tarried in commencing the proceeding and then further delayed in refining the relief sought into its current form (while Starcom was wound up on 1 August 2011, and books and records were produced to the liquidator in August 2011 and March 2012, the amended pleading was only belatedly served on 1 June 2018). Secondly, the plaintiffs delayed serving their evidence which resulted in the final hearing date being vacated. The defendants allege that this delay was due to the liquidator taking leave and the liquidator’s expert travelling overseas. Thirdly, the defendants submit that the “casual approach” of the liquidator is contrary to the overarching purpose and the case management objectives enshrined in Part VB of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and caused prejudice to the defendants by diminishing their ability to recall relevant events.

B.2    Absence of Records Contention

17    A number of factors are relied upon in support of the absence of records contention. First, a detailed review of Starcom books and records was undertaken by the liquidator in or around March 2018 which revealed that 178 archive boxes containing hard copy books and records appear to have been destroyed in 2014. Secondly, the liquidator did not make enquires of the company’s external accountants, BDO (NSW-VIC) Pty Ltd (BDO), until 14 March 2018 and this did not yield any further records. Thirdly, the liquidator did not make enquiries of Starcom’s auditors, Ken Crossman & Co and LBW Partners, until March 2018 at which time no Starcom records were in the auditors’ possession. Fourthly, the Pisces Group used electronic management accounting software Attaché until about 2009 and NetSuite from about 2009, and the liquidator did not obtain books and records from Attaché or NetSuite. Fifthly, they point to the absence of a “complete set” of Starcom’s records caused by the liquidator failing to recover and secure the books and records in whole and in a timely manner (as it appears that the liquidator did not obtain any books or records between the end of 2012 and the commencement of the proceeding).

B.3    Relevant Prejudice and Unfairness

18    In essence, the defendants assert that the practical effect of any delay and absence of records is that the defendants, through no fault of their own, are no longer fairly able to defend the case. More particularly, it is asserted by the defendants, that to defend the directors’ insolvent trading claim brought against them properly, they would need to: (a) refer to records which are absent to make out the positive defences available to them under s 588H, to rebut the presumptions of insolvency in s 588E and to challenge the plaintiffs’ case in chief; and, relatedly, (b) consider in detail the goings on of Starcom in a two year period that began nine years ago, “without documents to back faded memories”. This includes providing detailed testimony as to the operations and financing of the companies of the Pisces Group; explaining budgeting, revenue and income sources, intragroup funding and availability of external funding to address allegations that Starcom could not meet its debts as and when they fell due; and accessing detailed accounting and supplier contractual records and memories to try and recall the formal and informal arrangements that Starcom had with each supplier to prove the circumstances surrounding the incurring of each debt claimed to have been incurred while insolvent.

19    I will return to a consideration of these contentions in Section E below.

C    A SUMMARY OF THE Plaintiffs’ submissions

20    The plaintiffs characterise the essential basis of the defendants’ application (as to timing and gaps in the records) as follows:

There is a level of ambiguity in the points of claim as to the precise basis for the present application. However there seems to be a complaint made about the timing of the commencement of the proceedings (albeit commenced within the relevant limitation period) and a complaint that the defendants do not have available to them a "complete set of records", which seems to be put as a failure on the part of the liquidator to recover or secure books (para 63) and a lack of fault on the part of the second and third defendants (para 62). The alleged gaps in the records seem to be alleged to arise from events that occurred on or prior to 2014, and therefore in the first half of the limitation period.

21    The plaintiffs noted (correctly) that as the argument developed, the defendants’ principal complaint appears not to be delay per se, but rather the unfairness caused by the current unavailability of certain documents.

22    More specifically, as to the gaps in the records, the plaintiffs submit that the defendants’ contentions are inadequate to ground an entitlement to relief because the requisite unfairness and prejudice has not been established. In particular, the assertions of unfairness and prejudice fail for the following six reasons:

(1)    First, the allegations of the defendants do not enliven such a drastic remedy in circumstances where there is no allegation that the loss of documents was a result of destruction by the liquidator.

(2)    Secondly, the statutory context must be considered and the legislation places a number of obligations on the defendants to assist the liquidator in gaining access to documents; further, the liquidator was not required to incur expenses unless there was sufficient available property and was not required to incur heavy expenditure in acquiring assets including books in preparation for the liquidator’s report.

(3)    Thirdly, the lack of information, assumed to have been lost during the period of the liquidator’s tenure, is attributable to the failure of the officers of Starcom to produce material to the liquidator.

