FEDERAL COURT OF AUSTRALIA
Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi [2024] FCA 696
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. Judgment against the first defendant in the amount of $98,097.69 for loans that are due and payable to the second plaintiff.
2. Judgment against the second defendant in the amount of $188,309.88 for loans that are due and payable to the second plaintiff.
3. Pursuant to s 1317H of the Corporations Act 2001 (Cth) (Act), an order for compensation in favour of the second plaintiff against the first and second defendants in the amount of $89,056.96.
4. Pursuant to s 588M(2) of the Act, the defendants are to pay to the first plaintiff, as a debt due to the second plaintiff, the amount of $339,436.92.
5. The parties are to seek to reach agreement as to both costs and interest pursuant to s 51A(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and provide agreed short minutes to the Associate to Justice Halley, by 4.00 pm on Friday, 12 July 2024, failing which the parties are to file and serve submissions of no more than 5 pages, and any affidavit evidence in support, addressing any areas of disagreement between them, by 4.00 pm on Friday, 26 July 2024.
6. In the absence of agreed short minutes on costs and interest pursuant to s 51A(1) of the FCA Act, those matters will be determined on the papers unless a party requests an oral hearing at the time that they file submissions pursuant to Order 5 of these orders.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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E.5.2. Advances made to defendants during the Impugned Period | [291] |
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HALLEY J:
1 In these proceedings, the plaintiffs seek the recovery of shareholder loans alleged to have been made by Ironbark Blacksmithing Pty Ltd (in liquidation) (Company) to the defendants, and damages for breaches of directors’ duties and insolvent trading.
2 The first plaintiff, Richard Stone, is the liquidator of the second plaintiff, the Company.
3 The first defendant, Stephen Mizzi, and the second defendant, Andrew Mizzi, were both directors of the Company from the date it was incorporated on 18 June 1999, until the Company was placed into liquidation. The defendants were the only shareholders of the Company.
4 The plaintiffs contend that the defendants (a) obtained shareholder loans from the Company in the period to 30 June 2014 in an aggregate amount of $598,280.24 that have not been repaid, (b) made further advances by way of shareholder loans to themselves or for their benefit in the period 30 June 2014 to 5 February 2015 in an net amount of $102,157.28 in breach of their statutory directors’ duties, and (c) caused the Company to trade while insolvent in the period from at least 29 April 2013 until the appointment of a liquidator to the Company.
5 The defendants deny that the Company lent them any money. The defendants claim that to the contrary, they lent money to the Company. In the alternative, the defendants claim a set-off pursuant to s 553C of the Corporations Act 2001 (Cth) (Corporations Act) for salary, director’s fees, rent and shareholder advances.
6 Further, the defendants contend that (a) the creditors identified by the plaintiffs have not suffered the loss or damage alleged by the plaintiffs in the amended statement of claim (ASOC), (b) the plaintiffs’ claims are precluded by limitation defences, and (c) in any event, at all times they acted honestly and having regard to all the circumstances ought fairly be excused from any liability that might otherwise be imposed on them, pursuant to s 1317S or s 1318 of the Corporations Act.
7 For the reasons that follow, I have concluded that:
(a) the amounts alleged to have been advanced by the Company to the defendants prior to 30 June 2014 were made by way of shareholder loans and they remain outstanding in the amounts recorded in the Company’s financial records (shareholder loans);
(b) the defendants are not entitled to set off any amounts against the shareholder loans including amounts owed by the Company to the partnership between the defendants, A & S Mizzi (ABN 41 071 016 732);
(c) the plaintiffs’ claim for repayment of advances made by the Company by way of further shareholder loans after 29 June 2014 is not precluded by the limitation defences sought to be advanced by the defendants;
(d) the defendants breached their statutory directors’ duties by making payments to themselves or on their behalf by way of shareholder loans in the period between 30 June 2014 and 6 February 2015;
(e) the Company was insolvent at all times between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015;
(f) a reasonable person in the position of the defendants would have been aware that there were grounds for suspecting that the Company was insolvent at all times between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015;
(g) most, but not all of the debts alleged to have been incurred by the Company between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015 remain outstanding; and
(h) the defendants should not be otherwise excused pursuant to s 1317S or s 1318 of the Corporations Act for any liability that they might have to the plaintiffs.
8 I am therefore satisfied that judgment should be given in favour of the plaintiffs and orders for compensation should be made against the defendants, substantially in the form or to the effect of those sought by the plaintiffs.
9 The Company operated a metal fabrication business building steel stairs and iron balustrades.
10 The Company completed a number of projects for commercial properties in the central business district of Sydney and well known individuals, including John Symonds, Heath Ledger, Jamie Packer, Zara, Hugo Boss, Ivy Hotel, Real Life Insurance and Greg Page.
11 Stephen Mizzi’s role was to look after the workshop floor. He was also responsible for quotes, ordering, approving bills and making progress claims.
12 Andrew Mizzi’s role was in quoting, design, workshop drawings and logistics.
13 The Company initially operated its steel fabrication business from a factory at Smithfield (Factory) which was owned by a partnership between the defendants, with the name “A & S Mizzi” (Partnership). The Partnership acquired the Factory in or about 2003.
14 The Company paid a market value rent per square metre to the Partnership, but not all payments were made on a timely basis and over time a considerable shortfall arose. There were no written agreements between the Company and the Partnership recording the terms on which the Company leased the Factory from the Partnership.
15 The Company employed a professional bookkeeper from 1999 to about 2012. The Company’s bookkeeping records were kept on MYOB software (MYOB files). The MYOB files included general journals and general ledgers for multiple accounts.
16 From 2012, following the departure of the professional bookkeeper, the defendants’ sister, Kathryn Muscat, performed the bookkeeper role.
17 The Company retained Forest Accounting as its accountant to prepare its annual financial statements and taxation returns. Forest Accounting also prepared and lodged the defendants’ personal taxation returns and the Partnership’s taxation returns. The principal of Forest Accounting was Andrew Toumazis.
18 By the commencement of the 2010 financial year the Company had incurred retained losses of $387,780.
19 In late 2011 or early 2012, the Partnership commenced to market the Factory for sale and ultimately the Factory was sold in 2013. The Company thereafter leased a small previously unused space at the rear of the Factory from the purchaser (new leased premises). As a result, the Company’s monthly rental payments fell from an amount of between $18,000 to $22,000 to an amount of approximately $4,300. The reduction in rent, however, was offset, at least in the short term, by the cost of fitting out the new leased premises and downtime while the fit out was taking place, estimated by Stephen Mizzi to be in the order of $80,000 to $100,000.
20 In addition to relocating to the new leased premises, the Company reduced its staff to between 7 and 10 employees.
21 Notwithstanding these reductions in operating expenses and being able to trade profitably in FY2011, FY2012 and FY2014, the Company continued to hold insufficient cash at bank to meet its tax liabilities and was not able to comply with payment plans that it had entered into with the Australian Taxation Office (ATO).
22 On or about 25 July 2014, the ATO served a statutory demand on the Company in an amount of $140,463.49 with respect to an outstanding deficit on the Company’s running balance account with the ATO (statutory demand).
23 The Company did not pay the debt the subject of the statutory demand.
24 On 6 February 2015, the Company was wound up in insolvency by an order of the Supreme Court of New South Wales. Peter Marsden was appointed as the liquidator of the Company.
25 On 21 June 2019, Mr Marsden was replaced as liquidator of the Company by Mr Stone.
26 The plaintiffs relied on six affidavits affirmed by Mr Stone on 26 June 2020, 28 May 2021, 24 November 2021, 28 November 2022, 16 June 2023 and 19 June 2023. Mr Stone gave evidence of his review of the financial records of the Company, in particular, the existence of shareholder loans made by the Company to the defendants, liquidity ratios of the Company, continuing losses, overdue taxation liabilities, outstanding compulsory superannuation payments, and special arrangements with creditors. He also gave evidence of proofs of debt that had been provided to the former liquidator of the Company.
27 Mr Stone was cross examined.
28 His oral evidence was consistent with his affidavit evidence and he made appropriate concessions. He answered questions put to him directly and without prevarication. At times, however, his evidence tended to gloss over the detail provided in the Company’s financial records and drew conclusions too readily, particularly with respect to the quantum of loans outstanding, the time at which debts were incurred to the ATO and the relevance of the financial statements prepared by Forest Accounting for the Company.
29 Both defendants gave affidavit evidence in support of their defence to the claims advanced by the plaintiffs. In summary, they gave evidence that (a) the Company operated as a family business with no formal meetings, (b) there were no written agreements between the Partnership and the Company, (c) the Company’s financial records were maintained on the MYOB files, (d) in or about 2012 they discovered that their bookkeeper had stolen money from the Company and she was replaced by their sister, but she only had limited financial knowledge, (e) as a result of the money stolen by the bookkeeper they could not meet their taxations obligations and negotiated a payment plan with the ATO, (f) at the end of 2013 they moved to new and more modest premises and reduced the number of staff employed by the Company, and (g) many of the debts alleged to be owed by the Company have been repaid or were not incurred.
30 Significantly, the defendants also gave evidence that (a) they adopted the tax structure determined by their accountant, (b) they relied on their bookkeeper to document the Company’s financial transactions and their accountant to prepare the Company’s financial reports and their own individual taxation returns, (c) their accountant did not give them any indication that “we could be in a bit of trouble”, and gave them taxation returns “with no special comments”, (d) the Company made no loans to them, and (e) whenever the Company needed money they would put it in.
31 There was limited documentary support for the evidence given by the defendants.
32 Both defendants were cross examined.
33 The evidence that each gave in cross examination was broadly consistent with their affidavit evidence. It was readily apparent that each had a limited recollection of the financial transactions of the Company. This was not surprising given the dearth of contemporaneous documentation available to them, the passage of time, and their limited financial knowledge and understanding. I am satisfied that they left financial recording, reporting and taxation obligations to their bookkeeper and accountant.
34 Significantly, neither was able to explain discrepancies between their understanding of how much they were paid in wages by the Company and the wages income recorded in the MYOB files and the income declared in their income taxation returns.
35 In the course of his cross examination Andrew Mizzi estimated that his annual wages were approximately $120,000 for the financial year ending 30 June 2013, but was not able to explain why his tax return for that year only reported wages income of $41,000. Stephen Mizzi estimated his weekly wages paid by the Company were between $1,500 and $2,000 a week based on the money he was receiving in his bank account. He stated that he relied on his accountant to prepare his tax return, he did not review his tax returns and in 2013 he did not understand how a tax return worked or even that his 2013 tax return included a figure of $41,019 for salary and wages before tax.
36 Stephen Mizzi’s limited financial understanding and at times, combative approach to giving evidence, was illustrated in the following exchange during his cross examination, bearing in mind his 2013 tax return recorded that he had received a dividend from the Company of $50,000:
Do you understand what a dividend is?---Not entirely.
You say, “Not entirely”, but what is your understanding of a dividend?---I don’t know what a dividend is.
Do you understand if you were a shareholder and received a – you might – I withdraw that. As a shareholder of a company you may receive a payment?---A wage?
No. As a shareholder. So a shareholder is the owner of the company or the owner of the shares?---Okay.
Correct?---Correct.
And if the company is profitable they will make a payment to the shareholders?---As a dividend? Is that what - - -
As a – no, that’s - - -?--- - - - you’re telling me?
Is that what you understand is a dividend?---Well, if you’re telling me that that’s what it is, I suppose that’s what it is.
Did you have that understanding in 2013 that it was called a dividend?---No.
37 Ultimately, I was not able to place any significant weight on the evidence given by the defendants as to the financial position of the Company, except to the extent it was corroborated by contemporaneous documents or was consistent with the apparent logic of events.
38 The defendants also sought to rely on two expert reports prepared by a forensic accountant, Tamara Lindsay. Ms Lindsay was asked to comment on Mr Stone’s analysis of the financial records of the Company and to provide her opinion on whether the Company was insolvent in the period between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015.
39 Ms Lindsay did not agree with Mr Stone’s calculations of the amounts that the defendants owed the Company because they did not take into account that the Company’s financial records indicated that the Company owed a “significant amount” to the defendants “by virtue of the rent owing to the Partnership”. She considered that after setting off the Company’s rental debt to the Partnership and shareholder loans against the amounts owed by the defendants, the Company’s financial statements indicated that there was a balance owing by the Company to the defendants in each of the financial years ending 30 June 2010, 2011 and 2012, as well as 2013 based on the second version of the FY2013 accounts.
40 Ms Lindsay, however, concluded that the Company was likely insolvent during the periods 6 June 2013 to around 9 September 2014 and from 9 October 2014 to the appointment of a liquidator to the Company on 6 February 2015. In her first report, Ms Lindsay concluded that the Company was not insolvent during the period 9 September 2014 to 9 October 2014 on the basis that during that period the ATO had indicated it was prepared to enter into another payment plan arrangement.
41 Ms Lindsay also considered that if the Court was satisfied that the Company was insolvent during those periods, the debts that the plaintiffs claimed had been incurred while trading insolvent were materially overstated because the majority of those debts had been incurred prior to 6 June 2013.
42 Ms Lindsay was cross examined. She generally answered questions directly and without prevarication. On occasions, however, she strayed into advocacy and at times she was reluctant to make appropriate concessions. Having said that, I was satisfied that she was expressing opinions that she genuinely held and was seeking to assist the Court in understanding the financial records of the Company.
43 Ultimately, as I explain below, although I derived some assistance from the evidence of Ms Lindsay and Mr Stone, I principally relied on my own analysis of the financial records of the Company, in particular, the entries in the MYOB files and the bank statements for the Company’s Commonwealth Bank of Australia (CBA) cheque account.
44 The plaintiffs rely on the financial records of the Company to contend that substantial loans were made by the Company to each of the defendants. They contend that the loans are repayable either pursuant to a loan facility agreement dated 30 June 2012 between the Company and the defendants for the purposes of Div 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA1936) (Div 7A Loan Agreement) or under general loan principles. They contend that as at 30 June 2014, the Company had advanced $205,146.49 to Stephen Mizzi and $393,133.75 to Andrew Mizzi (ASOC at [12F]) (Alleged Loan Advances).
