FEDERAL COURT OF AUSTRALIA

Beattie v Gray, in the matter of Control Rail Pty Limited (in liq) (No 2) [2019] FCA 433

ORDERS

THE COURT DECLARES THAT:

The defendant, David Stanley Gray, contravened s 588G of the Corporations Act 2001 (Cth) by failing to prevent Control Rail Pty Limited from incurring the following debts in the period between 15 April 2015 and 14 April 2016 at a time when he was the sole director of that Company:

(a)    To Australian Taxation Office (NSW Insolvency), the amount of $176,482.91;

(b)    To Allianz Australia Limited, the amount $14,711.39;

(c)    To Industry Funds Credit Control, the amount $20,223.80;

(d)    To Worth Recycling Pty Ltd, the amount of $137,663.24.

THE COURT ORDERS THAT:

1.    The plaintiff is entitled to summary judgment pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) (FCA Act).

2.    Pursuant to s 588M(2), based on the defendant’s contravention of s 588G of the Corporations Act 2001 (Cth), the defendant must pay the plaintiff the sum of $349,081.34.

3.    Pursuant to s 51A(1) of the FCA Act the defendant must pay the plaintiff interest in the sum of $34,822.06.

4.    The defendant must pay the plaintiff’s costs as agreed or taxed.

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

REASONS FOR JUDGMENT

FARRELL J

Introduction

1    The plaintiff (Mr Beattie) and Christopher Darin were appointed as joint and several liquidators of Control Rail Pty Limited (in liq) (Company) on 20 May 2016 by order of this Court.

2    The defendant (Mr Gray) was appointed as sole director and secretary of the Company on 11 January 2011 and continued in those positions until the Company was placed in liquidation. Mr Gray is also the Company’s sole shareholder.

3    By an originating process filed on 6 February 2018, the plaintiff sought a declaration of contravention of s 588G by Mr Gray and an order under s 588M(2) of the Corporations Act 2001 (Cth) that Mr Gray pay the sum of $432,136.07 plus interest from 23 March 2017 and costs. On 8 March 2018, Gleeson J made orders that the proceeding be listed for hearing of an application by the plaintiff for orders on default or summary judgment. Since those initial timetabling orders were made and the matter was re-allocated to my docket, I have made orders progressing the matter, ultimately re-listing the hearing of the application to 14 January 2019.

4    Mr Gray has not filed a notice of appearance and he has taken no steps in these proceedings although it is plain from evidence given by the plaintiff and his solicitor, Mr Lum, that he is aware of the proceedings and of the hearing set down for 14 January 2019.

Evidence

5    The plaintiff relies on the following evidence:

(1)    Affidavits sworn by the plaintiff on 25 January, 3 April, 21 September, 21 December 2018 and 13 February 2019;

(2)    An affidavit of Averne Myles Loos sworn on 26 June 2018 deposing to service of the originating process dated 6 February 2018, the affidavit in support of the application and the plaintiff’s genuine steps statement on the defendant on 15 February 2018;

(3)    An affidavit of Johannes Bernadinus Hunt sworn on 21 August 2018 deposing to the service on the defendant personally on 11 August 2018 of a subpoena to produce documents and notice of filing and hearing dated 3 August 2018 together with conduct money;

(4)    Affidavits of Bruce Lum, the plaintiff’s solicitor, sworn on 21 September 2018 and 19 November 2018, in relation to correspondence between his office and the defendant;

(5)    Affidavit of Jeremy Mudford sworn on 19 November 2018 deposing to material obtained pursuant to a search and seizure warrant issued pursuant to s 530C of the Corporations Act: see Beattie v Gray, in the matter of Control Rail Pty Limited (in liq) [2018] FCA 1524; and

(6)    Exhibit 1 which is a letter and an email from Mr Lum to Mr Gray attaching a copy of orders made on 3 December 2018 listing the hearing of the plaintiff’s application for 10.15 am on 14 January 2019.

6    Factual findings in these reasons are based on that evidence.

Background

7    The Company was wound up in insolvency on the application of Worth Recycling Pty Ltd. The winding up was based on the Company’s failure to pay a statutory demand dated 12 February 2016 for a judgment debt in the sum of $137,663.24. The winding up application was taken as filed on 14 April 2016. The Company was not, at that time, in external administration of any kind and no resolution had been passed for its winding up. The “relation back day” is therefore the day on which the application for winding up was filed, having regard to s 9, item 14 of s 91 and s 513A(e) of the Corporations Act.