(4)    Fourthly, in relation to the records maintained by Starcom’s accountant and auditor, the product of their work is incorporated in information that is available, namely, the management accounts for years ended 2009 and 2010, identified and sourced from BDO, which are the audited figures incorporated into the final consolidated accounts for the Pisces Group.

(5)    Fifthly, the evidence indicates that for a liquidation with little funds, a reasonable level of activity occurred.

(6)    Sixthly, there is no objective basis upon which to conclude that the defendants have been prejudiced to the extent that no fair trial could take place.

23    The submissions filed by the plaintiff after the end of the hearing identify, with precision, the evidence that is available in relation to the related party debt, the revenue debt and the suppliers’ debt. In short, the plaintiffs submit that the “missing documents” alleged by the defendants can hardly be said to have a decisive bearing on proof of Starcom’s solvency. Finally, the plaintiffs contend that the defendants have failed to give any specific evidence to the effect that the allegedly “missing” documents were ever in existence. For reasons that I will explain below, I generally accept the plaintiffs’ submissions.

D     THE RELEVANT PRINCIPLES

24    Not surprisingly, there is no real difference between the parties as to the applicable principles, they are well known and they can be stated relatively shortly.

25    An action may be dismissed for abuse of process where in the circumstances, which are not confined to the conduct of the plaintiff, a fair trial would not be possible: Batistatos v Roads and Traffic Authority of New South Wales (2006) 226 CLR 256. However, the mere abstract or theoretical possibility of prejudice to a party, or an unfair trial, is insufficient to justify a stay of proceedings: Sands v South Australia [2015] SASCFC 36; (2015) 122 SASR 195 at 238 [166].

26    The concept of abuse of process overlaps with the need for a fair hearing. The content of these obligations cannot, however, be stated exhaustively or analytically. These obligations rely on intuitive judgments formed by experience: Ridgeway v The Queen (1995) 184 CLR 19. Even in the context of criminal law, where the power to stay a proceeding for abuse applies with a somewhat different emphasis, it has been said that the obligation is not to provide a perfect trial, but to provide a trial that is as fair as possible. A perfect trial is an unrealistic aspiration: Jago v District Court of New South Wales (1989) 168 CLR 23; R v Glennon (1992) 173 CLR 592.

27    As to the more particular issue of delay, the fact that the proceeding was brought within time does not mean that delay is of no moment. As McHugh J explained in Herron v McGregor (1986) 6 NSWLR 246 at 253:

… in my opinion the courts have power to stay an action, though brought within the relevant limitation period or even though not governed by such a period, if the conduct of the plaintiff or prosecutor is oppressive to the defendant or accused person.

28    Having noted this, the principled approach is as explained in Tolcher v Gordon [2005] NSWCA 135; (2005) 53 ACSR 442 at 460 [94] per Tobias JA (Hodgson and Ipp JJA agreeing) as follows:

In other words, the law permits proceedings to be instituted at any time within the limitation period. If at that time the delay between the time the cause of action arose and the filing of the initiating process makes it difficult for the defendant to obtain a fair trial, then that is irrelevant. This is because that difficulty is a product of the defendant having a potential liability until the limitation period expires in respect of which it may, if it sees fit, take precautions such as seeking out evidence when the possibility of a claim becomes known.

29    The relevant inquiry looks beyond simple tardiness and, contrary to what had initially been submitted by the plaintiffs, is not answered simply by pointing to the fact that the relevant proceeding was commenced within time. As Campbell J observed in Reynolds & Co Pty Ltd v Australian Stock Exchange Ltd [2003] NSWSC 33; (2003) 44 ACSR 612 at 651 [138]:

More important, however, is the fact that limitation statutes are enacted to provide justice with a very broad brush indeed – there is a recognition by parliament that, in the most general way, the passing of time can affect the justice of bringing an action, and an extremely arbitrary approach is taken to the drawing of a cut-off point, applicable by reference to categories of litigation which are quite broad. The focus of the court in deciding whether an action should be stayed for abuse of process is different – the focus is on the justice of the particular case before it being allowed to proceed. This difference in focus between that with which limitation statutes are enacted, and that which the court must adopt in deciding whether an action should be stayed for abuse of process, must necessarily mean that limitation statutes are of little, if any, help.