45 The plaintiffs contend that in breach of the Div 7A Loan Agreement, the defendants failed to make the minimum repayments prescribed by Div 7A of the ITAA1936 in each of FY2015, FY2016, FY2017 and FY2018, and failed to repay the whole or any part of the Alleged Loan Advances, together with interest, on or before 1 July 2019 (ASOC at [12G]).
46 The defendants deny the Company lent them money. They claim that to the contrary, they advanced considerable sums to the Company and in the alternative claim they are entitled to set off other amounts owed to them by the Company.
47 Further, the defendants contend that the limitation period for the claims with respect to each of the Alleged Loan Advances expired before the commencement of the proceedings on 30 June 2020 and are thereby statue barred pursuant to s 14 of the Limitation Act 1969 (NSW) (Limitation Act).
48 The contentions advanced by the parties with respect to the Alleged Loan Advances raise three principal legal issues, (a) the extent to which a party can rely on financial records of a company as evidence of the transactions that they purport to record, (b) the circumstances in which mutual debits and credits may be set off against each other, and (c) the time at which a cause of action accrues with respect to a loan for the purposes of the Limitation Act.
D.2.2. Books and records of a company
49 Section 1305 of the Corporations Act provides:
(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.
(2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).
50 A statement of a matter in a book kept by a company is thus sufficient to prove that matter in civil proceedings, unless other evidence convinces the Court to the contrary, on the balance of probabilities: Australian Karting Association Ltd v Karting (New South Wales) Incorporated [2022] NSWCA 188 at [129] (Gleeson JA, Meagher JA and Simpson AJA agreeing) citing Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC 1229. In Rich, Austin J stated at [397]-[400]:
[397] Section 1305(1) does not make the company’s books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact (Phipson on Evidence, 16th edn (2005), at [7–17]).
[398] In my view it would be open to the tribunal of fact to find that the prima facie evidence constituted by the company’s books is outweighed by other evidence (including evidence adduced by the proponent of the books, even if the opponent does not give evidence about them); or by some quality or characteristic of the books themselves, even if there is no other evidence. In particular, if a book has the appearance of a draft or (being electronic) has a file title indicating that it is a draft, that alone may be sufficient (all other things being equal) for the tribunal of fact to reject the book as evidence of the matter stated in it, notwithstanding that the book is prima facie evidence of that matter; a fortiori if, in addition to having the appearance of a draft, the book contains inconsistencies or ambiguities or the matter otherwise demands explanation.
[399] My view as to the meaning of the subsection is consistent with the explanatory memorandum to the Companies Bill 1981, which introduced the provision. The explanatory memorandum, which I also quoted in my judgment on the admissibility of corporate records (ASIC NSWSC 417at [225]), said:
[225] This is a new provision based on s-sec 156(3) of the Ontario Business Corporations Act. It is an evidentiary provision that is intended to expedite legal proceedings where books are to be introduced in evidence. This provision obviates the need to call witnesses to prove that books are books of the corporation when this fact is not in question or to prove transactions recorded in books when these matters are not in dispute.
[400] Therefore s 1305(1) allows a company’s books to be introduced into evidence as they are, without any “authenticating” evidence by any witness, and allows the books to be relied upon to prove transactions recorded in them. But it does not elevate matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document. If, for example, there is some doubt as to whether a particular transaction is “recorded” in a book because of some uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.
51 The New South Wales Court of Appeal in Karting observed that in Hoh v Ying Mui Pty Ltd [2019] VSCA 203, the Victorian Court of Appeal (Beach and Hargrave JJA and Sifris AJA) referred to a possible tension between statements by that Court in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [37] (Maxwell P and Buchanan JA), referring to the decision of the Full Court of this Court in Whitton v Regis Towers Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125 at [59] (Buchanan J, Marshall and Tracey JJ agreeing), and the statements in Rich.
52 In Livingspring, the Victorian Court of Appeal stated at [37]:
As the Full Federal Court said in Whitton v Regis Towers Real Estate Pty Ltd, s 1305 does not elevate an entry in a book of account to the status of prima facie evidence of the transaction(s) which the entry purports to record.
53 The Full Court in Whitton was concerned with a proof of debt submitted by an administrator of a company, which had been rejected by a trustee of a bankrupt estate. The proof of debt was based on the books of the company which the primary judge found to be insufficiently reliable to be accepted. Certain debit entries in a director’s loan account with the company had been described in the relevant journal entries as “balancing entries”. After observing at [55] that these entries were “the outcome of an undisclosed process of judgment or inference by the staff in the accounting firm which compiled the accounts”, the Full Court said, with respect to a journal entry recording a balancing debit entry of $1,198,969.72 in the director’s loan account with the company at [59]:
The particular entry (and many others) is not a direct record of an actual transaction. Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had.
54 The Victorian Court of Appeal, however, stated in Hoh at [193]:
There may be a tension between the decision of this Court in Livingspring, applying the decision of the Full Federal Court in Whitton, and ASIC v Rich, but it is unnecessary to explore that in the context of this appeal. In any case where a party to a legal proceeding relies upon financial statements of a company as proof of a contested fact, the court is required to consider all the evidence and attribute such weight to the entries in the financial statements as is appropriate in the context of the evidence as a whole. That is how the trial judge approached the shareholder loan entries in the financial statements in this case. There was no error in that approach.
55 In the light of the above statements in Livingspring, Whitton and Hoh, the Court of Appeal concluded in Karting at [136] that it was unnecessary to address the suggested tension between Livingspring and Rich, as:
Adopting the approach in Hoh, the court is required to consider all the evidence and attribute such weight to the entries in the financial statements as is appropriate in the context of the evidence as a whole.
56 The defendants seek a set-off, pursuant to s 553C of the Corporations Act, for salary, directors’ fees, rent and shareholder advances.
57 Section 553C of the Corporations Act provides:
(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
58 In order to assess whether there is mutuality, the rights of the parties are to be taken and ascertained as at the time of winding up. The important factor is whether there is an obligation or liability prior to liquidation which might mature into a debt. Any acquisition by a liquidator of new claims on behalf of a company cannot vary the parties’ antecedent set-off rights: Metal Manufactures Pty Limited v Morton (2023) 275 CLR 100; [2023] HCA 1 at [18] (Kiefel CJ, Gordon, Edelman and Steward JJ).
59 There are three aspects to mutual dealing, (a) the credits, debts or claims must be between the same persons, (b) the benefit or burden of them must lie in the same interests, and (c) the credits, debts or claims must be commensurable for the purposes of set-off under s 553C, meaning that they must ultimately sound in money: Gye v McIntyre (1991) 171 CLR 609 at 623 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ); Metal Manufactures at [19].
60 In Stec v Orfanos [1999] FCA 457, a Full Court of this Court considered a similar provision in the Bankruptcy Act 1996 (Cth), and said at [24] (Beaumont, Branson and Sundberg JJ):
Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518. Here three of Mr Stec’s claims were against ERI alone. There is thus no mutuality in relation to these claims. His other claim was against Messrs Conroy, Rybak and Georgopolos. Again there is no mutuality because one of the joint creditors, ERI, is not the subject of the cross claim.
61 The purpose of s 553C of the Corporations Act, similarly to s 86 of the Bankruptcy Act 1966 (Cth) on which it is modelled, “is to prevent a creditor of an insolvent company who is also a debtor of that company being required to pay the full amount of the debt owed to the company and yet being entitled to receive only a fraction of the credit due from the company where that would result in substantial injustice”: Metal Manufactures at [69] (Gageler J, as his Honour then was). His Honour continued:
With the object of confining the availability of set-off to circumstances where payment of the full amount of the debt without entitlement to the full amount of the credit would result in substantial injustice to a creditor, as distinct from unfairness to other creditors, the concept of mutuality has long been understood to entail that the burden of the debt and the benefit of the credit must lie in the same “equitable or beneficial interests”.
(Footnotes omitted.)
62 Section 553C(2) of the Corporations Act requires more than “reasonable grounds for suspecting” insolvency. It requires proof, not that the creditor at the relevant time knew the company to be insolvent, but that the creditor had notice of that fact. A person will have notice of the fact that a company is insolvent if the person has actual notice of facts which disclose that the company lacks the ability to pay its debts when they fall due. It is not necessary to show that the person actually formed the view that the company lacked that ability: Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657; [2009] VSCA 319 at [21] (Maxwell P, Byrne and Williams AJJA).
63 It is not sufficient, for the purposes of s 553C(2), that insolvency is a possible inference from the known facts: Jetaway Logistics at [22].
64 The relevant time at which the creditor or debtor is required to have had notice of facts that would have indicated to a reasonable person that the company lacked the ability to pay its debts when they fell due, is at the time of giving or receiving credit. Ordinarily, this would be when the transaction that gave rise to the liability occurred: Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd (2012) 265 FLR 33; [2012] VSC 112 at [72]-[76] (Sifris J).
65 Section 14(1)(a) of the Limitation Act provides:
(1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims—
(a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed
66 Section 14(1) of the Limitation Act has been construed as a procedural provision which has the effect of barring the commencement or maintenance of proceedings: Commonwealth of Australia v Dixon (1988) 13 NSWLR 601 at 605 (Hope JA). The provision bars the remedy, not the right, as a rule of procedure only: Pedersen v Young (1964) 110 CLR 162 at 166 (Menzies J).
67 Section 1317K of the Corporations Act provides:
Proceedings for a declaration of contravention, a pecuniary penalty order, or a compensation order, may be started no later than 6 years after the contravention.
68 Section 1317K has been construed to bar both the relevant right and remedy outside the six year period and that the Court does not have the power to extend the specific time period pursuant to s 1322(4)(d) of the Corporations Act: Austructures Pty Ltd v Makin (2014) 290 FLR 153; [2014] VSC 544 at [30], [46]-[50] (Almond J).
69 A cause of action accrues at the time the loan is made if no time is specified for repayment or a loan is repayable on demand: Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 566 (Dixon, McTiernan and Taylor JJ). As Fullagar J stated in Ogilvie v Adams [1981] VR 1041 at 1043-1044:
Where there is a loan of money simpliciter (i.e. with nothing at all said as to repayment), the money is repayable instanter. Where there is a loan of money and the borrower contracts to repay on demand, again the money is repayable instanter. Where there is a loan of money which is recorded or acknowledged by the parties to be a loan repayable on demand, again the money is repayable instanter.
The common law has always regarded the fact of indebtedness as a continuing detention by the debtor of the creditor’s money, and this whether the creditor brought an action of debt or an action in indebitatis assumpsit. Therefore, if A lends money to B, then instantly B is detaining A’s money. In order to prevent a cause of action for recovery arising in A instantaneously on paying the money, the parties must expressly contract out of that situation by words clearly inconsistent with that situation. The courts have long since settled it that a mere statement or agreement that the money is repayable on demand (or request or at call) is not sufficient to contract out of that situation where all else that is known of the terms of the contract is that A has paid money to B by way of loan. The lender’s cause of action still arises instanter on the receipt of the money by the borrower, so that the lender’s cause of action becomes statute barred at the expiry of six years after the receipt of the money. See, for example, the early cases of Capp v Lancaster (1597) Cro Eliz 548; 78 ER 794; Ashenden v Clapham (1673) 1 Freeman 114; 89 ER 84 Norton v Ellam (1837) 2 M and W 461; 150 ER 839; Jackson v Ogg (1859) Johnson’s Reports 397; 70 ER 476 and the recent case of Commercial Union Assurance Co. Ltd. V Revell, [1969] NZLR 106. See also the unanimous dictum of the Full High Court in Young v Queensland Trustees Ltd. (1956) 99 CLR 560, at p. 566; [1956] ALR 939, at p. 942, per Dixon, CJ and McTiernan and Taylor, JJ.: “A loan of money payable on request creates an immediate debt.”
70 The subsequent application of the principle stated by Fullagar J in Ogilvie was considered in some detail by Keane JA in Haller v Ayre [2005] 2 Qd R 410; [2005] QCA 224. In Haller at [30], Keane JA, quoting from McLure J in Mackenzie v Albany Finance Ltd [2003] WASC 100 at [244]-[245] set out:
“Where there is a simple loan of money, the debt is due and payable immediately and thus the cause of action therefore arises immediately upon the loan of the money. This position can be unchanged notwithstanding an express agreement making the loan repayable on demand, on request or on call: Young v. Queensland Trustees Ltd (1956) 99 CLR 560 at 566; Ogilvie v. Adams [1981] VR 1041.
If, however, the agreement between the parties is that the loan is repayable only upon the happening of a certain event or upon compliance with a condition precedent to liability, the debt is not immediately due and payable and the cause of action does not arise until the happening of the event or compliance with the condition: Atkinson v. Bradford Third Equitable Benefit Building Society (1890) 25 QBD 377. An agreement may provide that the amount of the loan is not repayable until a demand is made, in the sense that the making of the demand is a condition precedent to liability to repay, and in that case the cause of action does not arise until demand has been made: Joachimson v. Swiss Bank Corp (above); Re Brookers (Aust) Ltd (in liq); Brooker v. Pridham (1986) 41 SASR 380 at 382.
…
71 A loan payable on demand is to be distinguished from a loan only repayable on condition that a demand be first made. In the latter case, the making of the demand is a condition precedent to liability to repay, and the cause of action does not arise until such demand has been made: Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 at [37] (Murphy JA, Buss JA agreeing), citing Mackenzie at [244].
72 Further, if the existence of a loan is confirmed, including by the making of payments by a borrower to the lender, the time before the making of those repayments does not run for limitation purposes. Section 54 of the Limitation Act relevantly provides:
(1) Where, after a limitation period fixed by or under this Act for a cause of action commences to run but before the expiration of the limitation period, a person against whom (either solely or with other persons) the cause of action lies confirms the cause of action, the time during which the limitation period runs before the date of the confirmation does not count in the reckoning of the limitation period for an action on the cause of action by a person having the benefit of the confirmation against a person bound by the confirmation.
(2) For the purposes of this section—
(a) a person confirms a cause of action if, but only if, the person—
(i) acknowledges, to a person having (either solely or with other persons) the cause of action, the right or title of the person to whom the acknowledgment is made, or
(ii) makes, to a person having (either solely or with other persons) the cause of action, a payment in respect of the right or title of the person to whom the payment is made,
(b) a confirmation of a cause of action to recover interest on principal money operates also as a confirmation of a cause of action to recover the principal money, and
(c) a confirmation of a cause of action to recover income falling due at any time operates also as a confirmation of a cause of action to recover income falling due at a later time on the same account.
