FEDERAL COURT OF AUSTRALIA

Vaughan v Catanzariti, in the matter of Italian Prestige Jewellery Pty Limited (In Liq) [2018] FCA 1403

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act) the time in which any of the plaintiffs may bring any application under s 588FF(1) of the Act be extended to 31 December 2019.

2.    The plaintiffs’ costs of this proceeding are to form part of the costs of the special purpose liquidators in the conduct of the winding up.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    On 5 September 2018 I made orders, including an order pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act) extending the time in which any of the plaintiffs may bring any application under s 588FF(1) of the Act to 31 December 2019. These are my reasons for making those orders.

background

The parties

2    The plaintiffs are Stephen Ernest Vaughan and Gayle Dickerson in their capacity as special purpose liquidators (SPLs) of each of:

(1)    Italian Prestige Jewellery Pty Limited (in liq) (IPJ);

(2)    A1 Metals Pty Ltd (in liq) (A1 Metals);

(3)    Antel Metals Pty Ltd (in liq) (Antel);

(4)    4 Nines Pty Ltd (in liq) (4 Nines); and

(5)    Premium Metal Service Pty Ltd (in liq) (Premium Metal),

(collectively, Companies) and each of these Companies.

3    Each of the defendants to the proceeding is a party who the SPLs considered may have had an interest in the determination of the application. They are:

(1)    Adrian Catanzariti;

(2)    Marie Grace Catanzariti;

(3)    Vertebrate Management Specialists Pty Ltd (Vertebrate Management);

(4)    Eleonora Norella Catanzariti;

(5)    Antonio Catanzariti; and

(6)    Sandro Catanzariti.

4    The evidence relied on by the plaintiffs in support of their application established that each of the defendants had been served with the originating process and the affidavit of Mr Vaughan (one of the SPLs) affirmed on 19 July 2018 as well as copies of the orders made by the Court on 26 July 2018. Despite that, none of the defendants filed a notice of intention to appear nor was there an appearance by or on behalf of any of them when the matter was called on for hearing.

The appointment of liquidators and the SPLs to the Companies

5    On 23 July 2015 Ozem Azzam Kassem and Jason Bing-Fai Tang of Cor Cordis Chartered Accountants were appointed as liquidators of each of the Companies (Liquidators) following resolutions passed by the shareholders of the Companies pursuant to s 491(1) of the Act. Each winding up is a creditors’ voluntary winding up.

6    Prior to the commencement of the windings up, each of the Companies was under the control of members of the Catanzariti family at different times.

7    On 3 May 2018, on the application of the Deputy Commissioner of Taxation (Commissioner), orders were made appointing the SPLs to each of the Companies: see Deputy Commissioner of Taxation, in the matter of Italian Prestige Jewellery Pty Limited (in liq) ACN 116 031 022 v Italian Prestige Jewellery Pty Limited [2018] FCA 983 (Italian Prestige Jewellery).

8    The terms of the appointment of the SPLs authorised them to investigate and, if appropriate, commence and prosecute legal proceedings in respect of any voidable transactions to which the Companies may have been party in the period prior to the winding up. However, the orders appointing the SPLs were only made approximately 11 weeks prior to the last day on which they could cause the Companies to commence proceedings under s 588FF(1) of the Act to recover voidable transactions, namely 23 July 2018.

9    The Commissioner is a significant creditor of the Companies. The steps taken to audit the Companies and his dealings with them leading up to and after the appointment of the Liquidators are summarised at [4]-[8] of Italian Prestige Jewellery.

The SPLs’ preliminary investigations

10    Since their appointment on 3 May 2018 the SPLs have undertaken a number of steps to progress their investigations into the Companies as contemplated by the terms of their appointment. Those steps have included:

(1)    forming an investigation team consisting of members of their firm’s insolvency and forensic investigation divisions;

(2)    meeting with one of the Liquidators;

(3)    causing letters to be sent to each of the directors of the Companies informing them of their appointment as SPLs and requesting their assistance in progressing their investigations;

(4)    meeting with representatives of the Australian Taxation Office (ATO) who were responsible for the conduct of the ATO’s audit and taxation reviews of each of the Companies;