30    In any event, there is no doubt that the implied power to control the Court’s processes includes the power to prevent conduct which, although not inconsistent with the literal application of procedural rules of court, would nevertheless be manifestly unfair: Walton v Gardiner (1993) 177 CLR 378 at 393 per Mason CJ, Deane and Dawson JJ.

31    Further, each party recognises that the onus of proving an abuse of process in any given case rests upon the party alleging abuse and that the onus is a heavy one as the grant of a stay effectively brings to end the litigation without adjudication (Williams v Spautz (1992) 174 CLR 509 at 529). Accordingly, the power to grant a permanent stay of proceedings is to be exercised with “great care” and usually, “extreme caution” (Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 at 554 per Mason CJ, Deane, Dawson and Gaudron JJ).

E    CONSIDERATION

E.1    Delay Contention

32    In order for delay to form the basis of the relief sought in the interlocutory application, it must be established that the delay caused sufficient prejudice and unfairness so as to amount to an abuse of process. In this way, properly analysed, the delay contention does not stand on its own and is inextricably linked to the absence of records contention. Put another way, in the present case, the delay contention only has a significant bearing on prejudice and unfairness insofar as delay resulted in the absence of records material to the determination of the relevant issues. Accordingly, I do not propose to consider the prejudicial or unfair effect of any delay in a vacuum divorced from what is said to be its consequence – an absence of necessary records.

33    Connected to this point, and as I noted at [8] above, in addition to relying on the implied power of the Court to control its processes and the broad power in s 23 of the FCA Act, the relief sought by the defendants includes an order for a stay pursuant to ss 37M, 37N, 37P(6) of the FCA Act. Given the way the argument was presented, it is unclear why. Section 37M defines the overarching purpose of civil practice and procedure provisions and requires the Court (s 37M(3)) to apply any power conferred or duty in the way that best promotes the overarching purpose; s 37N obliges parties to act consistently with the overarching purpose and foreshadows costs consequences if they do not do so; s 37P(6) is more apposite (as it provides for orders such as a dismissal or stay), but importantly is preconditioned upon a party failing to comply with “a direction given by the Court or a Judge under subsection (2)”. No such direction or order made under s 37P(2) was identified by the defendants.

34    The defendants justifiably criticised the plaintiffs for a less than stellar compliance with their Part VB obligations, but any particular submissions relying on conduct which caused the adjournment of the hearing date (occasioned by dilatoriness in serving evidence) was undeveloped as an independent basis for relief. Having said this, as I understand it, the failure of the plaintiffs to progress the proceeding in an efficient way (contrary to the overarching purpose) is called in aid as a relevant discretionary factor, but its relevance is as a makeweight to the overall contention that the proceeding can be properly characterised as an abuse of process. This must be right as although the plaintiffs’ less than ideal conduct of the case causing a delay in the hearing is both relevant and significant, without more, it does not impact upon the ability for a fair trial to be held such that the continuation of the proceeding would amount to an abuse of process.

E.2    Absence of Records Contention

The Relevant Issues

35    As noted above, the submissions of the directors were couched, at least initially, at a relatively high level of generality. Mere abstract or theoretical possibility of prejudice or an unfair trial is, however, insufficient to justify a stay. To assess whether the absence of records forms the basis of a permanent stay based on abuse it is necessary to: first, identify which records are in fact “missing”; and, secondly, determine whether the absence of these records in particular has such an effect on the determination of the issues that the defendants will suffer real prejudice or unfairness. It was because I perceived this second issue to be of central importance, that I directed the parties to provide the further submissions to which I made reference at [12].

36    The defendants identified eleven issues in their submissions in response to my orders of 26 June 2018. These are:

(1)    Whether Starcom was insolvent at the time when it incurred each of the debts which are the subject of the claim (s 95A of the Act). (Issue 1)

(2)    Whether Starcom became insolvent at the time it incurred each of the debts which are the subject of the claim (s 588G(1)(b) of the Act). (Issue 2)

(3)    Whether, at the time each of the debts which are the subject of the claim was incurred, there were reasonable grounds to suspect that Starcom was insolvent. (Issue 3)

(4)    Whether, at the time each of the debts which are the subject of the claim was incurred, there were reasonable grounds to suspect that Starcom would become insolvent by incurring the debt (s 588G(1)(c) of the Act). (Issue 4)

(5)    Whether the defendants were aware at the time of the incurring of each of the debts the subject of the claim that there were such grounds for suspecting that Starcom was insolvent or would become insolvent by incurring each such debt. (Issue 5)