73 The plaintiffs submit that both the Company’s financial statements and the MYOB files support the contention that it was the defendants that borrowed funds from the Company. The plaintiffs submit that there is also other objective evidence supporting that contention, including the unsigned Div 7A Loan Agreement and bank statements.
74 The plaintiffs submit that there is no objective evidence that the defendants lent substantial amounts to the Company.
75 Further, the plaintiffs submit that contrary to the defendants’ contentions, account 2-1030 should be characterised as a joint shareholders’ loan account, not a Partnership loan account. They submit in the absence of any evidence from the Company’s bookkeepers or accountant or financial statements of the Partnership, that the Court should be very hesitant to draw any inference that the account was a Partnership account. They submit that in any event (a) many of the transactions on the account concerned the shareholders, not the Partnership, (b) the balances in the account were included as “Loan to Shareholder” in the Company’s financial statements, (c) there was no reference to any loans between the Company and the Partnership, and (d) the characterisation of the account as a shareholders’ loan account is consistent with the taxation strategy implemented by the Company’s accountant of treating the majority of the payments to the defendants as loans rather than wages or dividends.
76 The plaintiffs contend that account 2-1030 formed part of the accounts in the general ledger that recorded the shareholder loans made to the defendants. They contend that the Alleged Loan Advances included the outstanding $44,987.20 debit balance in the account as at 30 June 2014. They seek to add this amount, in equal shares, to the Alleged Loan Advances, made by way of shareholder loans to each of the defendants.
77 The plaintiffs submit that the set-off proposed by the defendants between amounts alleged to be owed to the Partnership by the Company and amounts owed by the defendants to the Company must be rejected. They submit (a) it is not between the same persons, is not for mutual dealings, and would not do substantial justice between the parties, and (b) there are good reasons why the amounts should not be set off, including that the Partnership is a different entity with its own ABN and TFN, the Partnership is responsible for its liabilities and the partners are required to pay tax on the distributions from the Partnership.
78 The plaintiffs submit that the circumstances raised by the defendants would not give rise to an equitable set-off. The plaintiffs submit that there is no evidence that there was a shared understanding that the amounts would not be demanded by the Company. There is no equitable reason why the defendants or Partnership could be put in a better position than the other unsecured creditors of the Company. Moreover, the plaintiffs submit that the defendants should not be able to avoid paying tax by engaging in a scheme whereby they set off loans against amounts purportedly owing pursuant to a rental agreement for which they would have been required to pay tax.
79 The plaintiffs submit that the defendants would, in any event, fail pursuant to s 553C(2) of the Corporations Act, on the basis that they had notice of facts that would have indicated to a reasonable person the fact that the Company was insolvent.
80 The plaintiffs submit that the defendants did not adduce any evidence of outstanding salary or directors’ fees. The plaintiffs submit that any payments made by the defendants to the Company have already been set off in the claims made and there was no mutuality with respect to rent because that was a debt owed by the Company to the Partnership.
81 The plaintiffs otherwise submit that their claims with respect to the Alleged Loan Advances are not statute barred because of, assuming the parties are bound by the Div 7A Loan Agreement, the demand made by the liquidator for repayment of the advances within six years of the commencement of the proceedings. Further, or alternatively, the plaintiffs submit that their Alleged Loan Advances claims are not statute barred because repayments of the Alleged Loan Advances were made by the defendants within six years of the commencement of the proceedings.
82 The defendants advance the following submissions in response to the plaintiffs’ claims with respect to the Alleged Loan Advances.
83 First, the defendants submit that the Court should find that it is not satisfied that the Div 7A Loan Agreement contained terms that they agreed with the Company.
84 The defendants submit that to have effect for tax purposes, a loan agreement for the purposes of Div 7A of the ITAA1936 must be in writing and signed. They submit as the Div 7A Loan Agreement was not signed it could have no effect. They submit that their evidence that they never approved the entry into a Div 7A Loan Agreement by themselves or the Company should be accepted.
85 The defendants submit that the financial records of the Company are inconsistent with the Div 7A Loan Agreement having been entered into. They principally rely on the absence of any inclusion of Div 7A interest income in the second version of the FY2013 financial statements.
86 Second, the defendants submit that to the extent there is evidence of the Div 7A Loan Agreement having been acted upon, the loan was intended to reflect amounts owing by the Partnership to the Company. They submit that (a) the Div 7A Loan Agreement refers to a single borrower “Andrew & Steven Mizzi” and it would not be an ordinary and natural usage to refer to joint parties, even if they had the same surname, in that way, (b) the description of the borrower is an approximation of the name of the Partnership “A & S Mizzi”, (c) the borrower is described as “A & S Mizzi” in the Div 7A calculator and decision tool included in the FY2013 financial statements of the Company, (d) Div 7A applies to an associate of a shareholder and an associate of a natural person includes a partnership, and (e) repayments made to the loan in FY2014 were made on the “2-1030 account” (an account that the defendants submit was a Partnership loan account).
87 Third, the defendants submit that account 2-1030 in the company’s MYOB files was a liability account that was used for amounts owed by the Partnership to the Company.
88 The defendants rely on (a) a MYOB print out dated 2 May 2014 included in the Company’s FY2013 financial statements that describes account 2-1030 as “Loan A & S Mizzi”, (b) a year end journal entry in the Company’s FY2013 financial statements that recorded that the balance of “2-1300 Loan A & S Mizzi Partnership” was reduced by a credit of $159,500 which corresponded to a $145,000 debit to the account “6-2960 Rental on Property” when it was grossed up by GST of $14,500, and (c) many payments made by the Company to the Partnership recorded in the Company’s bank statements were entered as debits to account 2-1030.
89 Ms Lindsay included in her expert report a summary that she had prepared of transactions through the Company’s trade creditor / accounts payable general ledger account with the Partnership in the MYOB files from 1 March 2008 to 4 September 2012. She concluded from this summary that the Company had a trade creditor balance in the MYOB files owing to the Partnership of $502,210 as at 30 June 2012.
90 Ms Linday stated in her expert report that it is very likely that the trade creditors on the Company’s balance sheet includes the amount owing to the partnership of $502,210 as at 30 June 2012 because it was possible to reconcile the Company’s aged payables balance in the 2012 MYOB file with the company’s trade creditors balance in its FY2012 financial statements (to within $20).
91 Ms Lindsay also concluded that as at 30 June 2013, the Company’s financial statements indicated there was a loan owing to the shareholders of $499,728.
92 Fourth, the defendants submit that the balances in the MYOB files that the plaintiffs rely upon in respect of FY2014 relate to balances that accrued prior to 29 June 2014. They point to the outstanding balances in the Company’s general ledger as at 24 June 2014 for the “A Mizzi Directors Drawings” account of $370,640.15, the “S Mizzi Directors Drawings” account of $182,652.89 and the “A & S Mizzi” account of $44,987.20.
93 Fifth, the defendants submit that a credit of $546,210 should be applied to account 2-1030 as at the date that the Company was wound up. They submit that the Court should reduce the amount outstanding on the loans made by the Company to the defendants by this amount. The defendants seek to rely on Ms Lindsay’s supposition, in her second report at [10] that it is likely that Forest Accounting effected an additional journal entry in the Revised FY2013 financial statements, in order to amend the balances shown in the “Rental on Property” and “Partnership loan accounts” (a reference to account 2-1030) in the MYOB files, by crediting $546,210 to account 2-1030 “A & S Mizzi Drawings/Loan A & S Mizzi Partnership”.
94 Ms Lindsay concludes that if this journal entry had been made then the MYOB files relied upon by the plaintiffs would record a “Rental on Property” expense of $145,000 and the “A & S Mizzi loan account (2-1030)” would record a debt owing by the Company to “A & S Mizzi” of $501,222.80. The defendants submit that the impact of including the credit of $546,210 to account 2-1030 would be to give rise to a debt owing by the Company to the “shareholders”, as at 6 February 2015, of $513,787.68 (being $546,210 - $32,422.32).
95 Sixth, the defendants submit that they had not agreed to repay any amounts that they owed to the Company because the Company owed money to the Partnership and they are therefore entitled to a set-off under s 553C of the Corporations Act. They submit that because Forest Accounting grouped balances on the 2-1010, 2-1015 and 2-1030 accounts as “Loans to shareholders” in the financial statements of the Company is evidence that the liabilities were on the same account and therefore gave rise to mutual debits and credits and mutual dealings between the defendants and the Partnership and the Court should infer that there was an understanding that the amounts could be set off against each other and would be treated as being on the same account.
96 The defendants submit that an equitable set-off applies, such that the Company’s claim to any amounts owing by the defendants personally or the Partnership must be reduced by the amounts owing to the defendants and the Partnership. They submit that the consistent practice between the Company, the defendants and the Partnership of making advances when needed was premised on a shared understanding that amounts would not be demanded by any party so as to allow the Company to continue to operate, and the defendants to continue to provide their labour. They submit that in those circumstances it would be unconscionable for the Company to call for an account for the advances made to the defendants and the partnership without bringing to account advances made by the defendants and the partnership to the Company. Alternatively, the defendants submit the transactions were in the nature of a running account.
97 Seventh, the defendants submit that any amounts payable by them to the Company in respect of FY2014 should be reduced by the amount of the FY2014 dividend and FY2014 directors’ fees because (a) the Court should infer that Forest Accounting recorded the FY2013 dividend as a payment to the defendants that was applied by them to reduce the Partnership loan, (b) the Court should infer that any amount payable by either of them in respect of FY2014 should be reduced by $40,000 on account of the FY2014 dividend due to the absence of any record of the FY2014 dividend in the MYOB files, and (c) the Court should infer that any amount payable by Stephen Mizzi with respect to FY2014 should be reduced by $100,000 on account of directors’ fees because his FY2014 tax return included a salary of $104,907 for FY2014.
98 Eighth, the defendants submit that the plaintiffs’ claim for repayment of advances made by the Company to Stephen Mizzi or Andrew Mizzi (and potentially any balance owed by A & S Mizzi after a set-off) before 29 June 2014 are not maintainable under s 14(1)(a) of the Limitation Act. They submit that (a) the Company’s cause of action for recovery of the loans or advances arose on receipt of the money by the defendants and the Company’s cause of action became statute barred at the expiry of six years after the receipt of the money, (b) there is no basis for the Court to infer an agreement to repay the advances or loans other than upon them being made, and (c) the loan repayments that the plaintiffs seek to rely upon were all made by the Company to the Partnership on account 2-1030.
99 Making findings as to the state of the financial position of the Company, given (a) the incomplete financial documentation now available, as I explain at [322] below , (b) the absence of any evidence from the Company’s former accountants or bookkeepers and, (c) the defendants’ evidence, that and they had very limited financial knowledge and they relied on their bookkeepers and accountant to record the transactions of the Company accurately, is an inherently difficult task.
100 The financial records of the Company that were in evidence relevantly comprise the end of year financial statements and taxation returns for the Company prepared by Forest Accounting for each of FY2012, FY2013 and FY2014, and the MYOB files, comprising general journals and general ledgers, for FY2013, FY2014 and for the period 1 July 2014 to 6 February 2015.
101 The plaintiffs rely on the references to shareholder loans in the Company’s financial statements but do not seek to quantify the alleged indebtedness of the defendants to the Company by reference to figures recorded in the financial statements of the Company.
102 Rather, the figures relied upon by the plaintiffs in the ASOC as quantifying the Alleged Loan Advances are taken from the balances outstanding as at 30 June 2014 in the general ledger in the MYOB files for account 2-1010 “A Mizzi Directors Drawings”, account 2-1015 “S Mizzi Directors Drawings” and account 2-1030 “A and S Mizzi Drawings”. The balances outstanding as at that date were recorded as $370,640.15 for account 2-1010, $182,652.89 for account 2-1015 and $44,987.20 for account 2-1030, which add to $598,280.24.
103 In order to determine whether the indebtedness recorded in those accounts formed part of the Alleged Loan Advances, it is necessary to have regard to all the available financial records of the Company. In particular, it is necessary to have regard to (a) entries in other accounts included in the MYOB files, most significantly, account 2-9000 that was named “Directors Drawings”, (b) financial statements of the Company prepared by Forest Accounting, (c) the Div 7A Loan Agreement, (d) bank statements for the Company’s CBA cheque account (CBA bank statements), (e) the taxation returns of the defendants and the Partnership.
104 In analysing the Company’s financial records, I also had regard to the evidence of (a) the defendants, but only to the extent that it was probative, plausible and consistent with the apparent logic of events, and (b) the evidence of Mr Stone and Ms Lindsay. This evidence, however, was of comparatively limited assistance compared with the inferences that I was able to draw from my own review of the financial records, particularly, with respect to account 2-1030 and the interrelationship between the financial statements of the Company and its tax returns prepared by Forest Accounting, the MYOB files maintained by the Company’s bookkeepers and the CBA bank statements.
105 The entries in the MYOB files in the period between an unspecified date in 2012 and the appointment of a liquidator on 6 February 2015 were made by the defendants’ sister, Ms Muscat, who replaced the former bookkeeper following her resignation and after the Company discovered that she was allegedly stealing money from the Company.
106 The defendants gave evidence that Ms Muscat had limited financial knowledge but received assistance from an independent bookkeeper, Mr Toumazis, for a short period, to enable her to record the financial transactions of the Company in the MYOB files. Given that the payments and receipts that are recorded in the general ledgers, other than journal entries, are largely corroborated by balancing credits and debits in Company’s contemporaneous CBA bank statements, I accept that the MYOB files reflect transactions that occurred and journal entries that were made to the accounts.
107 Before turning to accounts 2-1010, 2-1015 and 2-1030, it is necessary to first have regard to the end of year financial statements of the Company prepared by Forest Accounting, the Div 7A Loan Agreement and to review the entries made in the general ledger in the MYOB files for accounts 2-1027, 2-1170 and 2-9000.