8    By a letter dated 23 March 2017, Mr Beattie demanded payment from Mr Gray of $432,136.07. That amount related to the following claims made in proofs of debt filed with the plaintiff, copies of which were annexed to Mr Beattie’s affidavit sworn on 3 April 2018:

9    The amount said to be owing to de Mestre and Company is, in fact, the amount of Worth Recycling Pty Ltd’s costs of the application to wind up the Company.

10    The application was first set down for hearing on 11 April 2018. On 6 April 2018, by an email sent to my associate which was copied to a new email address for the defendant, Mr Lum requested that the hearing date be vacated because he had received an email dated 5 April 2018 from Mr Gray. Mr Lum said that this was the first correspondence he had received from Mr Gray in the matter and that the nature of the case might change if Mr Gray were to provide books and records of the Company to the plaintiff. Mr Gray’s email of 5 April 2018 was attached to Mr Lum’s email. Mr Gray enquired whether the books of the Company were still to be handed over, and if so, where and how. He also advised that property of the Company (tools, equipment, office furniture etc) was being stored at a facility in Blacktown. Mr Gray said that “I can hand over the keys and exact location along with the books”. He provided another email address for contact. The hearing was vacated and a case management hearing listed for 15 May 2018.

11    By email to the Court’s Registry on 14 May 2018 (copied to the defendant’s new email address), Mr Lum advised that there had been no contact from the defendant. As requested by Mr Lum, the Court made orders making provision for the filing of further evidence, filing of submissions and setting down the application for hearing on 25 June 2018. The plaintiff filed submissions on 6 June 2018.

12    At the hearing on 25 June 2018, the plaintiff’s evidence remained as it had stood on 4 April 2018. It was to the effect that:

(1)    Despite attempts made by the plaintiff and his staff to obtain a report as to affairs (RATA) and the books and records of the Company from Mr Gray, nothing had then been received from him.

(2)    On 15 August 2017, the defendant failed to appear at Sutherland Local Court and was convicted of offences under ss 475(1) and 530A(1) of the Corporations Act (failing to provide a RATA and the books and records of the Company to its liquidator or to tell the liquidator where they are) and he was fined $11,000.

(3)    The liquidators of the Company had received proofs of debt for amounts totalling $452,361.93.

13    No evidence had been filed which established what steps had been taken by the plaintiff to pursue Mr Gray’s offer made in his email dated 5 April 2018 to provide keys to the storage in Blacktown or to take delivery of the books and records. There was nothing in the written submissions filed on 6 June 2018 which addressed this matter. The plaintiff was not available to give evidence about it. From the bar table, Mr Lum advised the Court that nothing had been received from Mr Gray, but the Court noted that this was not a substitute for evidence which updated the position from that described in Mr Beattie’s affidavit sworn on 3 April 2018.

14    At the hearing on 25 June 2018, the Court pointed out to Mr Lum that, on the basis that there appeared to be books and records but the liquidator was not in a position to say whether and how the books and records were defective, the presumption of insolvency under s 588E(4)(a) could not then be made out: see Fisher v Divine Homes Pty Ltd [2011] NSWSC 8 at [25] per Barrett J:

It follows that where, as here, there is evidence that "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts) did exist in relation to the company's activities, the presumption will not be available in relation to a given period unless the person seeking to rely on the presumption shows that those documents were, in respect of the period in question, deficient in the sense just mentioned.

15    Mr Lum requested an opportunity to address these issues and the application was stood over until 30 July 2018 with orders being made for the filing of further evidence and that the plaintiff advise Mr Gray by email and letter to his last known address of the making of the orders.

16    On 24 July 2018, Mr Lum sent an email to Mr Gray noting that he had “just called and left a message”. He referred to Mr Gray’s email of 5 April 2018 and asked Mr Gray to advise when he would be able to provide him with the books and records of the Company. On 25 July 2018, Mr Lum advised my chambers by an email copied to Mr Gray that the matter was not ready to proceed on 30 July 2018 and sought leave to issue subpoenas.

