Federal Court of Australia

Bailey, in the matter of Australian Recruiting Group Pty Ltd (in liq) v Aningat [2020] FCA 1319

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth), leave be granted to the plaintiffs to continue this proceeding against the fourth defendant, Gregory Wayne Nicholson.

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

REASONS FOR JUDGMENT

MARKOVIC J

1    The first plaintiff, Liam Thomas Bailey, is the liquidator (Liquidator) of Australian Recruiting Group Pty Ltd (in liquidation) (ARG), Australian Recruiting Connect Pty Ltd (in liquidation) (AR Connect), ARG Staffing Pty Ltd (in liquidation) (ARG Staffing) and Australian Recruiting Group Properties Pty Ltd (in liquidation) (ARG Properties) (collectively, Companies). ARG, AR Connect, ARG Staffing and ARG Properties are the second to fifth plaintiffs respectively.

2    On 26 March 2020 the Liquidator and ARG commenced this proceeding against five defendants including Gregory Wayne Nicholson as the fourth defendant. On 19 February 2020 Mr Nicholson was made bankrupt and Alan Richard Nicolls was appointed the trustee of Mr Nicholson’s estate (Trustee).

3    On 21 July 2020 the Liquidator and ARG filed an amended statement of claim adding AR Connect, ARG Staffing and ARG Properties as third to fifth plaintiffs respectively and GWDM Services Pty Ltd, ARG Workforce Pty Ltd, ARG Payroll Pty Ltd, ARG Labour Services Pty Ltd, James Campbell and Jane Young as sixth to eleventh defendants respectively.

4    By amended interlocutory process filed on 23 July 2020 the plaintiffs, among other things, seek leave pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) (Act) to continue this proceeding against Mr Nicholson. By email dated 28 July 2020 the solicitors for the Trustee informed the solicitors for the plaintiffs that the Trustee did not oppose the plaintiffs’ application for leave to continue the proceeding against Mr Nicholson and that he intended to take no part in the proceeding. Accordingly, the plaintiffs have requested that their application be dealt with on the papers. In the circumstances, I am satisfied that it is appropriate that the matter proceed in that way pursuant to s 20A of the Federal Court of Australia Act 1976 (Cth).

5    For the reasons that follow I am satisfied that the leave sought by the plaintiffs pursuant to s 58(3) of the Act should be granted.

Summary of the proceeding

6    In summary, in the amended statement of claim the plaintiffs allege that:

(1)    on 3 October 2018, the Liquidator was appointed to each of the Companies;

(2)    between about February and June 2018, Mr Nicholson and David Young (the fifth defendant) as well as Laetitia Joan Nicholson (the third defendant and Mr Nicholson’s daughter), Ms Young (the eleventh defendant and Mr Young’s sister) and Mr Campbell (the tenth defendant and the Companies’ chief financial officer) devised and/or were involved in a plan to transfer the recruitment business being carried on by the Companies to a new group of companies of which Mr Campbell, Ms Young and Ms Nicholson would be appointed as directors;

(3)    on or about 1 July 2018, assets of the Companies were sold and transferred to the newly established group of companies of which Mr Campbell, Ms Young and Ms Nicholson were the newly appointed directors. The consideration paid to the Companies under those transactions was underpinned by valuations prepared (on instruction from Mr Campbell) on the basis that the recruitment business was being “exterminated” or “no longer trading”;

(4)    on and from 1 July 2018, being the date that the assets were transferred to one or more companies in the new group, the recruitment business continued to trade and continued to use or have the benefit of the Companies’ assets;

(5)    each of Messrs Nicholson, Young and Campbell, Ms Young and Ms Nicholson knew that the total amounts of the valuations obtained, which underpinned the sale of the Companies’ assets, were less than the market value of the Companies’ business and that the total amount paid by the new companies for that business were less than the market value and thus the assets of the Companies were acquired or transferred for no consideration or less than market value;

(6)    between 1 July 2015 and 30 June 2018, ARG made payments from its bank account held with Westpac Banking Corporation to Messrs Young or Nicholson or to third parties at their direction, totalling $5,597,750.74 (Impugned Payments);

(7)    no consideration was provided, and no benefit accrued, to ARG in making the Impugned Payments which had the effect of reducing the available assets of ARG that would otherwise have been available to meet liabilities owed by ARG to its creditors;

(8)    the Impugned Payments included 373 payments with an aggregate value of $1,114,543.53 to Glori May Aningat (the first defendant and Mr Nicholson’s wife) and 38 payments to Allmyne Property Investments Pty Ltd (the second defendant) with an aggregate value of $254,200. No consideration was provided, and no benefit accrued, to ARG in making those payments;

(9)    the Impugned Payments were transactions of one or more of the Companies entered into, or an act was done or omission was made to give effect to them, at a time when ARG was insolvent or, as a result of entry into those transactions or those acts or omissions, ARG became insolvent. Accordingly, the Impugned Payments were insolvent transactions within the meaning of s 588FC of the Corporations Act 2001 (Cth) (Corporations Act);

(10)    the Impugned Payments were made to a person on behalf, or for the benefit, of a director of ARG or a close associate of a director of ARG and a reasonable person in the circumstances of ARG would not have entered into the Impugned Payments having regard to the lack of benefit to ARG from entering into them, the detriment to ARG in doing so and the respective benefits to other parties to the Impugned Payments. In those circumstances, the Impugned Payments were unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act; and

(11)    the Impugned Payments were voidable transactions within the meaning of s 588FE of the Corporations Act.