D.5.2. Financial statements of the Company
108 The tax return and financial statements of the Company prepared by Forest Accounting for the year ending 30 June 2012 (FY2012 financial statements) record that the Company had made “Loans to Shareholders” in an aggregate amount of $498,291.99 as at 30 June 2012. This item was included as an asset in the notes to the financial statements under the heading “Trade and Other Receivables”. The financial statements also record that the current liabilities of the Company as at 30 June 2012 included “Loans to Shareholders” in an aggregate amount of $34,357.19. This would more accurately have been described as “Loans from Shareholders” given it was recorded as a liability, not an asset of the Company.
109 A listing of general journal entries for the Company for the period 1 July 2011 to 30 June 2012 produced from the MYOB files includes general journal entries under the heading “30/6/2012 agree to forest accounts” of a debit of $498,291.99 to account 1-1017 “Loan to Shareholders” and a credit of $34,357.19 to account 2-1036 “Loan [from] Shareholders”.
110 The Div 7A Loan Agreement is dated 30 June 2012. The Company is recorded as the lender and the borrower is recorded as “Andrew & Steven Mizzi”. The Div 7A Loan Agreement is not signed by the Company or either of the defendants. A copy of the Div 7A Loan Agreement was included in the FY2012 financial statements.
111 The attachment to the Div 7A Loan Agreement provides that it was for a principal sum of $463,934, with a commencement date of 1 July 2012 and for a seven year period expiring on 1 July 2019. The principal sum of $463,934 was in an amount equal to the difference between “Loans to Shareholders” of $498,291.99 and “Loans [from] Shareholders” of $34,357.19, rounded down to the nearest dollar, as recorded in the FY2012 financial statements.
112 Clause 10.1 of the Div 7A Loan Agreement relevantly provides that if the borrower fails to pay interest or make any repayment by the due date, the balance of the loan and any accrued interest will, at the option of the Company as lender, immediately become due and payable in full on demand.
113 The FY2012 financial statements also included unsigned minutes of a meeting of the Company that was stated to have been attended by Andrew Mizzi, Steven Mizzi and Mr Toumazis on 30 June 2012. Those minutes record:
1. It was noted that a loan had been made between the Company as the Lender and the Borrower as set out below (“the Loan”). The terms of the Loan are and the Loan will be made in accordance with the provisions contained within the Company’s Constitution.
2. The Loan was reviewed in detail and it was resolved that the Company accept the terms of the Loan and execute any relevant additional documentation required to give effect to the Loan.
Amount of Loan $463,934
Borrower Andrew & Steven Mizzi
Date of Advance 01/07/2012
Secured/Unsecured Unsecured
114 Forest Accounting prepared two versions of the financial statements of the Company for the financial year ending 30 June 2013.
115 The first version of the financial statements for FY2013 included the tax return for the Company for that financial year (FY2013 financial statements). Those statements record that the Company had made “Loans to Shareholders” as at 30 June 2013 in an aggregate amount of $534,906.47. As was the case for the FY2012 financial statements, this item was included as an asset in the notes to the financial statements under the heading “Trade and Other Receivables”. The financial statements did not disclose any “Loans to [or from] Shareholders” in the Company’s current or non-current liabilities.
116 The profit and loss statement for the Company in the FY2013 financial statements disclosed that an “Interim Dividend” of $100,000 was paid in FY2013. The payment of an interim dividend in that amount was also disclosed in the notes to the balance sheet of the Company with reference to the item “(Accumulated losses) Retained earnings”. Those notes included an item “Dividends provided for or paid” of (100,000).
117 The FY2013 tax returns prepared and lodged by Forest Accounting with the ATO for the defendants record that each received a franked dividend of $50,000 in that financial year and Stephen Mizzi and Andrew Mizzi were entitled to corresponding franking credits of $21,428 and $21,429, respectively.
118 The FY2013 tax returns for the defendants disclosed that each had received a gross payment for salary and wages for that financial year of $41,109 and their main salary and wage occupation description was “MANAGER – GENERAL”. Stephen Mizzi’s FY2013 tax return also disclosed that he had received total supplemental income of $19,950.
119 The FY2013 financial statements also included a Div 7A calculator and decision tool spreadsheet. The spreadsheet recorded:
(a) the “Name of shareholder or shareholder’s associate” was “A & S MIZZI”, the loan was made for seven years in “2011-12” and the amount of the loan not repaid at the end of the financial year ending 30 June 2012 was $463,935;
(b) the minimum yearly repayment for the financial year ending 30 June 2013 was $86,234.75 and $79,727.07 for the financial year ending 30 June 2014; and
(c) the total repayments made in the financial year ending 30 June 2013 was $100,000, comprising an interest payment of $25,657.41 and a principal repayment of $74,342.59 giving rise to a closing balance for the end of that financial year of $389,592.41.
120 On 25 July 2014, the ATO issued a statutory demand on the Company.
121 On 13 August 2014, a revised form of the FY2013 financial statements prepared by Forest Accounting were provided to the ATO in support of a payment plan that the Company was seeking from the ATO (Revised FY2013 financial statements). There are two principal differences between the FY2013 financial statements and the Revised FY2013 financial statements.
122 First, the figure of $534,906.47 for “Loans to Shareholders” included in current assets in the balance sheet for the Company in the FY2013 financial statements was replaced with a figure of $415,246.35 in the Revised FY2013 financial statements. As I explain below, however, the figure for “Loans to Shareholders” included in current assets in the Revised FY2013 financial statements is of a different character to the entry with that description in the FY2012 financial statements and the FY2013 financial statements.
123 Second, the figure for “Trade and Other Payables” of $784,240.23 in current liabilities in the balance sheet for the Company in the FY2013 financial statements was replaced with the description “Trade Creditors” in an amount of $117,132.46 and “Loans to Shareholders” in an amount of $499,728.29 in the Revised FY2013 financial statements. Given that it was recorded as a current liability, the “Loans to Shareholders” entry would more accurately be described as “Loans from Shareholders”.
124 The financial statements for the Company prepared by Forest Accounting for the year ending 30 June 2014 (FY2014 financial statements) record that the company had made “Loans to Shareholders” as at 30 June 2014 in an aggregate amount of $603,766.94 and in an aggregate amount of $415,246.35 for FY2013. Again, the “Loans to Shareholders” figures included in current assets in the notes to the FY2014 financial statements under the heading “Trade and Other Receivables” were of a different character to the entries with that description in the FY2012 financial statements and the FY2013 financial statements.
125 The FY2014 financial statements did not expressly disclose any “Loans [from] Shareholders” in the Company’s current or non-current liabilities. I note, however, that the figure for current liabilities of $663,279.41 for FY2013 recorded in the FY2014 financial statements is the same figure that appeared in the Revised FY2013 financial statements and that figure included “Loans [from] Shareholders” in an amount of $499,728.29.
126 The Company’s tax return for the year ending 30 June 2014 (FY2014 tax return) disclosed a figure of $760,834 for “All current assets”. This was the same figure that was disclosed in the balance sheet of the Company that was included in the FY2014 financial statements. The figure of $760,834.42 included $729,022.11 for “Trade and other receivables”, which in turn included the figure of $603,766.94 for “Loans to Shareholders”. A fee memorandum from Forest Accounting to the Company, marked for Andrew Mizzi’s attention, dated 24 October 2014, included in the fee narrative the preparation and lodgement of the FY2014 tax return and “[f]or arranging the signing of your return and the supply of a copy together with returning your documentation and the holding of the executed ATO declarations”.
127 I am satisfied that the objective intention of the parties was that they would be bound by the Div 7A Loan Agreement. Although the document was not signed, it was reduced to writing and it was contained in the Company’s bound financial records prepared by its accountant.
128 The Div 7A Loan Agreement was a critical component of the tax minimisation strategy implemented by the Company’s accountant. It enabled Forest Accounting to prepare and lodge taxation returns for the defendants in FY2013 and FY2014 that did not include the amounts advanced by way of “shareholder loans” in their assessable incomes. Had the Div 7A Loan Agreement not been entered into, the shareholder loans would have to have been included as dividends paid by the Company and would have been taxable.
129 The entry into the Div 7A Loan Agreement was confirmed in the FY2013 financial statements. The initial principal advanced under the Div 7A Loan Agreement also matched the net amount of the shareholder loans outstanding as at 30 June 2012, as recorded in the general ledger for account 1-1017 “Loan to Shareholders” and account 2-1036 “Loan [from] Shareholders”. I am satisfied that the Div 7A Loan Agreement, although not signed, recorded the terms on which loans were made by the Company to the defendants, in their capacity as shareholders of the Company.
130 I am not persuaded that I should draw the inference sought by the defendants that the reference to “Andrew and Steven Mizzi” as the borrower in the Div 7A Loan Agreement was a reference to the “A & S Mizzi partnership”.
131 As submitted by the plaintiffs, the objective circumstances supporting these findings include:
(a) there was no reference in the financial statements of the Company to any loans made by the Company to the Partnership, only references to “Loans to Shareholders”;
(b) the principal amount identified in the Div 7A Loan Agreement is consistent with the amounts recorded as being owed by the defendants, as shareholders, in the MYOB files and the FY2012 financial statements;
(c) a loan repayment in an amount of $100,000 was made from a dividend paid to the defendants by way of a debit to the retained earnings account 3-8000 and a credit to account 2-1030;
(d) but for the Div 7A Loan Agreement, the net amount of $463,934 recorded as loans to shareholders in the MYOB files would have been deemed to be a dividend and taxable; and
(e) the defendants did not disclose the net amount of $463,934 recorded as loans to shareholders in the MYOB files, or any other amount referrable to that figure, in their FY2012 tax returns.
132 A fundamentally different position, however, was sought to be advanced in the Revised FY2013 financial statements. Those financial statements were provided to the ATO as an attachment to a letter dated 13 August 2014 in which the defendants sought to explain the Company’s failure to comply with an existing payment plan and, I infer, persuade the ATO to extend or enter into a further payment plan with the Company with respect to its accumulated debt. The Revised FY2013 financial statements purported to disclose a new liability of “Loans [from] Shareholders” (incorrectly described as “Loans to Shareholders) of $499,728.29, a current asset of “Loans to Shareholders” of $415,246.35 and replacing current liabilities for “Trade and Other Payables” of $784,240.23 in the FY2013 financial statements with $117,132.46 for “Trade Creditors”.
133 These “revisions” to the FY2013 financial statements were supported by entries in the general journal that purported to show debits and credits made as at 30 June 2013, to give effect to the revisions.
134 The journal entries to give effect to the revisions appear from a date stamp on an extract from the general journal of the Company to have been made no later than 3.24 pm on 2 May 2014. They must have been made at a date after the FY2013 financial statements were prepared as they are not reflected in those financial statements.
135 The journal entries were made at a time when the Company was not meeting its payment obligations with the ATO. It can readily be inferred that the disclosure of “Trade and Other Payables” of $784,240.23 in current liabilities as at 30 June 2013, and net liabilities of $55,333.62 for FY2013 would not have assisted the Company in persuading the ATO that the Company could meet its taxation obligations.
136 The effect of the journal entries was first, to reduce the balance outstanding in account 1-1017 (Loan to Shareholders) of $498,291.99 to nil, and second, to reduce the balance outstanding in account 2-1036 (Loan [from] Shareholders) of $30,657.19 to nil.
137 The balance in account 1-1017 was reduced to nil by the following journal entries as recorded in the Company’s general ledger:
(a) credit $498,291.99 to account 1-1017 – “Loan to Shareholders”;
(b) debit $260,463.81 to account 2-1030 –“ A & S Mizzi Drawings”;
(c) debit $120,692.18 to account 2-1010 –“A Mizzi Directors Drawings”;
(d) debit $110,000.00 to account 2-1030 –“A & S Mizzi Drawings”; and
(e) debit $7,136.00 to account 2-1030 – “A & S Mizzi Drawings”.
138 The sum of the four debits identified above is $498,291.99.
139 I accept it is not unusual that journal entries might be made after the end of a financial year to record more accurately credits and debits in a company’s financial records. I am satisfied, however, that the entries made in the MYOB files to give effect to these revisions cannot be relied upon to alter the fundamental character of the Company’s financial relationship with the defendants. Irrespective of how they might have been categorised in the financial statements as at 30 June 2014, I am satisfied that the advances were made to the defendants as shareholder loans as recorded in the MYOB files under the umbrella of the Div 7A Loan Agreement or otherwise on the basis that they were loan advances, not the payment of wages or dividends.
D.5.4. Accounts 2-1027 and 2-1170
140 Payments were made from the Company’s CBA bank account to various credit cards of the defendants. They were recorded in a general ledger account 2-1027 named “Andy & Nat Credit Card Repay” and a general ledger account 2-1170 named “Aussie Credit Card – Steve M”.
141 Both defendants give evidence that the Company’s corporate credit card with a limit of $30,000 was generally “maxed out” and they used their personal credit cards and credit cards of Andrew Mizzi’s wife to pay for business expenses of the Company. Both emphatically denied that the Company paid any personal expenses incurred on their credit cards. The defendants’ denials are at least partly corroborated by the debit balances in account 2-1140 named “CBA BUS MCARD”, which I infer was the Company’s corporate credit card. The debit balances for that account were typically just below or above $30,000 for FY2013 and FY2014. To that extent, it is consistent with the apparent logic of events that the defendants would have used their personal credit cards to pay for business expenses of the Company. A matter underlined by the fact that the Company’s corporate card was still being used during FY2013 and FY2014 but regular small repayments were being made from another credit card, with the notation “Mastercard” in an effort to keep the outstanding balance below $30,000.
142 The plaintiffs submit that given the absence of any supporting documents to substantiate the claims that the defendants’ credit cards were used only to purchase goods and services for the Company, the Court can be satisfied that the alleged reimbursements were in truth, further loan advances made by the Company to the defendants as shareholder loans. They submit that conclusion can be reached given the alleged credit card reimbursements were recorded on a loan account, rather than an expense account, in the general ledger.
143 It may well be the case that some of the expenses the subject of the credit card reimbursements were in truth personal expenses, but given the perhaps understandable absence of credit card statements given the effluxion of time and the general lack of financial sophistication of the defendants, and the onus resting on the plaintiffs, I am not persuaded that I can infer that all or any specific subset of the credit card repayments were not for business expenses.