17    On 11 August 2018, Mr Gray was served with a subpoena to produce documents (comprising the books and records of the Company), a notice of filing and hearing on 3 August 2018 and conduct money. Mr Lum also sent a copy of the subpoena to Mr Gray by email on 10 August 2018. The return of the subpoena was adjourned on a number of occasions to allow Mr Gray time to comply with it. On each occasion he was notified of the adjournment. No response was received from him throughout that time and the subpoena was allowed to lapse.

18    On 7 September 2018, the Court made orders setting down the application for hearing on 24 October 2018 and providing a timetable for the provision of evidence by the plaintiff and defendant and submissions, with a copy of the orders to be provided to the defendant.

19    On 24 September 2018, the plaintiff filed an interlocutory process seeking the issue of a warrant to search for and seize the books and records of the Company from premises in Blacktown. By supporting affidavit dated 21 September 2018, Mr Lum recounted a conversation which he had with Mr Gray by telephone on 18 September 2018 as follows:

[Mr Lum]:    Is that David Gray?

Defendant:    Yes.

[Mr Lum]:    I am the solicitor acting for the liquidator of Control Rail Pty Limited. I have sent you numerous emails and letters about Federal Court proceedings. Have you received them?

Defendant:    Yes, but I haven’t opened them.

[Mr Lum]:    In an earlier email to me you said you had the books and records of the Company and that the assets of the Company were in a storage facility. Is that still the case?

Defendant:    Yes. The books and records of the Company and the assets of the Company are in two storage lockers at Blacktown Storage King. They are in my mother’s name, Kathleen Gray. I haven’t been there for a couple of years but I believe they are paid up to date. I am not sure where the keys are but will try and find them.

[Mr Lum]:    Do you consent to the liquidator having access to the books and records and assets of the Company?

Defendant:    Yes. I will look for the keys. If you do not hear from me by 1 pm tomorrow, give me a call.

[Mr Lum]:    Thank you.

20    Despite attempts by Mr Lum to contact Mr Gray between 18 and 20 September 2018, he was unsuccessful in doing so. Following an interlocutory hearing, the Court made orders on 9 October 2018 that a warrant be issued. The warrant was executed on 12 October 2018. On 18 October 2018, Mr Lum requested that the hearing date of 24 October 2018 be vacated to allow time to analyse seized materials. The hearing of the application was then set down for 3 December 2018 with allowance for the filing of evidence and submissions.

21    In Mr Mudford’s affidavit sworn on 19 November 2018, he recounts his participation in the search of storage facilities at Blacktown on 12 October 2018. Mr Mudford was formerly employed by Worrells and worked with Mr Beattie on this matter. He is a senior file accountant. He deposed that the storage contained office and household furniture, tools and equipment, two empty filing cabinets, a computer monitor and, relevantly, 13 archive style boxes. Those boxes contained:

(1)    Box 1: payroll records (timesheets, PAYG registration forms, and confidential employee information);

(2)    Box 2: payslips for David Gray for 2011, receipts and invoices for BAS lodgements in 2010 through to June 2013 and various site worksheets;

(3)    Box 3: application documents for ANZ loan accounts dated 27 August and 16 September 2013 and 15 August 2014, and two tenders;

(4)    Box 4: paid supplier invoices/statements of outstanding account issued between April and July 2015; minutes of meetings of directors and a consent to act; three applications for credit; remittance advices to Australian Super, Cbus Super, Amist and Host Plus; superannuation advice summaries which appear to be from an MYOB file for July 2013 and June 2014; payroll advice summaries for July 2013 to June 2014; and various customer invoices and statements issued in April, June, and July 2012 and in February 2015;

(5)    Box 5: superannuation advice summaries for January to March 2014; a tender application dated November 2014; payroll records for January to June 2013 and September to December 2013;

(6)    Box 6: an agreement for labour hire services, various correspondence to and from Novo Rail; application for an ANZ loan account dated 14 November 2011; certificates of currency for workers compensation in respect of the period January 2011 to January 2013; RMS registration notices for two vehicles, a lease dated August 2013;

(7)    Box 7: an agreement for labour hire services; work contracts for three organisations; correspondence from Novo Rail regarding liquidated damages dated May 2015, receipts and invoices for BAS lodged for the period October to December 2013; invoice books for July 2013 to June 2014 and employee timesheets for October to December 2013, January to March 2014 and July to October 2013;

(8)    Box 8: docket books for the financial year 2013; receipts and invoices for BAS lodged for the period January to March 2013; employee timesheets for April to June 2013.