7    Relevantly, in the amended statement of claim the plaintiffs claim as against Mr Nicholson that:

(1)    he has breached his duties owed to the Companies pursuant to ss 180, 181 and 182 of the Corporations Act; or

(2)    he aided, abetted, counselled or procured contraventions by Mr Young of s 181(1) and/or s 182(1) of the Corporations Act, has been, directly or indirectly, knowingly concerned in, or party to, the contraventions by Mr Young of s 181(1) and/or s 182(1) of the Corporations Act, or has conspired with others to effect the contraventions by Mr Young of s 181(1) and/or s 182(1) of the Corporations Act and, by reason of those matters, he has been involved in contraventions of s 181 and/or s 182 of the Corporations Act or has contravened those sections.

Legal principles

8    Section 58(3)(b) of the Act provides that, except as provided in the Act, after a debtor has become a bankrupt it is not competent for a creditor, except with leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

9    The principles governing a grant of leave pursuant to s 58(3) of the Act were recently summarised in Hillig, in the matter of Battaglia [2019] FCA 2191 at [6]-[8] where Wigney J relevantly said:

6    … The purpose of the requirement for leave is to ensure that a bankrupt is not subjected to a multiplicity of actions which would be both expensive and time-consuming, and in some cases unnecessary: see Zervas v Burkitt [2019] NSWCA 112 at [15].

7    The requirement for leave focusses attention on the choice between litigation and the proof of debt procedure in a bankruptcy. It will generally be appropriate for leave to be granted in cases where the issues would be better and more comprehensively dealt with by a contested trial of the action in a court proceeding than would be the case if the creditor was required to lodge a proof of debt in the debtor’s bankruptcy: see Allanson v Midland Credit Ltd (1977) 30 FLR 108; [1977] FCA 66. That would particularly be the case where the creditor’s claims involve other parties.

8    The relevant factors to be taken into account cannot be stated exhaustively and will vary from case to case: see Burkitt at [15]. Nevertheless, the factors generally considered to be relevant to such applications include: the amount and seriousness of the claims; the degree and complexity of the legal and factual issues involved; the stage to which the proceedings have progressed; the risk that the same issues would be re-litigated if the claims were to be the subject of a proof of debt; whether the claim has arguable merit; whether proceedings are already in motion at the time of the bankruptcy; whether the proceedings will result in prejudice to creditors; whether the claim is in the nature of a test case for the interest or large class of potential claimants; whether the grant of leave will result in further litigation; whether the cost of the hearing will be disproportionate to the size of the bankrupt estate; the risk of delay; and whether pre-trial procedures such as discovery and interrogatories are likely to be required or beneficial: see Cassegrain v Gerard Cassegrain & Co Pty Limited (in liq) [2012] NSWCA 435 at [33].

Consideration

10    Having regard to the factors that are generally considered to be relevant to an application pursuant to s 58(3) of the Act, the following matters cause me to be satisfied that it is appropriate to make the order granting leave to the plaintiffs to continue this proceeding against Mr Nicholson.

11    First, as is evident from the brief summary set out above, the claims made against Mr Nicholson involve relatively complex factual and legal issues. In summary, the plaintiffs allege that Mr Nicholson breached his duties owed to the Companies as a director and make claims for accessorial liability arising out of:

(1)    a scheme alleged to have been devised by Messrs Nicholson and Young to transfer assets in the Companies to a new group of companies owned by them or by their family members and ultimately controlled by them through nominee directors; and

(2)    alleged payments totalling approximately $5.6 million made from ARG’s bank account to Messrs Nicholson or Young or to third parties at their direction.

12    In my opinion, given their nature, those issues are best considered and resolved in this proceeding rather than by the process of the submission of a proof of debt and possible appeal.

13    Secondly and relatedly, it is apparent from the amended statement of claim and the affidavits filed by the Liquidator in this proceeding to date that there is at least a serious case to be tried against Mr Nicholson.

14    Thirdly, the plaintiffs’ claims made against Mr Nicholson are well advanced. The Liquidator has carried out public examinations of a number of individuals, including Mr Nicholson, which led to the filing of the amended statement of claim.

15    Fourthly, if leave to continue the proceeding against Mr Nicholson is refused, the proceeding will continue against the balance of the defendants. That being so, there is a risk, given the commonality of claims and issues raised as against Mr Nicholson and other of the defendants, that the same issues would be litigated in two fora: those against Mr Nicholson as part of the proof of debt process and those against the balance of the defendants in this proceeding.

16    Fifthly, despite the fact that this proceeding was commenced shortly after Mr Nicholson became a bankrupt, there is no evidence that he or the Trustee would be prejudiced by the grant of leave. The Trustee has indicated that he does not intend to take part in the proceeding.

17    Sixthly, if leave is granted and the plaintiffs obtain judgment against Mr Nicholson, that will not place them in any position of unfair advantage over other creditors with a claim against Mr Nicholson’s bankrupt estate. The plaintiffs’ claim will be an unsecured debt. However, the position and the process moving forward in respect of the proof of debt will be considerably easier if judgment is obtained.

Conclusion

18    It follows that it is appropriate that an order pursuant to s 58(3) of the Act to continue the proceeding against Mr Nicholson should be made.

19    I will make orders accordingly.

Associate:

Dated:    16 September 2020

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