144 It follows, that I am not satisfied that the plaintiffs have established that the credit card repayments recorded in accounts 2-1027 and 2-1170 constituted shareholder loans.
145 Account 2-9000 was named “Directors Drawings” in the general ledger in the MYOB files.
146 In the period from at least 1 June 2012 to 6 February 2015, advances made to the defendants were generally first recorded in account 2-9000.
147 By way of example, the general ledger entries for account 2-9000 records that on 5 July 2012 the account was debited in aggregate the sum of $3,807.16 in three payments of $1,888.08, $200.00 and $1,719.08, each with the notation “A Mizzi and S M[izzi]”. The CBA bank statements for that day includes a debit for $3,807.16 with the notation “Direct Credit 301500 Ironbark Blacksm Co, Director transfers”.
148 The general ledger for account 2-9000 also records on 5 July 2012 a credit of $1,027.22 as “Wages” for Andrew Mizzi and a credit of $1,027.22 as “Wages” for Stephen Mizzi.
149 For the balance of FY2013, similar debits with the notation “A Mizzi and S M[izzi]” and credits for wages to each of the defendants were recorded on a weekly basis on account 2-9000 until 30 June 2013. Over that period the aggregate of the debits on the account was $186,324.47 and the aggregate of the credits to the account for wages was $66,145.72.
150 By a journal entry dated 30 June 2013, the net amount outstanding on the account as at that date was reduced to nil by crediting the account $120,178.75 and debiting $60,089.37 to account 2-1010 “A Mizzi Directors Drawings” and $60,089.38 to account 2-1015 “S Mizzi Directors Drawings”.
151 During FY2014, the general ledger for account 2-9000 recorded aggregate debits with the notation “A Mizzi and S M[izzi]” in an aggregate amount of $170,585.84. Each of these debits was reflected in withdrawals from the Company’s CBA bank account with notations such as “Direct Credit 301500 Ironbark Blacksm Co”. The debit balance outstanding in the account as at 30 June 2014 was $43,892.82 due to offsetting credits for wages paid to the defendants in the period up to 7 November 2013 in an aggregate amount of $16,563.52 and by a journal entry dated 30 March 2014 crediting the account $110,129.50 and debiting $55,064.75 to each of account 2-1010 and account 2-1015.
152 The amounts debited to the account, as reflected in the CBA bank statements, were not included as income in the individual taxation returns of the defendants. I am satisfied that these payments were in substance loans made by the Company to the defendants as shareholders in accordance with the taxation structure implemented by the Div 7A Loan Agreement.
153 Account 2-1010 was named “A Mizzi Directors Drawings” in the general ledger in the MYOB files.
FY2013
154 As at 1 July 2012, the general ledger recorded that it had a nil balance.
155 At the end of FY2013, the account had a debit balance of $211,533.55. The debit entries comprised 12 payments to the ATO, each in the amount of $671.00, and three journal entries. The debit entries to the ATO were corroborated by debits recorded in the bank statements for the Company’s CBA cheque account. I infer, in the absence of any other explanation, that the payments made to the ATO were with respect to PAYG taxation liabilities of the Company with respect to wages payable to Andrew Mizzi and therefore could not constitute shareholder loans.
156 The journal entries, made as at 30 June 2013 comprised a $31,500 debit for “Andy and Nat Credit Card Repay”, a $120,692.18 debit against a credit in that amount on account 1-1017 “Loan to Shareholders” and a $60,089.37 debit against a credit in that amount on account 2-9000 - “Directors Drawings”.
157 In my view, given my conclusions at [144] and [152] above, the Alleged Loan Advances represented by the journal entries for $120,692.18 and $60,089.37, but not the credit card repayments, were payments that were in substance loans to Andrew Mizzi as a shareholder of the Company. I infer that by reason of the Div 7A Loan Agreement, these amounts were not treated as income in Andrew Mizzi’s FY2012 taxation return.
158 The aggregate of the shareholder loans made to Andrew Mizzi by the end of FY2013 was thus $180,781.55 ($120,692.18 and $60,089.37).
FY2014
159 During FY2014, the debit balance outstanding on account 2-1010 increased from $211,533.55 to $370,640.15 as a result of four journal entries made on the account as at 31 March 2014.
160 First, a $86,125.85 debit to account 2-1010 and a corresponding credit in that amount to account 2-1027 named “Andy & Nat Credit Card Repayme” in the general ledger. The balance in account 2-1027 increased from nil as at 1 July 2013 to $86,125.85 by 31 March 2024 by a series of debits with the notation “Any & Nat Cre” in the general ledger in amounts ranging from $27.00 to $29,136.47. There was one offsetting credit of $3,800.00 on 4 September 2013.
161 Each of the debits in account 2-1027 reflected corresponding transfers in the Company’s CBA cheque account in payment of Andrew Mizzi’s CBA and Aussie credit cards and his wife’s HSBC, Aussie, CBA, AMEX and Ignite credit cards.
162 As I concluded at [144] above, I am not persuaded that the payment of Andrew Mizzi and his wife’s credit cards were shareholder loans.
163 Second, a $6,490 debit to account 2-1010 and a corresponding credit in that amount to account 2-9001 named “Andy and Nat Macquarie” in the general ledger. The balance in account 2-9001 increased from nil as at 1 July 2013 to a debit balance of $6,490.00 as at 31 March 2014 by a series of debits in the amount of $260 in the period between 10 October 2013 and 27 March 2014. The notation that was recorded in the general ledger for each of these debits was “A Mizzi and S M[izzi]”. There was one offsetting credit for $260 on 11 October 2013 with the notation “Macquarie Bank” that appears to have been made because two debits of $260 were made on 10 October 2013.
164 There are no transactions recorded in the Company’s CBA cheque account corresponding to the debit entries in account 2-9001. Andrew Mizzi did not provide any coherent explanation why the debits were made to this account. When pressed about the issue in cross examination, he only responded as follows:
The money which is recorded as being paid from the company to the A and S Mizzi – sorry – to the Andy and Nat Macquarie bank account were advances to you?---What do you mean advances? I have already explained what the – I don’t understand. That seems like the same question I was asked before about what the Macquarie account is and I thought I have already answered that.
Mr Mizzi, the amounts that were paid from the company to the Andy and Nat Macquarie account were loans from the company to you?---No. I put that money in, probably only a few weeks before, from the sale of the factory.
165 In the absence of any coherent explanation from Andrew Mizzi, and given the title to the account “Andy and Nat Macquarie” and the corresponding debit to account 2-1010 (against the credit to account 2-9001), I am satisfied that there is a sufficient basis for me to conclude that the debit of $6,490 for “Andy and Nat Macquarie” was a payment made by way of a shareholder loan. Further, as I explain below at [296], these payments were included in payments to the defendants recorded in the CBA bank statements.
166 Third, a $55,064.75 debit to account 2-1010 and a corresponding credit in that amount to account 2-9000, as explained at [151] above.
167 As I concluded at [152] above, in my view these drawings were shareholder loans falling within the Alleged Loan Advances.
168 Fourth, a $11,426.00 debit to account 2-1010 and a corresponding credit in that amount to account 2-1379 named “Andy ATO” in the general ledger. The balance in account 2-1379 increased from nil as at 1 July 2013 to $11,426 as at 31 March 2014 by a series of debits in amounts of $500.00, $671.00 and $742.00 in the period between 4 July 2013 and 25 March 2014. The first three debits had the notation “Australian Taxat” and the remainder had the notation “Andy ATO”.
169 Each of the payments to the ATO recorded in account 2-1379 reflected payments made from the Company’s CBA cheque account to the ATO. By way of example, the CBA bank statements t record that on 18 March 2014 a payment of $500 was made with the notation of “BPAY TAX OFFICE PAYMENTS 75556 CommBiz, 551002644168962421 AM ATO”.
170 Again, in the absence of any evidence to the contrary I infer that the payments made to the ATO were with respect to PAYG taxation liabilities of the Company with respect to wages payable to Andrew Mizzi and therefore could not constitute shareholder loans.
171 No other debit or any credit transactions were recorded on account 2-1010 during FY2014.
172 The cumulative aggregate of the Alleged Loan Advances that I am satisfied were made by way of shareholder loans to Andrew Mizzi by the end of FY2014 was thus $242,336.30 ($61,554.75 and $180,781.55).
173 There were no transactions recorded in the account in the general ledger in the MYOB files in the period from 1 July 2014 to the winding up of the Company on 6 February 2015.
174 Account 2-1015 was named “S Mizzi Directors Drawings” in the general ledger in the MYOB files.
FY2013
175 As at 1 July 2012, the general ledger in the MYOB files for account 2-1015 recorded that it had a nil balance.
176 The debit entries to account 2-1015 during FY2013 included 11 payments to the ATO, each in an amount of $738.00, payments to “Stephen Mizzi” in various amounts that in aggregate were in an amount of $19,100, a $14,000 payment to Andrew Mizzi on 9 July 2022 that was repaid the following day, and a $4,000 payment to a suspense account.
177 The debits to the ATO and the payments to Stephen Mizzi reflected debits recorded in the CBA bank statements t. By way of example, a $10,000 payment to “Stephen Mizzi” on 11 December 2022 was recorded in the CBA bank statements with the notation “Direct Credit 301500 Ironbark Blacksm Co Linda Mizzi”.
178 I am satisfied that the debit entries to “Stephen Mizzi” were in substance advances that were made to him by way of shareholder loans.
179 In the absence of any evidence to the contrary, however, I infer that the payments made to the ATO were with respect to PAYG taxation liabilities of the Company with respect to wages payable to Stephen Mizzi and therefore could not constitute shareholder loans.
180 There were also two debits by way of journal entries in the MYOB files that were made in the account and related accounts as at 30 June 2013.
181 First, a $15,210.05 debit to account 2-1015 and a corresponding credit in that amount to account 2-1028 named “Steve Interest Ironbark” in the general ledger. The debit balance in account 2-1028 increased from nil as at 1 July 2012 to $15,210.05 as at 27 June 2013 by a series of debits with the notation “Steve Interest L” in the period to 28 February 2013 and thereafter “A Mizzi and S M[izzi]” in the general ledger in amounts, initially of $300.00, then one amount of $710.05 and thereafter of $500.00.
182 The debits in account 2-1015 to facilitate the payments of interest for Stephen Mizzi were corroborated by debits in the CBA bank statements.
183 By way of example, the CBA bank statements record a payment of $710.05 on 6 December 2012 with the notation “Direct Credit 301500 Ironbark Blacksm Co, Steve Mizzi” against a debit entry in the same amount in the general ledger for account 2-1028 with the notation “Steve Interest L”.
184 The corroboration for the payments made after 28 February 2012 with the notation “A Mizzi and S M[izzi]” was less direct. By way of example, the CBA bank statements record a payment of $4,138.16 on 25 April 2013 with the notation “Direct Credit 301500 Ironbark Blacksm Co, Director transfers”. This payment can be reconciled against the following debit entries recorded in the MYOB accounts as at that date:
Account | Debit |
2-9000 (Directors Drawings) | $1,819.08 |
2-9000 (Directors Drawings) | $1,519.08 |
2-9000 (Directors Drawings) | $300.00 |
2-1028 (Steve Interest Ironbark) | $500.00 |
Total | $4,138.16 |
185 Second, a $60,089.38 debit and a corresponding credit in that amount on account 2-9000 referred to at [156]-[157] above.
186 As I concluded at [152] above, in my view these drawings were shareholder loans.
187 Finally, there was a journal entry entered on account 2-1015 as at 30 June 2013 providing for a credit of $30,657.19 to the account and a debit to account 2-1036 named “Loan to Shareholders”. I am satisfied, however, that it is apparent that the account was in truth a “Loan from Shareholders” account. I note that the balance sheet in the FY2012 financial statements of the Company included in current liabilities what were incorrectly described as “Loans to Shareholders” in an amount of $34,357.19. The effect of the credit of $30,657.19 was to offset amounts owed by the Company to Stephen Mizzi against loans the Company had made to him.
188 At the end of FY2013, account 2-1015 had a net debit balance of $76,160.24.
189 The net aggregate of the Alleged Loan Advances that I am satisfied that were made by way of shareholder loans to Stephen Mizzi by the end of FY2013 was thus $63,742.24 ($19,100 +$ 60,089.38 + $15,210.05 - $30,657.19).
FY2014
190 During FY2014, the debit balance outstanding on account 2-1010 increased from $76,160.24 to $182,652.89 as a result of a payment to Stephen Mizzi of $2,500 on 24 October 2013 and five journal entries made on the account as at 31 March 2014. Four of the five journal entries were debit entries on the account.
191 First, a $33,317.12 debit to account 2-1015 and a corresponding credit in that amount to account 2-1028 named “Steve Interest Ironbark” in the general ledger. The debit balance in account 2-1028 increased from nil as at 1 July 2013 to $33,317.12 as at 31 March 2024 by a series of debits with the notation “A Mizzi and S M[izzi]” in the general ledger in amounts of either $500.00 or S1,519.08.
192 As was the case for the previous year from 28 February 2013, there were corresponding entries in the CBA cheque account that can be corroborated in the manner shown at [184] above.
193 Second, a $55,064.75 debit to account 2-1015 and a corresponding credit in that amount to account 2-9000, as explained at [151] above.
194 As I concluded at [152] above, in my view the debits to account 2-9000 were advances by way of shareholder loans to the defendants.
195 Third, a $2,141.00 debit to account 2-1015 and corresponding credit in that amount to account 2-1170 named “Aussie Credit Card – Steve M” in the general ledger. The balance in account 2-1170 increased from $550.70 as at 1 July 2013 to $2691.70 as at 31 March 2014 by a series of debits with the notation “Aussie Credit C[ard]” in the general ledger in amounts ranging from $150.00 to $500.00.
196 Each of the debits in account 2-1170 reflected corresponding transfers in the Company’s CBA cheque account in repayment of Stephen Mizzi’s Aussie credit card.
197 As I concluded at [144] above, I am not persuaded that the payments made to repay Stephen Mizzi’s credit cards were shareholder loans.