22    Mr Mudford deposed that:

(1)    The Company maintains incomplete management accounts (at least for payroll purposes) for the period from January 2013 to at least June 2014 (possibly using MYOB’s accounting software);

(2)    A majority of the records viewed included documents that could not assist in determining the Company’s financial position as at the date of appointment of the liquidators and earlier;

(3)    He could not locate any financial documents for the financial year 2015. The majority of documentation related to the financial year is 2013 and 2014;

(4)    He did not consider that the records recovered sufficient to assist with the preparation of a solvency report of the Company because it retained payment vouchers/receipts in a haphazard manner (that is, dumped into archive boxes) which would not enable financial statements to be prepared; the cost to reconstruct the Company’s financial position at any given time from the source documentation recovered would be uncommercial; he could not determine if the source documentation was complete for all relevant periods; and the director did not ensure that underlying source documents were maintained in such a manner that financial statements could be prepared; and

(5)    He did not consider that the records complied with s 286 of the Corporations Act in that they did not correctly record and explain transactions and its financial position and performance or that they would enable true and fair financial statements to be prepared and audited.

23    The submissions filed by the plaintiff on 26 November 2018 largely repeated submissions filed in June 2018 with the addition of references to the fact of the execution of the warrant and the material obtained. The submissions asserted that ss 588E(4) and 588G(2) had been satisfied, however, they contained no reference to relevant case law beyond Fisher v Divine Homes Pty Ltd to which the Court had referred Mr Lum at the hearing on 25 June 2018. They did not state for what period the plaintiff asserted that the Company had failed to meet its obligations under s 286 to keep adequate financial records in order to establish for what period the Company would be deemed insolvent. They did not attempt to establish when debts which the plaintiff sought to recover had been incurred or the circumstances which then existed which might go to establishing whether Mr Gray knew that the Company was insolvent when the debts were incurred or whether a reasonable person in a like position in the Company’s circumstances would have been so aware, all of which would be necessary to establish liability under s 588G(2). These matters were discussed at the hearing on 3 December 2018 and the plaintiff made another oral interlocutory application for summary judgment which the Court listed for hearing on 14 January 2019, allowing a final opportunity to address those issues.

24    On 21 December 2018, the plaintiff filed a further affidavit of Mr Beattie sworn on 21 December 2018. To it were annexed:

(1)    A copy of the application to wind up the Company taken as filed on 14 April 2016.

(2)    Copies of the Company’s ANZ bank statements from 15 June 2015 to 30 May 2016.

(3)    A spreadsheet analysis of the Company debts.

(4)    A balance sheet as at 29 January 2016 prepared by Mr Beattie which indicates that, based on the limited records he has: the Company had cash at bank of $10,707.99 and equipment with an estimated worth of $5,000, vehicles with an estimated worth of $1,860.21 and Worth Recycling was owed $118,601.50. The Company had a net asset shortfall of $351,978.04 or $233,376.54 (depending on whether or not Novo Rail was a debtor of the Company to an amount of $118,601.50). The possible obligation of Novo Rail may have been related to the Company’s obligation to Worth Recycling. There is a note which indicates that, without books and records, Mr Beattie could not determine if there were other creditors but notes that there were amounts paid from the Company’s account after 29 January 2016.

25    Based on the proofs of debt, it appears that the Company’s total known indebtedness is $452,361.03 and it was incurred at the times referred to below.

26    The plaintiff now claims the amount of $349,081.34 in relation to a subset of those debts, being the debts that the plaintiff can demonstrate were incurred by the Company during the period 15 April 2015 to 14 April 2016, at which time the plaintiff says that the Company was actually and presumptively insolvent having regard to the terms of ss 588E(3)(b) and (4). The debts incurred in the period on which the plaintiff bases the claim is:

27    The plaintiff also claims interest of $34,822.06 which has been calculated at the rate published on the Court’s website, 5.5%, from 23 March 2017 when the first demand for payment was made by the liquidator. The plaintiff also claims costs.