(6)    Whether a reasonable person in the like position of a company in Starcom’s circumstances would be aware at the time of incurring each of the debts which are the subject of the claim that there were such grounds for suspecting that Starcom was insolvent or would become insolvent by incurring each such debt (s 588G(2) of the Act). (Issue 6)

(7)    Whether the absence of records presumption under s 588E(4) of the Act is established for all times from October 2009. (Issue 7)

(8)    Whether the continuance of insolvency presumption under s 588E(3) of the Act is established for the whole of the year beginning on 1 August 2010 and ending on the date of the liquidation. (Issue 8)

(9)    A positive defence under s 588H(2) of the Act that at the time when the debt was incurred, each of them had reasonable grounds to expect, and did expect, that the company was and would remain solvent even if it incurred that debt and any other debts that it incurred at that time. (Issue 9)

(10)    Whether a positive defence under s 588H(3) of the Act is available. (Issue 10)

(11)    Whether exculpatory relief under s 1317S or s 1318 is available to the defendants. (Issue 11)

37    These various issues may be usefully grouped, with some overlap, in the following manner: (a) issues that go to proof of Starcom’s insolvency, including through the use of the presumption of insolvency, namely, issues 1, 2, 7 and 8 (insolvency issues); (b) issues that go to reasonable grounds to suspect insolvency or what a reasonable person would suspect, being issues 3, 4, 6, 9 and 10 (reasonableness issues); (c) issues that go to the defendants’ awareness and expectations, namely, issue 5 and 9 (defendants’ state of mind issues); and (d) relief issues, that is, issue 11.

38    I will deal with each of these groupings of issues below, but it is important to make two preliminary observations which are of relevance to each of the issues.

Two Important Preliminary Observations

39    First, although not said so in terms, the submissions of the defendants tended to place their entire focus on the notion that the way that evidence relevant to the facts in issue, in a case such as the present, is adduced is by tender or explication of contemporaneous documentary records. Of course, this submission is true up to a point, as it reflects the reality that the surest way to accurate fact finding is reference to contemporaneous records or recollection informed by such records, but the submission is incomplete. The defendants were both officers of Starcom. Indeed, each defendant was a director of both Starcom and the Pisces Group. In holding these offices, the defendants necessarily were exposed to, and involved in, the business dealings of the companies in general and the maintenance of the financial records of the company and the Pisces Group in particular. In these circumstances, the defendants are able to provide evidence as to their best recollection of what in fact occurred.

40    It is trite that unprompted by contemporaneous material, the directors’ present recollection may not be as complete or thorough as would be the case if all records remained available, but this is hardly a unique circumstance in litigation. The trial judge will perform the role of fact finder by reference to such evidence as can be adduced and the inferences that can be drawn, consistent with principle, from that evidence. As French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ explained in a different context in Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at 412 [165]:

Disputed questions of fact must be decided by a court according to the evidence that the parties adduce, not according to some speculation about what other evidence might possibly have been led. Principles governing the onus and standard of proof must faithfully be applied. And there are cases where demonstration that other evidence could have been, but was not, called may properly be taken to account in determining whether a party has proved its case to the requisite standard. But both the circumstances in which that may be done and the way in which the absence of evidence may be taken to account are confined by known and accepted principles...

41    The key part of this passage for present purposes is the reference to evidence that “could have been” adduced “but was not”. That is not the case here, if this matter was to proceed to a hearing. Lord Mansfield’s dictum in Blatch v Archer (1774) 1 Cowp 63 at 65; (1774) 98 ER 969 at 970 that “[i]t is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted” is well known and often applied in the context of inferences being drawn by reason of the failure of one party to adduce evidence. It is important to recall, however, that the same principle (or at least the rationale for the dictum) has a broader application. The question of whether the Court is satisfied of proof of a fact in issue on the balance of probabilities in accordance with s 140(1) of the Evidence Act 1995 (Cth) is an inquiry that, when relevant, takes into account the explicable inability of a party to furnish material, which may have existed, but is now lost through no fault of their own.

42    Secondly, accurate secondary recollection should be less challenging in the present case as might otherwise have been the case, as this is not the first time that the defendants have been required to give their account of their recollection of these issues.