198 Fourth, a $16,469.78 debit and a corresponding credit in that amount to account 2-1377 named “Steve ATO” in the general ledger. The balance in account 2-1377 increased from nil as at 1 July 2013 to $16,469.78 as at 27 March 2014 by a series of debits in the period between 4 July 2013 and 27 March 2014, initially in amounts between $738.00 and $1,038.00, and from 29 August 2013 in payments each week of $209.05 and $259.50. The first two debits had the notation “Australian Taxat” and the remainder had the notation “Steve ATO”.
199 Each of the payments to the ATO recorded in account 2-1377 reflected payments made from the Company’s CBA cheque account to the ATO. By way of example, the bank statements for the CBA cheque account record that on 27 March 2014 payments of $209.05, with the notation “BPAY TAX OFFICE PAYMENTS 75556 CommBiz [************]2221 SM ATO” and $259.50 with the notation of “BPAY TAX OFFICE PAYMENTS 75556 CommBiz, [************]0560 Steve ATO”, were made to the ATO.
200 Again, in the absence of any evidence to the contrary, I infer that that the payments made to the ATO were with respect to PAYG taxation liabilities of the Company with respect to wages payable to Stephen Mizzi and therefore could not constitute shareholder loans to him.
201 The cumulative net aggregate of the Alleged Loan Advances that I am satisfied were made by way of shareholder loans to Stephen Mizzi by the end of FY2014, was thus $152,124.11 ($63,742.24 + $55,064.75 + $33,317.12).
FY2015
202 There were no transactions recorded in account 2-1015 in the general ledger in the MYOB files in the period from 1 July 2014 to the winding up of the Company on 6 February 2015.
203 In my view, account 2-1030 operated as a loan account that recorded liabilities that the defendants had to the Company, but only in the period after the settlement of the sale of the Factory on 20 September 2013.
204 I accept that some of the entries in the account prior to the sale of the Factory appeared to be concerned with the defendants in their personal capacities. These entries included “Wages”, “Mastercard”, “Pays” and a debit of $25,657.41, made by a journal entry as at 30 June 2013, for “Interest Div7A”.
205 On balance, however, I am satisfied that prior to the sale of the Factory, the account was principally operated as a loan account reflecting liabilities of the Partnership to the Company. In part that is demonstrated by the description of the account in the 2 May 2014 general journal entries as “Loan A & S Mizzi Partnership” and the descriptions of account 2-1010 as “Loan A Mizzi” and account 2-1015 as “Loan Steve Mizzi”. It is also demonstrated by the inclusion of debit entries in the account with the notation “Mortgage” in the period prior to the sale of the Factory on 20 September 2013, which I infer to be a reference to payments made by the Company to the Partnership’s mortgagees with respect to the Factory. By way of example, account 2-1030 records a debit with the notation “Mortgage” in an amount of $3,000 on 30 July 2013.
206 The position changed after the settlement of the sale of the Factory. From that time, I am satisfied for the following reasons that account 2-1030, in effect, operated as a joint loan account recording liabilities that the defendants had to the Company, together with accounts 2-1010 and 2-1015.
207 First, the tax return for the Partnership for FY2014, unlike the tax returns for previous financial years, recorded that the Partnership had nil business income and a nil net income or loss for FY2014. It can readily be inferred that following the sale of the Factory, the Partnership ceased to operate in any meaningful sense.
208 Second, Andrew Mizzi gave evidence that after the Factory was sold some of the net proceeds were lent by Stephen Mizzi and him to the Company. In the course of his cross examination he provided the following explanation of how this occurred:
And so when you received money from the sale of the factory - - -?---Yes.
- - - who do you say that money belonged to?---Myself and Steve.
Right. And then was that – did that belong to you by reason of the amount of money that you put into the partnership in 1999?---Yes, and – and the additional – and the additional 300,000.
And then am I to understand it that you and Steve decided to lend further money – I withdraw that. You and Steve decided to lend that money to the company?---Some of the money, yes.
Some of the money?---Yes.
And was it your understanding at that time that it was your money as an individual that was being lent to the company?---Yes.
As opposed to the partnership?---Yes. Yes.
Yes.
HIS HONOUR: Just your money or also Steve’s money?---Steve and I’s money, yes.
209 Third, the entries in account 2-1030 for FY2014 following the settlement of the sale of the Factory include three credits in an aggregate sum of $65,000, with the notation “funds from Mizz” (a credit of $20,000 on 28 September 2013) and “Payments” (credits of $5,000 and $40,000, both on 30 September 2013). The entries also include three debits of $1,800 and one debit of $670, with the notation “ANZ Mortgage”. This is to be distinguished from the earlier entries with the notation “Mortgage”. The Partnership’s mortgagees were BNY Trust Company of Australia Limited and Premier Financial Services Pty Ltd, both of whom were paid out from the proceeds of the sale of the Factory.
210 Fourth, the entries in account 2-1030 for FY2014 following the settlement of the sale of the Factory included the following debits and credits with the notation “wages” or “pays”:
Debit | Credit | |
12 March 2014 | $10,000 | |
19 March 2014 | $4,500 | |
19 March 2014 | $4,300 | |
20 March 2014 | $8,800 | |
25 June 2014 | $4,000 | |
26 June 2014 | $7,300 |
211 Each of these entries reflected debits and credits in the Company’s CBA cheque account. The practical effect of these debits and credits for wages was to reduce the amount outstanding in account 2-1030 by $13,300.
212 The balance outstanding in account 2-1030 at the end of FY2014 was $44,987.20. For present purposes, the more relevant figure is the reduction in the balance outstanding in the account once it ceased to be operated as a Partnership loan account following the sale of the Factory. In the period from 20 September 2013 to 30 June 2014, the debit balance in the account fell from $140,475.16 to $44,987.20. Given the Partnership was no longer active, I am satisfied that this net reduction reflected payments made by the defendants to the Company, including allocating wages otherwise payable to them as amounts to reduce the balance outstanding in the account.
213 In the period between 1 July 2014 and the appointment of a liquidator to the Company on 6 February 2015, the debit balance in account 2-1030 decreased from $44,987.20 to $32,422.32. During that period, debits were made to the account in an aggregate amount of $36,963.74 and credits were made in an aggregate amount of $49,528.62. As the account was operating as a shareholders’ loan account by this time, the debits reflected additional drawings made by the defendants and the credits reflected payments made by way of repayments, including allocating amounts payable as wages to them in the amount of $13,830 on 3 July 2014 and $12,000 on 10 July 2014.
214 In the period that account 2-1030 operated as a loan account recording the indebtedness of the defendants to the Company, the account records net repayments of $108,052.84, comprising net repayments of $95,487.96 for FY2014 and $12,564.88 for the period 1 July 2014 to 6 February 2015.
215 Finally, given my conclusion that account 2-1030 was not operated as a loan account for the defendants until after the sale of the Factory and the entries in the defendants’ loan accounts 2-1010 and 2-1015, it is not necessary to determine what if any relevance the journal entries made to the account as at 30 June 2013 might have had to the determination of the balance outstanding on the shareholder loans as at 6 February 2015. The 30 June 2013 journal entries purported to re-characterise $377,599.81 of a $498,291.99 loan recorded in account 1-1017 as a “Loan to Shareholders” as a loan to the Partnership, thereby in effect seeking to transfer to the Partnership their liability to repay that amount to the Company. The justification for, or the basis on which, those journal entries were made, was unexplained and is largely inexplicable in the absence of any evidence from Forest Accounting or coherent evidence from the defendants.
Credit of $546,210 to the account
216 Nor do I accept, the defendants’ submission that a credit of $546,210 should be applied to account 2-1030 as at the date that the Company was wound up in order to reduce the amount outstanding on the loans made by the Company to the defendants.
217 The general ledger in the MYOB files for FY2013 records a credit of $496,554.55 made on 13 August 2012 to account 6-2960 “Rental on property” and a credit of $49,655.45 to account 2-1330 “GST paid”. In both cases the “memo” in the general ledger was recorded as “Purchase; A &”, presumably intended to be a reference to “A & S Mizzi Drawings”, being account 2-1030. The general ledger for FY2013, however, does not include any corresponding entries in account 2-1030.
218 The defendants seek to rely on Ms Lindsay’s supposition, in her second report at [10] that it is likely that Forest Accounting effected the following additional journal entry as at 30 June 2013 in order to amend the balances shown in the “Rental on Property” and “Partnership loan accounts” (a reference to account 2-1030) in the MYOB files:
Credit $546,210 to account 2-1030 “A & S Mizzi Drawings / Loan A & S Mizzi Partnership”.
219 Ms Lindsay concludes that if this journal entry had been made then the MYOB files would record a “Rental on Property” expense of $145,000 and the “A & S Mizzi loan account (2-1030)” would record a debt owing by the Company to “A & S Mizzi” of $501,222.80. The defendants submit that the impact of including the credit of $546,210 to account 2-1030 would be to give rise to a debt owing by the Company to the “shareholders”, as at 6 February, of $513,787.68 ($546,210 - $32,422.32).
220 The defendants did not seek to explain why a credit entry of $546,210 in account 2-1030 was not included in the MYOB files, except to suggest that this was because Forest Accounting had not made, prior to the appointment of a liquidator to the Company, similar journal entries to entries that they had made in previous financial years.
221 More fundamentally, the “Rental on Property” was a liability owed to the Partnership. The analysis of Ms Lindsay and the submissions made by the defendants elide the distinction between the defendants as shareholders of the Company and the defendants as partners in the Partnership. The taxation structure devised by Forest Accounting, as reflected in the Div 7A Loan Agreement, was that the amounts advanced by the Company to the defendants were shareholder loans, not dividends, wages or other benefits. Any corresponding credit to a loan account to balance the elimination in the amount of rent owed by the Company to the Partnership would have to be a credit to a loan account with the Partnership, not with the defendants in their personal capacities, as shareholders. Even, if one were to proceed on the basis that account 2-1030 was an account in which transactions between both the Company and the defendants and the Company and the Partnership were recorded, a credit to the Partnership recorded in the account could not reduce the amount outstanding on shareholder loans made to the defendants.
D.5.9. Set-off for dividend and directors’ fees
222 The Company’s FY2014 financial statements recorded that the Company paid an interim dividend of $100,000 in FY2013 and $40,000 in FY2014. The dividends were also recorded in the Company’s FY2013 and FY2014 tax returns.
223 The FY2013 dividend was recorded in the MYOB file as a $100,000 debit to the retained earnings account 3-8000 and a $100,000 credit to the 2-1030 account by way of journal entries to those accounts, as at 30 June 2013.
224 The FY2014 dividend was not recorded in the MYOB files.
225 The Company’s FY2014 financial statements also recorded a payment of $100,000 in directors’ fees. The payment, however, was not credited to the 2-9000 Directors’ Drawings account or any other account of the Company for that financial year.
226 In my view, the defendants are not entitled to set off any of these amounts against the shareholder loans.
227 The financial statements of the Company purporting to record the payment of the dividends were prepared or made at a time when the Company was not able to pay its outstanding indebtedness to the ATO, and was thereby insolvent. The declaration of the dividends would necessarily in those circumstances have had the effect of materially prejudicing the Company’s ability to pay its creditors and hence would likely be contrary to s 254T of the Corporations Act: see DSHE Holdings Ltd (recs and mgrs apptd) (in liq) v Potts (2022) 405 ALR 70; [2022] NSWCA 165 at [80]-[110] (Leeming and Kirk JJA and Basten AJA) .
228 Further, the rationale for any set-off is not readily apparent.
229 The defendants contend that the FY2013 dividend of $100,000 was applied to reduce an alleged indebtedness of the Partnership to the Company. Assuming for present purposes, it was applied in that way, it could not give rise to any mutual set-off of credits and debits. A reduction in a liability of the Partnership to the Company cannot be set off against personal liabilities of the defendants to the Company.
230 The position with the FY2014 dividend and the $100,000 directors’ drawings is even more stark. They are only identified in the FY2014 financial statements. There is no reference to either in the MYOB files, and in particular the $100,000 directors’ drawings’ does not appear in the 2-9000 directors drawing account. I do not accept that I should infer that the absence of any reference to the dividend and the drawings in the MYOB files was because the MYOB files available to the Court only included journal entries up to 30 March 2014. Given the insolvency of the Company at the time the dividend was purported to have been declared and the directors’ drawings paid, I do not see any coherent basis on which I could infer that journal entries should be assumed to have been made, where that would have given rise to likely breaches of statutory directors’ duties.
231 Further, and in any event, the defendants’ reliance on s 553C of the Corporations Act to set off alleged amounts owed to them by the Company by way of dividends and drawings is misconceived. At the time the dividends were purported to be declared and the $100,000 of directors drawings was alleged to be applied to reduce the Partnership’s liability to the Company, both directors had actual notice of facts which would indicate to a reasonable person in their position that the Company lacked the ability to pay its debts as and when they fell due, namely the Company’s inability to pay its debts outstanding the ATO. Hence, by reason of s 553C(2) the defendants are not entitled to claim the benefit of any set-off that they might otherwise have been able to establish with respect to those dividends and drawings.
232 For the foregoing reasons, the defendants attempt to rely on an equitable set-off for the dividends and drawings must also fail.
D.5.10. Limitation Act defences
233 The Limitation Act defences sought to be relied upon by the defendants in answer to the Alleged Loan Advances case cannot succeed for two alternative reasons.
234 First, on 30 November 2015, the former liquidator of the Company, Mr Marsden made a demand for repayment of the loans made by the Company to the defendants. The proceedings were commenced within six years of that date. The demands did not refer expressly to the Div 7A Loan Agreement but did identify the amounts outstanding on the loan as recorded in the MYOB files. As explained above, cl 10.1 of the Div 7A Loan Agreement provided that the loan was repayable on demand if there was any failure to pay interest or principal on the due date for each payment. Clause 3.1 provided that interest had to be paid annually in arrears on 30 June each year and cl 5.1 provided that the borrower had to pay the minimum amount prescribed by or under Div 7A in each income year after the year in which the loan was first made. Any repayments of principal made by the defendants in the financial years ending 30 June 2014 and 30 June 2015 fell well short of the minimum loan repayment amounts. As disclosed in the Div 7A calculator and decision tool for FY2014 included in the Company’s financial records in evidence, the minimum repayment for that financial year was $79,727.07.
235 Second, I am satisfied that repayments were made by the defendants on the loan the subject of the Div 7A Loan Agreement or under general loan principles, within six years of the commencement of these proceedings.