(5)    obtaining electronic and hard copy documents in relation to the Companies from the Liquidators and the ATO, including copies of some of the general ledgers and financial statements that had been prepared by the accountant for the Companies, Jonathon Dundovic, using MYOB accounting software;

(6)    meeting with representatives of KordaMentha in relation to the appointment of Rahul Goyal and Jennifer Nettleton of that firm as special purpose liquidators to EBS & Associates Pty Ltd (in liq) (EBS). This meeting was organised because the SPLs became aware that the Companies had extensive dealings with EBS;

(7)    writing to each of the known creditors of the Companies to inform them of their appointment;

(8)    reviewing the material provided by the Liquidators and the ATO, preparing memoranda outlining preliminary findings in relation to the solvency of the Companies and any related party transactions entered into by the Companies and considering the steps required to progress their investigations into the Companies;

(9)    meeting with their solicitors; and

(10)    entering into a confidential funding agreement with the ATO.

11    As set out above, Mr Vaughan and his team obtained and reviewed documents from the ATO which were obtained by the ATO as part of its investigations. Mr Vaughan considers that the ATO documents, concerning matters referred to at [9] above, are likely to be highly significant to his investigations going forward.

12    Mr Vaughan is also aware of the findings made by the ATO in relation to the business carried on by the Companies and its conclusion that the Companies’ businesses were fraudulently operated to obtain a tax benefit by:

(1)    availing the Companies of input tax credits for purported acquisitions of jewellery from 25 GST registered jewellery wholesale companies;

(2)    allowing the Companies to claim input tax credits to reduce the GST they would otherwise have to account for in respect of the supplies they had purportedly made to EBS and other refineries; and

(3)    allowing EBS and other refineries to claim input tax credits on the purchase of gold granules from the Companies.

13    Mr Vaughan is aware that the ATO’s findings are a result of a complex investigation and audit conducted by it since the end of 2013. While his team is continuing to work with the ATO to obtain a complete copy of its investigations file and gain a proper understanding of the evidence provided by the ATO, Mr Vaughan has not had an opportunity to verify each of the ATO’s findings by undertaking his own investigations.

14    Mr Vaughan said that in the time since their appointment, he and Ms Dickerson could not have progressed their investigations into the Companies any further than they have. Mr Vaughan was of the opinion that they required more time to investigate the ATO’s conclusions given the gravity of its findings.

Solvency of the Companies

15    As noted at [10] above the SPLs prepared a draft memorandum concerning the solvency of each of the Companies based on the material made available to them by the Liquidators and the ATO. Their preliminary high level findings were that each of the Companies may have been insolvent from the following dates:

(1)    IPJ since 30 June 2012;

(2)    4 Nines since 31 October 2012;

(3)    Antel since 31 December 2012; and

(4)    A1 Metals since 31 March 2013.

The SPLs were not able to access sufficient information to draw any conclusions about the solvency of Premium Metal. Mr Vaughan gave evidence that he intends to investigate whether Premium Metal has breached its obligations under s 286 of the Act in failing to create and maintain proper books and records.

16    The SPLs’ findings in relation to solvency are preliminary given the limited information currently in their possession. Mr Vaughan considered that to finalise a report into the solvency of the Companies, among other things, he would need to:

(1)    obtain a more complete set of the books and records of the Companies;

(2)    as far as possible reconcile the “cash at bank” and “cash on hand” accounting entries in the MYOB accounts against the statements issued in respect of each of the bank accounts which were opened in the name of the Companies;

(3)    assess whether any of the Companies had entered into any moratorium agreements with any of their creditors or were otherwise subject to litigation or other enforcement action undertaken by any their creditors; and

(4)    consider whether the Companies had access to any assets which could be readily liquidated into cash.

17    Given the limited time since their appointment, Mr Vaughan was unable to complete the investigations referred to in the preceding paragraph and was of the opinion that, without doing so, he could not cause the Companies to commence proceedings under s 588FF(1) of the Act.