43    In their affidavits both sworn on 13 June 2018, the defendants indicate that they had already been the subject of disqualification proceedings commenced by ASIC in June 2013 pursuant to s 206F of the Act, a provision which empowers ASIC to disqualify directors under certain circumstances for a period of up to five years. These proceedings were eventually dismissed and did not result in the defendants being disqualified. Having said that, the existence of these proceedings required the defendants to address themselves to their recollection of facts substantially similar to those in issue in the present proceeding. Importantly, ASIC could only exercise its power to disqualify a director where ASIC has provided the person with a notice in the prescribed form (ASIC Form 5249) requiring the person to demonstrate why they should not be disqualified, and the person has been provided an opportunity to be heard on this issue (see s 206F(1)(b)).

44    In cross-examination, the third defendant accepted that he had cause to consider the financial circumstances of the Pisces Group in the context of the disqualification proceedings when reviewing the notice provided to him by ASIC, being the ASIC Form 5249. Obviously enough, the third defendant turned his mind to subject matters identified in it to assist his lawyers in defending his case. The third defendant also agreed that in order to deal with the “show-cause hearing” before ASIC, he expressly turned his mind to whether the company was experiencing financial difficulties from at least May 2009, and agreed he was comfortable dealing with these issues.

45    The second defendant also agreed in cross-examination that he had cause to consider the financial circumstances of the Pisces Group companies in the same context.

46    Moreover, in addition to the ASIC actions, the defendants have also had to recall information on relevant issues in the context of the current liquidation. For example, the second defendant agreed in cross-examination that following the issuance of the liquidator’s demand in 2012 (alleging he was responsible for insolvent trading), the second defendant would have carefully considered the substance of the claims of the liquidator and information as to how Starcom operated and its sources of funding was then within his current knowledge. The second defendant also agreed that in August 2014, he had cause again to think about the financial circumstances of Starcom as the liquidator issued a second demand, and that the financial circumstances remained in his memory in May 2015 when the second defendant received a letter from the liquidator.

47    On the evidence, it must have been the case that instructions were provided to the defendants’ solicitors at earlier times as to matters directly relevant to the question of how Starcom operated, its sources of funding solvency and the financial circumstances of the Pisces Group companies generally. The loss of some records may be less than ideal and may serve to prevent a further refreshing of recollection, but the fact that the defendants are not tilling virgin ground in recalling these events for the first time after many years, is some amelioration of the prejudice that might have otherwise existed if this was not the case.

48    I now return to the three types of issues identified by the defendants.

I    Insolvency

49    The defendants submit that there are three main types of debts relevant to the question of insolvency: (a) related party debt; (b) revenue debt; and (c) suppliers’ debt. They argue that the terms of the related party debt are not available due to the absence of Pisces Group books and records regarding the relevant loan facility or series of loans. The revenue debts are due to two authorities – the Commissioner of Taxation (Commissioner) and the Office of State Revenue (OSR). While the terms of the debts are clear, there is insufficient evidence of the payment arrangements which Starcom appears to have entered into to satisfy these debts. The absence of detailed aged creditor listings makes it impossible to reconstruct what was due in the past and the small amount of private suppliers’ debts in the evidence would not of themselves mandate insolvency.

50    In addition to the absence of records in relation to the Pisces Groups books, the payment arrangements entered into with the Commissioner and the OSR and Starcom aged creditor listings, the defendants point to missing Starcom records which lead the liquidator to conclude that Starcom failed to comply with s 286 of the Act. These include the following Starcom records over specified periods between 2006 and 2011: cashbooks; bank statements; purchase invoices; annual asset registers; business activity statements; income tax returns; PAYG returns; employee PAYG summaries or supporting records; and FBT returns.

51    The defendants submit that the following Pisces Group records are missing and relevant to the question of Starcom’s insolvency: revenue reports; metrics reports; headcount reports; monthly aged receivable (debtors) report; monthly aged payables (creditors) report; research and development grant report; contracts with suppliers and other creditors; working papers and other inputs provided to BDO, including papers used to formulate the profit and loss statements and balance sheets by BDO; and board minutes from May 2009 prior to the group entering into liquidation.