236 The MYOB files record repayments being made by the defendants within six years of the commencement of the proceedings, each of which constituted a payment in respect of the right or title of the person to whom the payment is made to the Company, as a person having the relevant cause of action for the repayment of the loans to the defendants.
237 As I explain at [213] above, repayments were made by way of credits to account 2-1030 in the period between 2 July 2014 and 29 September 2014, in an aggregate amount of $49,528.62.
238 For the foregoing reasons, in my view the net amounts outstanding as at the date of the appointment of a liquidator to the Company on 6 February 2015 on the shareholder loans made by the Company to the defendants were as follows.
239 First, as to Andrew Mizzi a net amount of $188,309.88, comprising net advances by way of shareholder loans of $242,336.30 on account 2-1010 less net receipts by way of repayments of shareholder loans on account 2-1030 of $54,026.42 (inferring in the absence of any more specific evidence that it was 50% of the aggregate net figure of $108,052.84).
240 Second, as to Stephen Mizzi a net amount of $98,097.69, comprising net advances by way of shareholder loans of $152,124.11 on account 2-1015 less net receipts by way of repayments of shareholder loans on account 2-1030 of $54,026.42 (inferring in the absence of any more specific evidence that it was 50% of the aggregate net figure of $108,052.84 ).
E. BREACH OF DIRECTORS’ DUTIES
241 The plaintiffs contend that the defendants authorised or permitted the Company to pay to them in the period from 30 June 2014 to the appointment of a liquidator to the Company on 6 February 2015 (Impugned Period), a net amount of $102,157.28, in circumstances where the Company was insolvent, and thereby breached their duties as directors and contravened s 180(1), s 181(1) and s 182(1) of the Corporations Act (Restated Directors’ Duties Contraventions).
242 The Restated Directors’ Duties Contraventions were first advanced by the plaintiffs in their ASOC.
243 On 11 June 2021, the plaintiffs were granted leave to file the ASOC, on the basis that the issue of when the Restated Directors’ Duties Contraventions were to take effect would be determined at the final hearing.
244 The ASOC was subsequently filed on 17 June 2021, more than six years after the end of the Impugned Period.
245 The plaintiffs also pleaded a contravention of s 183(1) of the Corporations Act but did not advance any written or oral submissions in support of such a contravention. I have therefore proceeded on the basis that alleged contravention is not pressed.
246 The breach of directors’ duties claim raises two issues for determination.
247 First, whether the claim is statute barred because it was commenced outside the limitation period. This largely turns on whether the claim arises from the same or substantially the same facts.
248 Second, whether the payments that the defendants caused the Company to make to them, or on their account, were payments that were made in breach of their statutory duties as directors.
249 The rule that the time from which an amendment to a pleading should operate is from the date of amendment, rather than from the date of commencement of the proceedings, was set out in Weldon v Neal (1887) 19 QBD 394 at [395] (Lord Esher MR).
250 This rule was subsequently affected by statutory changes in various jurisdictions, including by s 59(2B) of the Federal Court Act of Australia 1976 (Cth) (Federal Court Act), which relevantly provides:
(2B) The Rules of Court may make provision for:
(a) the amendment of a document in a proceeding; or
(b) leave to amend a document in a proceeding;
even if the effect of the amendment would be to allow a person to seek a remedy in respect of a legal or equitable claim that would have been barred because of the expiry of a period of limitation if the remedy had originally been sought at the time of the amendment.
251 As explained by Colvin J in Sydney Subdivision Pty Ltd (in liq) v Chow [2023] FCA 8 at [53], s 59(2B) of the Federal Court Act was introduced following obiter observations by Toohey J in Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514 at 559-562. The observations of Toohey J were to the effect that if a proposed amendment introduced a new cause of action, s 82(2) of the Trade Practices Act 1974 (Cth) presented an insurmountable statutory barrier to the new cause of action and no express, implied or incidental powers of the Court provided any answer. The Explanatory Memorandum to the legislation amending the Federal Court Act to insert s 59(2B), the Law and Justice Legislation Amendment Act 1994 (Cth), as Colvin J explained in Sydney Subdivision at [45], included the following statements at [114]-[115]:
The proposed amendment is necessary to overcome the operation of the rule in Weldon v Neal (1887) 19 QBD 394. That case held that leave to amend will not be granted to enable a plaintiff to raise a new cause of action if that cause would, if proceedings in relation to it were then started for the first time, be barred by the expiry of a period of limitation. The amendment would not enable Rules to be made to allow a person to amend a claim so as to seek relief which was not available at the time the action was commenced because the action was commenced out of time.
Comments made by the Hon. Justice Toohey of the High Court in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 have raised some doubts whether the Federal Court currently has the power to make such rules. This amendment will overcome that doubt.
252 Relatedly, r 8.21(1)(g), (2) and (3) of the Federal Court Rules 2011 (Cth) (Rules) states:
8.21 Amendment generally
(1) An applicant may apply to the Court for leave to amend an originating application for any reason, including:
…
(g) to add or substitute a new claim for relief, or a new foundation in law for a claim for relief, that arises:
(i) out of the same facts or substantially the same facts as those already pleaded to support an existing claim for relief by the applicant; or
(ii) in whole or in part, out of facts or matters that have occurred or arisen since the start of the proceeding.
Note: For paragraph (1)(b) and the avoidance of multiplicity of proceedings, see section 22 of the Act.
(2) An applicant may apply to the Court for leave to amend an originating application in accordance with paragraph (1)(c), (d), (e) or subparagraph (g)(i) even if the application is made after the end of any relevant period of limitation applying at the date the proceeding was started.
(3) However, an applicant must not apply to amend an originating application in accordance with subparagraph (1)(g)(ii) after the time within which any statute that limits the time within which a proceeding may be started has expired.
Note 1: Applicant, claim and originating application are defined in the Dictionary.
Note 2: For the Court’s power to make rules amending a document, see section 59(2B) of the Act.
Note 3: Rule 9.05 deals with joinder of parties by court order.
253 There is no express rule which deals with the question of when an amendment made by leave takes effect but the default position adopted by the Courts is that an amendment of a pleading by leave that was based on the same, or substantially the same facts as those pleaded, is to take effect on the filing of the original pleading: Gloucester Shire Council v Fitch Ratings, Inc (No 2) [2017] FCA 248 at [235] (Wigney J) citing Baldry v Jackson [1976] 2 NSWLR 415 at 419; Oztech Pty Ltd v Public Trustee of Queensland (No 2) [2015] FCA 1485 at [61].
254 The Full Court of this Court in McGraw-Hill Financial Inc v Clurname Pty Ltd (2017) 123 ACSR 467; [2017] FCAFC 211 (Allsop CJ, Jagot and Yates JJ) considered that the Rules did not constrain the power of the Court to grant leave to amend so as to add a statute-barred cause of action limited to the circumstances set out in r 8.21(1)(g) and r 8.21(2) of the Rules. Their Honours noted at [23]-[25]:
… The language of r 8.21(1) is clear: an applicant may apply to the Court for leave to amend an originating application for any reason “including” any of the reasons in r 8.21(1)(a)-(g). Subrules (a) to (g) are examples of amendments that may be the subject of application. They are not a code. Thus, the interaction of r 8.21(1)(g) and (2) does not mean that the Court’s power to permit an amendment asserted to involve a statute-barred claim is confined to the circumstances in r 8.21(1)(g)(i). We leave to one side for further argument the proper approach to an amendment introducing an unarguably statute-barred claim. Nevertheless, the following considerations undermine any rigid or bright-line approach exclusively based on r 8.21(1)(g) and r 8.21(2).
The Federal Court Rules must also be construed as a whole. Apart from the fact that the power to apply to amend is expressed inclusively in the opening words of r 8.21(1), other rules disclose the true position. Thus, the rules include
R 1.32
The Court may make any order that the Court considers appropriate in the interests of justice.
R 1.33
The Court may make an order subject to any conditions the Court considers appropriate.
R 1.34
The Court may dispense with compliance with any of these Rules, either before or after the occasion for compliance arises.
R 1.35
The Court may make an order that is inconsistent with these Rules and in that event the order will prevail.
R 16.51
(1) A party may amend a pleading once, at any time before the pleadings close, without the leave of the Court.
(2) However, a party may not amend a pleading if the pleading has previously been amended in accordance with the leave of the Court.
(3) A party may further amend a pleading at any time before the pleadings close if each other party consents to the amendment.
(4) An amendment may be made to plead a fact or matter that has occurred or arisen since the proceeding started.
Rules 1.32 to 1.35 are important weapons in the Court’s armoury to enable the overarching purpose of the “civil practice and procedure provisions” (defined in s 37M(4) of the Court Act to comprise the Rules and “any other provision made by or under this Act or any other Act with respect to the practice and procedure of the Court”) to be achieved as identified in s 37M(1) of the Court Act. The overarching purpose is to facilitate the just resolution of disputes according to law, as quickly, inexpensively and efficiently as possible. Faced with these provisions to construe r 8.21(1)(g) as an exclusive power to permit a statute-barred amendment let alone a merely arguably statute-barred amendment (as in the present case) only in the circumstances permitted by r 8.21(2), is inconsistent with the language of the Rules and inimical to the overarching purpose in s 37M of the Court Act. As the present case demonstrates, given the competing arguments about when the cause of action first accrued and the potential operation of s 55(1) of the Limitation Act, if there is a reasonable argument the claim is not statute-barred, there is no reason in principle that an amendment should not be permitted, particularly if all rights are preserved by the date on which the amendment takes effect being determined as part of the final judgment rather than on an interlocutory basis.
255 In relation to an amendment which raises new facts, Murphy J in Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (No 2) (2013) 213 FCR 289; [2013] FCA 409, considered a case where the applicants sought leave to amend a statement of claim to include new facts in support of an existing cause of action. The defendants submitted that the amendments took effect from the date on which they were made, and as such the facts occurred outside the relevant limitation period.
256 In considering the question as to the date on which amendments to a statement of claim should operate from, Murphy J noted the power of the Federal Court under s 59(2B) of the Federal Court Act and said at [18]-[19]:
Nothing in the Explanatory Statement to the Rules indicates any intent to alter the existing practice that amendment of a pleading may operate from the commencement of the proceeding, even if it is otherwise statute barred. It says that Pt 16 “adopts, simplifies and streamlines the process and procedures which operated under the former Rules and does not substantially alter existing practice.”: Explanatory Statement, Federal Court Rules 2011, 13–14. I do not consider that the new rules made any change of significance in relation to this question. Should the new rules be seen to operate to alter this practice I would rely upon my broad discretionary powers in rr 1.32, 1.33 and 1.35 to take the same approach as I set out below.
I note also that the amendments to the pleadings under consideration are of lesser significance in the proceeding than, for example, an application to add a new cause of action after the limitation period has expired. Yet r 8.21(2) makes it clear that an amendment to add a new cause of action which is otherwise statute barred, is allowable, and the amendment may run from an earlier date.
257 In McGrath v HNSW Pty Ltd (2014) 219 FCR 489; [2014] FCA 165, Cowdroy J agreed with Murphy J’s approach in Australian Property Custodian. His Honour stated at [50] that r 16.53 of the Rules, which facilitates applications for leave to amend, should not be understood to prevent amendments to statements of claim that would have the effect of adding a new cause of action that would otherwise be time barred. His Honour stated that this:
[E]nsures that the court will be able to do justice between the parties where amendment to pleadings is sought irrespective of the nature of the amendment or the circumstances in which it has arisen. The only limitation is the discretion of the court to grant leave.
258 In Gloucester Shire Council, Wigney J made further orders pursuant to r 1.32 of the Rules, confirming that amendments took effect on the date of filing the original pleading. His Honour considered this to be appropriate and in the interests of justice, given the lack of an express rule: at [239].
259 Ultimately, amendments to introduce a new cause of action at a time outside a limitation period must be justified by reference to a source of authority that permits the amendment to relate back to the commencement of proceedings, if not it will be statute barred: Sydney Subdivision at [46].
260 Finally, as Colvin J stated in Sydney Subdivision at [47], where r 8.21(1)(g) of the Rules is relied upon as the basis for an amendment:
[I]t has been observed that ‘the Court should not be too pedantic in considering the nature of the facts added to the existing pleading’ as the question whether ‘the added facts are substantially the same as the facts already pleaded will be a question of degree, and will depend on the nature and extent of the existing pleaded case, the facts sought to be added in and the relief already sought’: Camilleri v Trust Company (Nominees) Ltd [2015] FCA 1138 at [11] (Middleton J). As to instances where reliance was placed upon r 8.21(1)(g) see Captiv8 Pty Ltd (in liq) v Bodger [2018] FCA 1801 at [54] (Gleeson J); Bryant (Liquidator) v L V Dohnt & Co Pty Ltd, Re Gunns Ltd (in liq) (recs and mgrs apptd) [2018] FCA 238 at [67] –[71] (Davies J); and Hastie Group Ltd (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) [2020] FCA 1824 at [27] (Middleton J).
261 Section 180(1) of the Corporations Act provides:
180 Care and diligence—civil obligation only
Care and diligence—directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
262 The standard of care required by s 180(1) of the Corporations Act is assessed objectively, but the Court can take into account the circumstances of a particular director or officer involved, and the circumstances of the company: Termite Resources NL (in liq) v Meadows, Re Termite Resources NL (in liq) (No 2) (2019) 370 ALR 191; [2019] FCA 354 at [181] (White J).
263 In determining whether a director has exercised their powers and discharged their duties with the degree of care and diligence of a reasonable person, the Court can consider (a) the type of corporation, (b) the provisions of its constitution, (c) the size and nature of its business, (d) the board’s composition, (e) the director’s position, responsibilities, experience and skills, (f) the terms on which the director has undertaken to act as a director, (g) the manner in which responsibility for the business of the company is distributed between its directors and its employees, and (h) the circumstances of the specific case: Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [100] (Brereton J).