Related party transactions

18    Mr Vaughan also caused an analysis to be undertaken of payments made by the Companies in the period from 1 July 2012 to 30 October 2013 based on a review of the relevant material in the possession of the SPLs. Based on that analysis the SPLs found evidence of:

(1)    regular withdrawals of cash and cheques from the Companies’ bank accounts in the period from 1 July 2012 to 30 October 2013 which increased in frequency and size over that time and in total amounted to $7,280,250; and

(2)    identifiable related party payments of $5,223,803 made by the Companies to either the relevant directors of the Companies, Ageo Holdings Pty Ltd (Ageo Holdings) or Vertebrate Management. The payments were identified as a result of the descriptions given to the transactions in either the MYOB accounts or the bank statements for the Companies.

19    Searches undertaken of the database maintained by the Australian Securities and Investments Commission (ASIC) by the SPLs revealed that:

(1)    Adrian Catanzariti and Marie Grace Catanzariti were former directors of Ageo Holdings between 6 February 2012 and 2 August 2015 and 1 August 2015 and 1 July 2018 respectively. Adrian and Marie Grace Catanzariti were also former shareholders of Ageo Holdings. On 1 July 2018 Ageo Holdings was deregistered as a corporation by ASIC pursuant to s 601AB of the Act; and

(2)    from 17 August 2012 to 7 May 2017 Adrian Catanzariti was the director of Vertebrate Management. Since 7 May 2017 Marie Grace Catanzariti has been the director. Adrian Catanzariti is a former shareholder of Vertebrate Management and Marie Grace Catanzariti is now its sole shareholder.

20    Ageo Holdings was the trustee of the Ageo Family Trust, the beneficiaries of which are Adrian Catanzariti, Marie Grace Catanzariti and their relatives and related entities. As at 19 July 2018, when Mr Vaughan affirmed his affidavit, the only document which had been identified which appeared to provide a basis for any of the payments made to Ageo Holdings were loan agreements dated 9 August 2012 and 30 June 2013 between Ageo Holdings (in its capacity as trustee for the Ageo Family Trust) as borrower in the agreements and IPJ as lender.

21    Mr Vaughan pointed out that the findings made to date in relation to potential related party transactions were preliminary and were based on the limited information currently in the SPLs’ possession. Mr Vaughan considered that in order to better understand these transactions, among other things, he needs to:

(1)    obtain a more complete set of the books and records of the Companies;

(2)    arrange for forensic traces to be undertaken in order to identify where any funds transferred out of the Companies’ bank accounts have been deposited;

(3)    conduct a more thorough review of the bank statements for each of the Companies’ bank accounts against their MYOB accounts;

(4)    obtain copies of bank statements for any bank accounts opened in the name of the recipients of payments; and

(5)    contact the directors to obtain an explanation from them as to why each of the transactions occurred.

22    Given the limited time since the appointment of the SPLs, Mr Vaughan was unable to complete any of these investigations. In his opinion, without doing so, he could not cause the Companies to commence proceedings under s 588FF(1) of the Act. Among other things, at this stage, Mr Vaughan does not know who should be named as a defendant to such proceedings and in what amount judgment should be sought.

Steps taken by the Liquidators

23    In undertaking his review of the books and records obtained from the Liquidators Mr Vaughan is aware of the following steps taken by them:

(1)    on 3 August 2015 they provided a report to creditors of each of the Companies;

(2)    on 7 March 2017 the Liquidators issued demands to the directors of IPJ, A1 Metals, Antel, 4 Nines and Premium Metal claiming amounts for insolvent trading; and

(3)    on 17 May 2017 the Liquidators issued demands to each of Adrian Catanzariti and Ageo Holdings to recover loans allegedly advanced to them by Premium Metal in the case of Adrian Catanzariti and by Premium Metal and 4 Nines in the case of Ageo Holdings.

24    Based on his discussions with the Liquidators Mr Vaughan understands that they did not receive a response to any of the demands issued by them and did not take any further enforcement action because they had insufficient funds to do so.

Next Steps

25    Mr Vaughan set out the steps he would take in order to progress his investigations and an estimate of the time required to complete those steps if the Court was minded to make the order sought pursuant to s 588FF(3)(b) of the Act.