Relevant statutory provisions

28    Section 95A of the Corporations Act provides as follows:

95A Solvency and insolvency

(1)    A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2)    A person who is not solvent is insolvent.

29    Section 286 of the Corporations Act provides as follows:

286 Obligation to keep financial records

(1)    A company, registered scheme or disclosing entity must keep written financial records that:

(a)    correctly record and explain its transactions and financial position and performance; and

(b)    would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.

Note: Section 9 defines financial records.

Period for which records must be retained

(2)    The financial records must be retained for 7 years after the transactions covered by the records are completed.

Strict liability offences

(3)    An offence based on subsection (1) or (2) is an offence of strict liability.

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

30    Relevantly to s 286 and s 588E(4), s 9 of the Corporations Act defines financial records as follows:

financial records includes:

(a)    invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and

  (b)    documents of prime entry; and

  (c)    working papers and other documents needed to explain:

(i)    the methods by which financial statements are made up; and

(ii)    adjustments to be made in preparing financial statements.

31    Section 588E of the Corporations Act sets out the presumptions to be made in proceedings for recovering property or compensation for the benefit of creditors of an insolvent company. It occurs in Div 1 of Part 5.7B of the Corporations Act and relevantly provides as follows:

588E Presumptions to be made in recovery proceedings

(1)    In this section:

recovery proceeding, in relation to a company, means:

(a)    an application under section 588FF by the company’s liquidator; or

(b)    proceedings begun under subsection 588FH(2) by the company’s liquidator; or

(c)    proceedings, in so far as they relate to the question whether a security interest created by the company is void to any extent, as against the company’s liquidator, because of subsection 588FJ(2); or

(d)    proceedings begun under subsection 588FJ(6) by the company’s liquidator; or

(e)    proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt by the company (including proceedings under section 588M in relation to the incurring of the debt but not including proceedings for an offence); or

(f)    proceedings under section 588W in relation to the incurring of a debt by the company.

(2)    Subsections (3) to (9), inclusive, have effect for the purposes of a recovery proceeding in relation to a company.

(3)    If:

(a)    the company is being wound up; and

(b)    it is proved, or because of subsection (4) or (8) it must be presumed, that the company was insolvent at a particular time during the 12 months ending on the relation-back day;

it must be presumed that the company was insolvent throughout the period beginning at that time and ending on that day.

(4)    Subject to subsections (5) to (7), if it is proved that the company:

(a)    has failed to keep financial records in relation to a period as required by subsection 286(1); or

(b)    has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);

the company is to be presumed to have been insolvent throughout the period.

(5)    Paragraph (4)(a) does not apply in relation to a contravention of subsection 286(1) that is only minor or technical.

(6)    Subsection (4) does not have effect, in so far as it would prejudice a right or interest of a person for the company to be presumed insolvent because of a contravention of subsection 286(2), if it is proved that:

(a)    the contravention was due solely to someone destroying, concealing or removing financial records of the company; and

(b)    none of those financial records was destroyed, concealed or removed by the first-mentioned person; and

(c)    the person was not in any way, by act or omission, directly or indirectly, knowingly or recklessly, concerned in, or party to, destroying, concealing or removing any of those financial records.

(7)    …

(8)    If, for the purposes of another recovery proceeding in relation to the company, there has been proved:

(a)    if the other proceeding is of the kind referred to in paragraph (1)(a) of this section—a matter of the kind referred to in a paragraph of section 588FC or of subsection 588FG(2); or

(b)    if the other proceeding is of the kind referred to in paragraph (1)(b) of this section—a matter of the kind referred to in a paragraph of section 588FC or of subsection 588FG(2) or 588FH(1), or a defence under subsection 588FH(3); or

(c)    if the other proceeding is of the kind referred to in paragraph (1)(c) or (d) of this section—a matter of the kind referred to in subsection 588FJ(3); or

(d)    if the other proceeding is of the kind referred to in paragraph (1)(e) of this section—a matter of the kind referred to in a paragraph of section 588G, or a defence under section 588H; or

(e)    if the other proceeding is of the kind referred to in paragraph (1)(f) of this section—a matter of the kind referred to in a paragraph of subsection 588V(1), or a defence under section 588X;

it must be presumed that that matter was the case, or that the matters constituting that defence were the case.