52    However, as the plaintiffs correctly submit, “there is an abundance of records that support the existence of the [related party] debt”. This evidence includes Starcom’s draft balance sheets for the period 2007 to 2010, the general ledger between Starcom and Pisces Group and the verified Report as to Affairs of Starcom verified by the second defendant on 16 August 2011. Similarly, the plaintiffs point to a number of documents which include the terms of payment arrangements entered into with the Commissioner and OSR. The documentary trail includes letters from the Commissioner dated 23 September 2010, 16 May 2011 and 15 June 2011. In addition, the Starcom accounts which are in evidence include the supplier aged trial balance, which records only two payments of $15,000 (on 30 August 2010 and 24 September 2010). The plaintiffs submit that the likely explanation for the absence of books and records of the Pisces Group regarding the payment arrangement with the OSR is that no such arrangement ever existed. Whether it is safe to draw such an inference will be a matter for the trial on the basis of all evidence adduced, including any secondary evidence of the defendants.

53    In relation to the suppliers’ debt, the plaintiffs again submit that the records to which the defendants refer as being absent likely never existed. It is said that in June 2011, when Starcom applied for a new payment arrangement with the Commissioner, Starcom did not provide an aged Creditors and Debtors listing, suggesting these documents were not part of Starcom records at that time. Again, what conclusions are safe to be drawn is a matter for a hearing on the basis of all the evidence.

54    Finally, as the plaintiffs submit in response to the lists of missing documents prepared by the defendants, there remains a “substantial” body of documents including financial statements of Starcom prepared by external accountants, management accounts containing audited figures and audited financial statements of Pisces Group for the relevant period.

55    It is trite that s 95A(1) provides that a company is solvent if the company is able to pay all their debts as and when they become due and payable. Whether such a conclusion can be drawn here by reference to statutory presumptions and the available financial records of Starcom, being (final and draft) financial statements prepared by BDO for the financial years ended 30 June 2007, 30 June 2008 and 30 June 2010 and management accounts for the year ended 2009 and 2010 (which provide significant insight into Starcom’s financial position at various times in combination with other material), will be a matter assessed at trial. Part of this additional material, which will no doubt be relevant, reflects the fact that Starcom was a consolidated entity (as part of the Pisces Group) and that some records of the Pisces Group are apparently available being a draft financial statement for the financial year ended 30 June 2007; audited financial accounts for the years ended 30 June 2008 and 30 June 2009; and audited financial statements for the financial year ended 30 June 2010.

56    In light of: (a) the still available records for Starcom and the Pisces Group; (b) the two preliminary observations I have made at [39]–[47] above; and (c) the lack of a complete account given by the directors in evidence as to actually what was specifically in existence and hence is now “missing”, I consider the alleged prejudice to assessing issues as to insolvency (when viewed with greater granularity than a mere assertion of a loss of classes of documents), is somewhat overblown.

II    Defendants’ State of Mind and Reasonableness

57    The defendants argue that an inquiry into the defendants’ awareness can only be undertaken fairly by reference to contemporaneous records available to the defendants. They again rely upon the absence of records including, among other things, the absence of board papers, and the absence of documents recording payment arrangements and intercompany debt. The defendants submit that it is impossible to infer awareness at a particular point in time in the absence of contemporaneous records which are in their view missing or destroyed. The plaintiffs respond by repeating their submissions outlined in relation to the insolvency issues, namely, that there is no evidence that a number of the documents referred to ever existed, undermining the argument that the records are “missing or no longer available”.

58    For reasons I have already explained, the available evidence as to solvency issues described above, in conjunction with the ability to adduce secondary non-documentary evidence, provides a basis upon which the defendants can adduce evidence relevant to the Court assessing both the defendants’ awareness and the reasonableness of any belief as to Starcom’s solvency. That subjective evidence will be assessed by reference to the other evidence available. The situation may not be perfect, but it is not one where the attainment of a fair trial is sufficiently impaired so as to require a permanent stay be granted.

III    Relief

59    The defendants repeat many of the arguments already dealt with to support the contention that they will be unable to present a plausible narrative about their contemporaneous actions. In so doing they submit that they will be unable to prove positively they acted honestly and thereby fail the onus of proof for exculpatory relief (see Dominion Insurance Co of Australia Ltd (in Liq) v Finn (1988) 7 ACLC 25 at 33 per Powell J; Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 at 123 [166] per Santow J). In response, the plaintiffs make the point I have already remarked upon: that there is no reason why the defendants cannot themselves give direct evidence in support of such claims for relief.

60    As explained above, I consider that the defendants have sufficient information available in the form of extant documentary records and that they must have previously considered the relevant issues in sufficient detail (and given an account of their recollection to their solicitors) so as to allow them to present secondary oral testimony if they so wish. The fact that the defendants bear an onus in establishing positive defences is not decisive. Indeed, speaking generally, when positive defences are maintained, experience suggests that the absence of records allowing a cross-examiner to impeach subjective evidence as to understanding or intentions might be thought to present just as many (if not more) forensic problems for a plaintiff than a defendant. Again, the situation is not perfect, but the attainment of perfection is an illusory goal and does not represent the relevant test.