26    The proposed steps include conducting public examinations under Pt 5.9 of the Act in respect of each of the Companies, including causing orders for production to be issued for the disclosure of further documents; reviewing any documents produced pursuant to orders for production and undertaking the examinations; and thereafter reviewing transcripts and other evidence obtained from the public examinations, briefing solicitors and counsel to consider what causes of action may be available based on the evidence obtained and preparing pleadings and other evidence required to commence proceedings, including a solvency report. Based on his experience, Mr Vaughan estimated that he would require a period of approximately 15 months to complete those steps, namely until 31 December 2019.

Legal PRINCIPLES

27    Section 588FF of the Act relevantly provides:

(1)    Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a)    an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b)    an order directing a person to transfer to the company property that the company has transferred under the transaction;

(c)    an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(d)    an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:

(i)    money that the company has paid under the transaction;

(ii)    proceeds of property that the company has transferred under the transaction;

(e)    an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;

(f)    if the transaction is an unfair loan and such a debt, security or guarantee has been assigned — an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;

(g)    an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;

(h)    an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;

(i)    an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;

(j)    an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.

…

(3)    An application under subsection (1) may only be made:

(a)    during the period beginning on the relation‑back day and ending:

(i)    3 years after the relation‑back day; or

(ii)    12 months after the first appointment of a liquidator in relation to the winding up of the company;

whichever is the later; or

(b)    within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.

28    As noted at [8] above, based on s 588FF(3)(a), the period for commencement of any proceeding pursuant to s 588FF(1) of the Act expired on 23 July 2018. The plaintiffs filed their originating process on 20 July 2018 prior to the expiration of the three year period specified in s 588FF(3)(a) but I made the order pursuant to s 588FF(3)(b) after the expiration of that period. Notwithstanding this, no issue arises for the SPLs.

29    In McGrath v National Indemnity Company (2004) 182 FLR 309; [2004] NSWSC 391 at [18] Barrett J held that “the ambiguity in s 588FF(3)(b)” should be resolved in favour of a construction under which an extension order made after the period of three years has expired is effective for the purposes of the section provided that the application upon which the order was made was itself, by the filing of the appropriate initiating process, within that period.

30    The SPLs sought an order in the form of what is commonly described as a “shelf order”. That is an order enabling proceedings to be brought under s 588FF(1) against any party within the extended period. Such a form of order is permissible: see Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489 at [24].

31    Section 588FF(3)(b) of the Act confers a discretion on the Court. In Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) (2018) 124 ACSR 100; [2018] FCA 102 at [54]-[55] Gleeson J set out the principles which guide the exercise of that discretion:

54    The Court is required to consider what is fair and just in all the circumstances: BP Australia Ltd v Brown (2013) 58 NSWLR 322; [2003] NSWCA 216 (BP Australia) at [187]. The applicant for the extension must satisfy the Court that it should be granted: BP Australia at [183].

55    The matters that ordinarily inform the exercise of the Court’s discretion are:

(1)    the liquidator’s explanation for the delay in taking action within the three year period provided for by the statute;

(2)    the merits of the foreshadowed proceeding, assessed by a “preliminary review”; and

(3)    any likely prejudice that would be suffered if the extension of time is granted: Parker, Re Worldwide Specialty Property Services Pty Ltd (in liq) v Worldwide Specialty Property Services Pty Ltd (in liq) [2017] FCA 687 at [15]-[16]; Walker and Moloney v CBA Corporate Services (NSW) Pty Ltd [2012] FCA 328 (Walker) at [43].

32    In Walker and Moloney v CBA Corporate Services (NSW) Pty Limited (2012) 88 ACSR 153; [2012] FCA 328 at [44] Nicholas J said the following about the issue of the assessment of the merits of a proposed action in circumstances where an extension is sought to permit further investigation:

The preliminary review of the merits of the proposed proceedings is “an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit”: Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 at [15] (Green) per Austin J. However, a review of the merits may be unnecessary if the purpose of the application for an extension of time is to allow the liquidator time in which to properly decide whether or not to bring the proposed proceedings: Green per Austin J at para [15]; see also the summary of the relevant principles of White J in New Cap Reinsurance Corporation Ltd (in liq) v Reaseguros Alianza SA (2004) 186 FLR 175; [2004] NSWSC 787 at [52]-[55].

consideration

33    For the reasons that follow I was satisfied that I should make the orders sought by the plaintiffs extending the time to bring an application under s 588FF(1) of the Act.