(8A)    If, for the purposes of another recovery proceeding in relation to the company, evidence has been adduced or pointed to that suggests a reasonable possibility of:

(a)    subsection 588GA(1) applying in relation to a person and a debt; or

(b)    subsection 588WA(1) applying in relation to a corporation and a debt;

it must be presumed that that reasonable possibility exists.

(9)    A presumption for which this section provides operates except so far as the contrary is proved for the purposes of the proceeding concerned.

32    Section 588G occurs in Div 3 of Part 5.7B and it relates to a director’s duty to prevent insolvent trading. It relevantly provides as follows:

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 this Act.

(1A)    …

(2)    By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a)    the person is aware at that time that there are such grounds for so suspecting; or

(b)    a reasonable person in a like position in a company in the company’s circumstances would be so aware.

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

(3)    A person commits an offence if:

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

(aa)    at that time, a person is a director of the company; and

(b)    the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

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

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

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

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

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

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

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

33    Section 588M occurs in Subdiv 4A of Part 5.7B under the general headings of “Director liable to compensate company” and “Proceedings against director” as follows:

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.

(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.

Consideration and Conclusion

Summary judgment

34    This judgment follows the Court hearing the plaintiff’s application for summary judgment on 14 January 2019. Although submissions have been filed in this proceeding on more than one occasion, no submissions were made concerning the law dealing with when summary judgment may be entered in favour of a plaintiff.

35    The Court has power to give judgment for one party against another in relation to the whole or any part of a proceeding if the Court is satisfied that the defending party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding (see s 31A(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act)). A defence need not be hopeless or bound to fail for it to have no reasonable prospect of success (see s 31A(3) of the FCA Act).

36    British American Tobacco Australasia Limited v Taleb (No 3) [2013] FCA 80 is a case where summary judgment was claimed against a respondent who did not file a defence or participate in the proceedings. At [20]-[26], Dodds-Streeton J summarised the relevant legal principles as follows:

RELEVANT LEGAL PRINCIPLES

20    Section 31A of the Federal Court of Australia Act 1976 (Cth) (“the Federal Court Act”) provides:

(1)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is prosecuting the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding.

…

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

21    Rule 26.01(1) of the Federal Court Rules 2011 (Cth) states:

A party may apply to the Court for an order that judgment be given against another party because:

…

(e)    the respondent has no reasonable prospect of successfully defending the proceeding or part of the proceeding.

22    In Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd [2009] FCA 499 (“Adnunat”), Sundberg J relevantly summarised, at [37] the principles applicable to the operation of s 31A as follows:

(a)    The Court must assess the strength of the allegations made by reference to the pleadings, the affidavits and any other evidence adduced.

(b)    The Applicant bears the onus of demonstrating that the Third and Seventh Respondents have no reasonable prospect of success. However, if the Applicant establishes a prima facie case for summary judgment, the Third and Seventh Respondents must identify specific factual or evidentiary matters which necessitate a trial.

(c)    In order to have reasonable prospects of success, the Respondents must have prospects of success that are “real” and not “fanciful” or even “merely arguable”.

23    In Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372 (“Jefferson Ford”), Gordon J stated at [127]:

... it must be emphasised that once a moving party has established a prima facie case that the opponent has no reasonable prospect of success, the opposing party must respond by pointing to specific factual or evidentiary disputes that make a trial necessary; general or non-particularized denials will be insufficient to defeat the motion: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [22]. In other words, it is inappropriate in defence of a claim for judgment under s 31A of the Federal Court Act to seek to defend by merely putting a claimant to formal proof: Vans Inc v Offprice.Com.Au Pty Ltd [2006] FCA 137 at [12]. This is not a new concept. It finds earlier reflection in ss 190(4) and 191 of the Evidence Act 1995 (Cth) and O 33, O 34 and O 34B of the Federal Court Rules.