Further Contextual Matters and Summary

61    Further, it is important that some context is given to the defendants’ contentions. This is not a case where there is an allegation that the loss of documents was a result of destruction by the liquidator. Moreover, as the plaintiffs correctly submit, the statutory context must be considered. The Act placed obligations on the directors to assist the liquidator to gain access to documents. In cross-examination the plaintiffs’ Counsel asked each defendant whether they were aware of their obligation to make sure the liquidator was made aware of the location of the books and records of Starcom. The third defendant responded that he “didn’t know it”, the second defendant agreed that he knew that when Starcom was put into liquidation he was under a personal obligation, as a Starcom director, to tell the liquidator where the company’s books and records were located.

62    In cross-examination, the third defendant indicated that upon receiving requests for information from the liquidator he had assumed that “the records and documents and where they were stored were operational matters and that the CEO was going to take care of it through his people – people working for him”. The third defendant then admitted that he had assumed that the second defendant would respond to the liquidator. The second defendant indicated in cross-examination that he was aware of the location of the books and records of Starcom and of the other companies within the Pisces Group. However, the second defendant clarified that he did not have personal access to the electronic accounting systems, rather this was within the purview of the CFO. The second defendant maintained that the defendants told the liquidator that the CFO was the appropriate person to ask concerning the location of Starcom’s books and records. The following exchange then occurred between the plaintiff’s Counsel and the second defendant in cross-examination:

What steps did you take to make sure that the CFO informed the liquidator of the password access to the electronic data?---In the meeting we assured that we would give all the data and I have asked CFO that, “Have you provided the data?” And he said, “It’s fine.” In fact, we have been proactive and we have asked, “Do you need more information? Do you need any more information?” So to the extent I know, CFO has given whatever he knew.

What steps did you take to ensure that the CFO informed the liquidator of the relevant passwords required to access the electronic data?---The only thing I did was to ask the CFO, “You give all the information they are looking for” and that was the end of the matter from my point of view.

And what – did you have, at the time, discussions with the CFO to find out where the books and records of the company were located?---No.

63    In the context of the above, it is not entirely clear on the evidence that the directors did all they possibly could have done to secure and provide all relevant documents to the liquidator in a timely fashion. Further, commercial reality must intrude. Although there was some delay, at least part of it is explicable by reason of the liquidator, understandably, not wishing to incur significant expense unless there was sufficient available property. Although the liquidator has not been a hive of focussed activity, I accept that for a liquidation with little funds, it cannot be said that an unreasonable level of activity occurred.

F    Conclusion and orders

64    Last week, in Strickland (a pseudonym) v Commonwealth Director of Public Prosecutions [2018] HCA 53 at [154], Gageler J observed that:

…the power of a superior court to stay its own proceedings as an abuse of process is a power to protect the integrity of its own processes. It is not a power to discipline or to punish those who might bring those proceedings or those who might stand behind them. Its focus is on prevention of the court's procedures being used in a manner that is inconsistent with the due administration of justice by the court. In a case where use of the court's procedures would be substantially unfair, the inconsistency lies in the administration of justice by the court being converted into an instrument of that substantial unfairness. In a case where use of the court's procedures would bring the administration of justice into disrepute, the inconsistency lies correspondingly in the tendency of the court, in permitting that use of its procedures to occur, to erode public confidence in the court's administration of justice in that and other cases.

65    This is not such a case. I am not persuaded that the Court’s procedures, if this hearing proceeded, would be used in a manner that is inconsistent with the due administration of justice or in a way that would be substantially unfair. In summary, although I accept that certain records are no longer available to the defendants and that the plaintiffs have not acted with celerity, I consider that the defendants nonetheless have sufficient records available to them to defend the proceeding fairly when one has regard to the issues to be determined and the ability of the defendants, if they are so advised, to adduce secondary evidence. Put another way, when the detail is examined, the defendants have not discharged the onus of proving to my satisfaction that they have been prejudiced to the extent that no fair trial could take place.

66    In these circumstances, the interlocutory application filed by the defendants must be dismissed. There is no reason why costs should not follow the event.

Associate:

Dated:    14 November 2018