Delay

34    The SPLs were appointed approximately 11 weeks prior to the expiration of the three year limitation period prescribed by s 588FF(3)(a). The evidence established that given the position they found themselves in, they understandably were not able to commence proceedings within that period. Since their appointment the SPLs have acted diligently to commence and progress their investigations and taken all steps that they were reasonably capable of taking.

35    In considering the issue of delay, some regard should be had to the steps taken by the Liquidators in the period since their appointment which, as is evident from the matters set out at [23]-[24] above, were limited. However, given the issuing of demands in March 2017 to the Companies’ directors alleging insolvent trading, it is evident that by that time the Liquidators had formed the view that such claims were available, although it does not appear that the Liquidators identified the availability of claims under s 588FF(1) prior to the appointment of the SPLs. The Liquidators did not pursue any further recovery action because of a lack of funding.

36    The SPLs have only had a very limited period within which to undertake investigations and considerably less than the three year period that would otherwise apply. That the Liquidators did not take further investigative and recovery steps given their lack of funding cannot be sheeted home to the SPLs who have acted with diligence.

Merits of the investigation and potential claims

37    This is a case where a review of the merits is unnecessary given that the purpose of the application for an extension of time is to allow the SPLs time in which to properly decide whether or not to bring the proposed proceedings and if so, against whom.

38    In the circumstances of this case, it was not possible for the Court to reach any conclusion about the merits because the potential claims have not been identified with precision. However, the evidence before me was sufficient to establish that there was merit in permitting the SPLs to proceed with their investigation in relation to those transactions and the potential claims identified to date. In Italian Prestige Jewellery I similarly concluded, based on the evidence before me, that there were matters that clearly required investigation: at [37].

39    That said, based on the SPLs’ preliminary investigations and analysis, it is apparent that, while it not yet possible to precisely identify what form any claims might take or the likely defendants, there is clearly conduct which may form the basis of viable claims against a number of parties, including those that are named as defendants to this proceeding. The SPLs’ views about the existence of potential claims cannot be dismissed as speculative. Mr Vaughan’s investigations revealed that large sums of money passed through the Companies’ bank accounts and, it seems, into the hands of related parties without there being any sufficient explanation on the face of the available records as to why those funds were transferred out. Despite notice being given to the directors of the Companies of the appointment of the SPLs and to the named defendants of this proceeding, no one has contacted the SPLs offering to assist in their investigations nor did any of the defendants appear at the hearing to explain the position.

Prejudice

40    As I have already observed, none of the defendants to the proceeding responded to the originating process or appeared at the hearing. No actual prejudice was identified by any party.

41    As the plaintiffs submitted there can be presumptive prejudice in cases of lengthy delay. The claims the subject of the SPLs’ proposed investigations are, at this stage, against related entities. In those circumstances I accept the SPLs’ submission that the possibility of actual prejudice diminishes. The persons most likely to be affected by the claims were in charge of the Companies, or closely related to those who were in charge, at the time of the alleged transactions. One would ordinarily expect them to have knowledge or access to knowledge of the operation of the Companies at the time of the alleged transactions. If an explanation is available for those transactions they are well placed to provide it. Further, since March 2017 the directors of the Companies have been on notice of the possibility of claims being made, at least in relation to insolvent trading.

42    Accordingly, I was satisfied that any prejudice caused by the extension of time was minimal.

The nature of the orders sought

43    The SPLs sought a shelf order. In my opinion, that was necessary and appropriate because the SPLs were unable to complete their investigations such that they could exhaustively identify all parties who may have received monies from the Companies during the relation-back period and identify with certainty the potential defendants in a s 588FF(1) claim.

44    Mr Vaughan provided a detailed explanation of the remaining steps he and Ms Dickerson will need to undertake in order to complete their investigations, obtain advice and commence any proceedings. In doing so, he estimated a realistic timeline for the completion of those steps. Accordingly, I was satisfied that the order should be made extending the period by 15 months to 31 December 2019.

conclusion

45    For those reasons I made the orders sought by the plaintiffs.

Associate:

Dated:    13 September 2018

SCHEDULE OF PARTIES