24    In Jefferson Ford, Finkelstein J stated at [22]:

Perhaps one should look further at what Parliament intended to achieve. In O 14 cases, to show cause against an application for summary judgment, a defendant is required to go into some detail and state clearly and concisely the facts to be relied upon: Country Estates Pty Ltd v Leighton Contractors Pty Ltd (1975) 49 ALJR 173 at 173-174. This requires only the material facts to be stated as distinct from the evidence that would establish those facts: Ritter v North Side Enterprises Pty Ltd (1975) 132 CLR 301 at 304. If the test under s 31A raises the hurdle for the opposing party, it may be necessary for that party at a minimum to provide an outline of the evidence that will be relied upon. The outline must be sufficient to show that there is a genuine dispute about facts that are material to the outcome of the case. That will enable the judge to make some assessment of the merits. It would not, of course, be necessary, in most cases, to require the party to do more than provide an outline, because that would turn the summary judgment application into a trial.

25    In QS Holdings Sarl v Paul’s Retail Pty Ltd (2011) 92 IPR 460, Kenny J referred to Spencer v Commonwealth (2010) 241 CLR 118 and observed at [16]:

No hard and fast rule can be laid down as to when summary judgment is available. Much depends on the case at hand. None the less, generally speaking, summary judgment would appear appropriate when well established propositions of law deny the prospect of success. Summary judgment would appear inappropriate where there are "factual issues capable of being disputed and in dispute". See generally Spencer at [25] per French CJ and Gummow J. Generally speaking, it also remains true to say, as Gordon J did in Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372; 246 ALR 465; 103 ALD 505; [2008] FCAFC 60 at [127] (Jefferson Ford) that “it is inappropriate in defence of a claim for judgment made under s 31A of the Federal Court Act to seek to defend by merely putting a claimant to formal proof”. There are, of course, a variety of circumstances that may attract summary judgment under s 31A of the Federal Court Act and, on each occasion, the critical question is that set by the statute - has the moving party persuaded the court that the opposing party has no reasonable prospect of success?

26    In Polar Aviation Pty Ltd v Civil Aviation Safety Authority (No 4) [2011] FCA 1126, Kenny J again considered s 31A and her analysis was affirmed by the Full Court in Polar Aviation Pty Ltd v Civil Aviation Safety Authority [2012] FCAFC 97 at [93].

37    In the absence of any defence, denial of the allegations on reasonable grounds or indication of definite facts pointing to a defence, Dodds-Streeton J concluded that the respondent had no reasonable prospect of success and that summary judgment was appropriate. A similar approach was taken more recently by Davies J in Deputy Commissioner of Taxation v Batchelor [2017] FCA 950, where summary judgment was given where no defence had been filed.

38    An assessment of whether a proceeding or a part of a proceeding has no reasonable prospects of success for the purposes of s 31A(1) will necessarily require (1) identification of the cause of action pleaded; (2) identification of the pleaded facts said to give rise to that cause of action; (3) a review of the evidence (if any) tendered in support of the claim for judgment; (4) identification of the defence pleaded; (5) identification of any facts pleaded which are said to give rise to the defence; and (6) a review of the evidence (if any) tendered in defence of the claim. (see Jefferson Ford Pty Limited v Ford Motor Company of Australia Limited [2008] FCAFC 60; 167 FCR 372 per Gordon J at [126]).

39    For the reasons that follow, I am satisfied that summary judgment should be entered in the plaintiff’s favour under s 31A of the FCA Act.

Consideration of evidence

40    In this case, despite many opportunities being given to participate, the defendant has elected not to do so. Accordingly, the plaintiff’s evidence is unchallenged. The defendant has not sought to establish any of the defences available to a director against whom a claim of contravention of s 588G is made.

41    The plaintiff says that the Company was actually insolvent in the period from 15 June 2015 until it was wound up and that this is demonstrated by:

(1)    The bank statements which demonstrate that:

(a)    The Company had an opening balance of $17,508.99 at a time when it owed the ATO $219,592.56;

(b)    The Company had a maximum bank balance of $141,985.67 on 24 August 2015 at a time when it owed the ATO $270,540.08;

(c)    It had a maximum overdrawn balance of $4,539 on 27 November 2015 at a time when it owed the ATO $282,088.40;

(d)    At no time during the period of the bank statements did the Company have sufficient funds to pay the ATO.

(2)    The fact that both the ATO and Worth Recycling served statutory demands. I note that neither of the demands appear to have been satisfied.

(3)    The balance sheet prepared by the liquidator as at 29 January 2016 demonstrates that the Company had a deficit of assets compared to liabilities of at least $233,376.54.

(4)    At the time that it was placed in liquidation, the Company appears to have had only $24,899 in the bank and over $450,000 in debts.

42    To this might be added the failure of the Company to keep appropriate financial records. This is based on the evidence that Mr Gray told Mr Lum that the Company’s financial records were at the Blacktown storage spaces. Based on Mr Mudford’s evidence, there are scant records for this period.

43    While the question of solvency is not determined on a “balance sheet” test but rather by the capacity of a company to pay its debts from its own resources or from available credit, the Company plainly had a deficit of assets over liabilities from 15 June 2015 onwards, it was not paying its creditors in a timely way (either the ATO or Worth Recycling) and its appears not to have kept adequate financial records. Further, Mr Gray’s own conduct in failing to assist the liquidators by providing a RATA, failing to respond to the liquidators’ questions and failing to provide access to the books and records of the Company should be regarded as a significant indicium of the Company’s insolvency in that period.

44    Although the records obtained by the liquidators through execution of the warrant at the Blacktown storage space were scant, I accept that some of them fell within the definition of financial records. While there are materials for 2013-2014, there appears to be no relevant documents for 2015. Nonetheless, Mr Gray told Mr Lum that the Company’s financial records were at the Blacktown storage space maintained by his mother. Accordingly, although Mr Mudford’s evidence did not qualify him as an expert, it is plain that the records obtained thus far by the liquidators do not meet the requirements of s 286 of the Corporations Act in respect of any of the 2013, 2014 or 2015 financial years on any view. On that basis, I accept the submission made in the plaintiff’s written submissions filed on 10 January 2019 that s 588E(3)(b) and (4) apply and the Company should be presumed to be insolvent for the whole of the 12 months period prior to the relation-back day of 14 April 2016.

45    In respect of the ATO’s running account, although charges to the sum of $176,482.91 were made during the year to 14 April 2016, there were also payments to an amount of approximately $81,500. However, the amount owing to the ATO on 14 April 2015 was $155,707.24 and the payments must accrue to that debt before the debts incurred after 15 April 2015.

46    In my view, a reasonable person of ordinary competence in Mr Gray’s position as the sole director of the Company would, objectively speaking, have grounds for suspecting that the Company might be insolvent in the year to 14 April 2016 having regard to the matters set out above: see Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; 220 ALR 148 at [249]-[250] per Barrett J.

47    Accordingly, in my view it is appropriate to make the declaration that Mr Gray contravened s 588G by failing to prevent the Company from incurring the debts identified by the plaintiff to an aggregate amount of $349,081.34 and an order should be made directing Mr Gray to pay that amount to the plaintiff under s 588M of the Corporations Act.

48    The plaintiff also seeks interest under s 51A(1) of the FCA Act. It provides as follows:

In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a)    order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or

(b)    without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.

49    I note that the amount of the demand made by the plaintiff on 23 March 2017 exceeded the amount now claimed in these proceedings. However, I do not consider that that would constitute a “good cause” to decline to order pre-judgment interest of $34,822.06 as now claimed.

50    I have some concern that this application has not been conducted as efficiently as it reasonably might have been. A party moving for summary judgment under s 31A of the FCA Act bears the onus of making the case out; it is not for the court to make out that case by engaging with the material in the way that the moving party’s submissions fail to do: Hutchinson v Comcare (No 2) [2018] FCA 1179 at [29] per Bromberg J. The Court would have been better assisted by a keener identification of the issues and reference to relevant case law. Where, as here, summary judgement is sought and the defendant does not appear, it is the obligation of the plaintiff’s legal representative to bring to the Court’s attention all matters relevant to the just resolution of the proceeding. The fact that an insolvency practitioner is unfunded is not a reason to resile from that standard. I expect that the question of whether it should have been necessary for the Court to stand over the hearing of the application on two occasions for the reasons referred to above will be a factor which is taken into account in the rendering of an account by the plaintiff’s legal representative.

51    Having said that, the plaintiff has been successful in these proceedings and the defendant should pay the plaintiff’s costs as agreed or taxed.

Associate:

Dated:    2 April 2019