264 In relation to the level of care and diligence expected of directors, Brereton J in Maxwell noted the following at [101]:
Directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances [ASC v Gallagher]. And while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company [Daniels v Anderson (1995) 37 NSWLR 438 at 495–505 ; 16 ACSR 607, 659–668], they are entitled to rely upon others, at least except where they know, or by the exercise of ordinary care should know, facts that would deny reliance [Re City Equitable Fire Insurance Co; Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785 at 856–8 ; 11 ACLC 1082; (1994) 15 ACSR 1 at 60–2; Daniels v Anderson (1995) 37 NSWLR 438 at 502–504; 16 ACSR 607, 665–6; Re Property Force Consultants Pty Ltd (1995) 13 ACLC 1051 (QSC)].
265 Section 180(1) requires, as a first stage of the inquiry, for the foreseeable risk of harm to be balanced against the potential benefits which could be expected to accrue to the company from the conduct in question. The type of harm is not limited to financial harm but includes harm to all interests of the company: Australian Securities and Investments Commission v Bettles [2023] FCA 975 at [439] (Markovic J).
266 The second stage of the inquiry requires the Court to enquire, when considering the discharge of the duty, what a reasonable person, in the circumstances, would have done by way of response to the foreseeable risk: Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; [2016] FCA 1552 at [397]-[401] (Edelman J).
267 Section 181(1) of the Corporations Act provides:
181 Good faith — civil obligations
Good faith — directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly‑owned subsidiaries.
268 The duty to act in good faith in the best interests of the corporation, and for a proper purpose, are conceptually different duties: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239 at [4456] (Owen J).
269 In Bettles, Justice Markovic at [441] summarised the principles applicable to the consideration of the duty owed under s 181(1) of the Corporations Act, as follows:
(1) the requirements of a duty to act in good faith include that the officer must: (a) exercise their powers in the interests of the company; (b) not misuse or abuse their power; (c) avoid conflict between their personal interests and those of the company; (d) not take advantage of their position to make secret profits; and (e) not misappropriate the company’s assets for themselves: Chew v R (1991) 4 WAR 21 at 49; Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789 at [419];
(2) the case law remains unsettled as to whether establishing a contravention of s 181(1)(a) of the Corporations Act requires establishing that a director engaged deliberately in conduct which he or she knew was not in the company’s best interests or whether it is determined objectively, involving an assessment by the Court of what is reasonable in the circumstances: Re Colorado Products at [420]; Hanwood Pastoral Co Pty Ltd v Kelly (No 2) [2022] FCA 850 at [142];
(3) nevertheless, it is well-established that an allegation of breach involves both subjective and objective elements: subjective in the enquiry as to the director’s subjective purpose, and objective in the assessment of whether that purpose was improper: Termite Resources at [194]; United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347 at [641]; Australian Securities and Investments Commission v Flugge (2016) 342 ALR 1; [2016] VSC 779 at [1976]; and
(4) in considering whether s 181(1) of the Corporations Act has been breached, the Court seeks to balance “the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question”: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450 (per Ipp J); Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [465], [479].
270 Section 182(1) of the Corporations Act provides:
182 Use of position—civil obligations
Use of position—directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E)
271 The test of whether conduct is improper is objective: R v Byrnes (1995) 183 CLR 501 at 514 and 515 (Brennan, Deane, Toohey and Gaudron JJ). The conduct of a director will be considered improper if it breaches the standards of conduct that would be expected of a person in their position by reasonable persons with knowledge of the duties, powers and authority of their position as directors, and in the circumstances of the case, including the commercial context: Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18; [2005] HCA 78 at [35] (Gleeson CJ, Gummow, Kirby, Hayne and Callinan JJ).
272 It is not necessary for the contravention to be found for the detriment to have occurred, or the advantage to have been gained: United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347 at [644] (Elliott J).
273 The plaintiffs submit that the payments that the defendants caused the Company to make for their benefit in the period from 30 June 2014 to the date of the appointment of a liquidator to the Company included payment of personal credit cards, taxation payments, interest payments and directors’ drawings. They submit that those payments were made at a time that the Company was insolvent, provided no benefit to the Company and promoted the defendants’ personal interests.
274 They submit that by reason of causing the Company to make those payments, the defendants breached their statutory duties as directors and thereby contravened s 180(1), s 181(1) and s 182(1) of the Corporations Act.
275 In answer to the defendants’ submissions that the Court should not grant leave to permit the directors’ duties claim to be brought because it was statute barred, the plaintiffs submit that it is not a new claim. They submit that (a) by the originating process they sought, inter alia, to recover $598,280 from the defendants by way of loans, declarations as to breaches of directors duties and an order for compensation under s 1317H of the Corporations Act, (b) by their original statement of claim they alleged breaches of directors’ duties by the defendants, (c) the defendants’ complaint appears to rise no higher than a complaint that the plaintiffs failed to plead a distinction between amounts that the defendants became liable for before and after 1 July 2014, and (d) the practical effect of the amendments was to limit the scope of the alleged entitlement to amounts incurred after 30 June 2014.
276 The defendants submit that the largest proportion of the payments made to them in the Impugned Period were for wages and the balances were consistent with the Company “tracking amounts paid for the partnership, the company or the directors personally, so that a reconciliation could be done at the end of the financial year”. They submit that in these circumstances there can be no breach of duty by the defendants as the payments were made in the ordinary course of business “as it had been conducted, profitably, in recent years”.
277 The defendants submit that the plaintiffs’ claim for repayment of advances made by the Company to the defendants in the Impugned Period, and for compensation under s 1317H of the Corporations Act for breach of duty in relation to those advances, is not maintainable under s 14(1)(a) of the Limitation Act and s 1317K of the Corporations Act.
278 They submit that the claims for contraventions of directors’ duties by the plaintiffs in respect of advances made in the Impugned Period took effect on 17 June 2021, the date the ASOC was filed.
279 The defendants submit that the Restated Directors’ Duties Contraventions do not arise out of the same facts or substantially the same facts as those already pleaded. They submit that the Restated Directors Duties’ Contraventions as alleged in paragraph 11(g1) of the ASOC and the claims for a compensation order were commenced more than six years after the contravention and were thus statute barred pursuant to s 1317K of the Corporations Act.
280 The defendants further submit that the Court should not find the date of the amendments to the statement of claim relate back to the earlier date because (a) there was no evidence of any justification for the delay by the plaintiffs in bringing claims in relation to payments made to or on behalf of the defendants after 30 June 2014 (FY2015 advances), (b) the discretion to extend time must be exercised in the context of the rationales for the existence of limitation periods, (c) the plaintiffs were permitted to go to trial on their claims in relation to the FY2015 advances on the basis that the advances were covered by the alleged Div 7A Loan Agreement or had been confirmed by repayment, (d) the defendants have had difficulties remembering events and obtaining documents relevant to their defence due to the delay in the plaintiffs advancing claims with respect to the FY2015 advances, and (e) the claims in relation to the FY2015 advances are substantially new claims and do not overlap with facts already pleaded.
281 The ASOC introduced claims for repayment of “$102,157.28 or 50% of $102,157.28” against each defendant with respect to net advances of $102,157.28 made to them or for their benefit during the Impugned Period. That figure is the net amount of the payments shown in the table at paragraph 11(g1) of the ASOC. It was alleged in the ASOC that by authorising or permitting those payments to be made, at a time the Company was insolvent, the defendants contravened s 180(1), s 181(1), s 182(1) and s 183(1) of the Corporations Act. There were no other facts alleged that constituted the cause of action for repayment of those amounts.
282 The Restated Directors’ Duties Contraventions were supported by Mr Stone’s affidavit affirmed on 24 November 2021, in which he gave evidence that $114,722.16 was advanced by the Company to the defendants for personal expenses and was not accrued to the shareholder loan ledgers at the date of liquidation.
283 I am satisfied that the Restated Directors’ Duties Contraventions are not statute barred. In my view the specific claims that the plaintiffs seek to advance against the defendants in respect of payments that the Company made to them or on their account in the Impugned Period arose out of the same facts or substantially the same facts that had already been pleaded.
284 The originating process filed by the plaintiffs in these proceedings on 29 June 2020 sought, inter alia, (a) a declaration that the defendants, as directors of the Company, contravened s 180(1), s 181(1), s 182(1), s 183(1), s 588G(2) and s 588G(3) of the Corporations Act, (b) a declaration that the conduct of the defendants, as directors and shareholders of the Company, contravened s 598 of the Corporations Act, (c) judgment against the defendants in the amount of $598,280 for shareholder loans payable to the Company, (d) a declaration that the loans and the subsequent actions of the defendants in their capacity as directors and shareholders of the Company caused the Company to trade whilst insolvent from at least 30 June 2013, and (e) an order for compensation pursuant to s 1317H of the Corporations Act.
285 In substance, the proceedings from the outset, were directed at the conduct of the defendants, as directors and shareholders in permitting the Company to trade and incur debts and make payments while it was insolvent. The proceedings were advanced on the basis that the Company was insolvent from at least, 29 April 2013 and continued to be insolvent until the appointment of a liquidator on 6 February 2015.
286 I accept that it was not until the ASOC was filed that the specific payments alleged to give rise to the Restated Directors’ Duties Contraventions were identified. In substance, however, the identification of those specific payments narrowed the scope of the compensation that the plaintiffs were seeking with respect to the directors’ duties statutory contraventions originally sought in the statement of claim.
287 It was alleged in paragraph 11 of the statement of claim, filed on 12 August 2020, that the defendants had contravened s 180(1), s 181(1), s 182(1), 183(1), s 588G(2) and s 588G(3) of the Corporations Act, including by:
(f) Failing to consider whether the withdrawal of funds from the Second Plaintiff was in the best interests of the Second Plaintiff;
(g) By allowing the Second Plaintiff to trade whilst insolvent from at least 29 April 2013;
(h) By improperly using their position and the information available to them as Directors of the Second Plaintiff to gain an advantage for themselves or someone else which ultimately caused detriment to the Second Plaintiff;
288 The following loss and damage was alleged in paragraph 12 of the statement of claim to have been suffered by the Company by reason of the breach of the defendants’ statutory duties contraventions:
(i) The sum of $598,280.00 from the First and Second Defendants in respect of the funds withdrawn by the Defendants from the Company.
(ii) The sum of $415,439.44 from the First and Second Defendants in respect of the loss to creditors of the Company.
(iii) Compensation against the First and Second Defendants pursuant to section 1317H of the Act.
(iv) Further, or in the alternative to 12(i) above, equitable damages or an account of profits against the First and Second Defendants.
289 The conduct pleaded in the statement of claim at paragraphs 11(f) to (h) was not confined to any particular debts or payments and was pleaded in addition to the alleged shareholder loans pleaded at paragraph 11(d) and (e). Moreover, the relief sought in the statement of claim at paragraph 12 included compensation pursuant to s 1317H, in addition to the sums advanced under the alleged shareholder loans and losses suffered by creditors.
290 For the foregoing reasons, I am satisfied that the alleged Restated Directors’ Duties Contraventions are to take effect from the date that the proceedings were commenced, namely 30 June 2020, rather than the date that the ASOC was filed. As a consequence, the Restated Directors’ Duties Contraventions are not statute barred pursuant to s 1317K of the Corporations Act.
E.5.2. Advances made to defendants during the Impugned Period
291 I am satisfied that each of the advances identified by the plaintiffs were made to the defendants or on their behalf after 30 June 2014. The more relevant question is whether the payments were made in breach of the defendants’ statutory directors’ duties.
292 It is first necessary to exclude from the plaintiffs’ statutory directors’ duties contravention claims the amounts recorded as debits to account 2-1030. These debits have already been taken into account as advances by way of shareholder loans to the defendants, as have corresponding credits to that account as constituting repayments of shareholder loans. Moreover, as explained at [212]-[214] above, the debits and credits in account 2-1030 in the period 1 July 2014 to 6 February 2015 resulted in a net credit, not debit, to the account. In those circumstances, I do not accept that there is any loss to the Company as a result of the debit and credit entries on that account.
293 The balance of the credits and debits otherwise relied upon by the plaintiffs as comprising the further payments to the defendants, or on their behalf, as shareholder loans, after 29 June 2014 are summarised in the following table:
Date | Memo | Debit | Credit |
I Jul 2014 - 5 Dec 2014 | Andy & Nat Credit Card Repayments | $11,493.45 | |
1 Jul 2014 -17 Oct 2014 | Andy ATO | $5,200.00 | |
3 Jul 2014 - 15 Oct 2014 | Steve ATO | $7,785.75 | |
3 Jul 2014 -11 Dec 2014 | Director Drawings | $74,503.96 | |
6 Jul 2014 -11Dec 2014 | Steve Interest Ironbark | $9,613.00 | |
6 Jul 2014 -11 Dec 2014 | Andy and Nat Macquarie | $4,940.00 | |
4 Aug 2014-3 Dec 2014 | Aussie Credit Card – Steve Mizzi | $1,186.00 |
294 Of the debits set out in the table above, in my view the payments to the ATO and Stephen Mizzi’s Aussie Credit Card were neither payments to the defendants nor in any relevant sense, payments made on their behalf. As I have concluded above, given the categorical denials of both defendants, I do not accept that the plaintiffs have established that the credit card reimbursements extended to personal expenses of the defendants. In my view, the payments to the ATO and the credit card reimbursements were both meeting expenses of the Company that had been incurred in the normal course of its operations and could not be characterised as payments made in breach of the defendants’ statutory directors’ duties.
295 The most significant of the remaining payments is the amount of $74,503.96 for directors’ drawings. This amount is the aggregate of debits in the “Directors Drawings” account 2-9000 in the period from 3 July 2014 to 11 December 2014. Typically, these amounts were recorded at weekly or fortnightly intervals in groups of three debits, each with the notation “A Mizzi and S M[izzi]” in amounts of $1,819.08, $1,519.08 and $300.00.
296 The payments to the defendants of these amounts by way of directors’ drawings and the interest payments for Stephen Mizzi and the Macquarie payments for Andrew Mizzi and his wife (Impugned Payments) are corroborated in the CBA bank statements. By way of example, the payment recorded in the CBA bank statements of $4,398.16 made on 11 September 2014 with the notation “Direct Credit 301500 Ironbark Blacksm Co Director transfers” can be reconciled against the following debit entries recorded in the MYOB accounts as at that date:
Account | Debit |
2-9000 (Directors Drawings) | $1,819.08 |
2-9000 (Directors Drawings) | $1,519.08 |
2-9000 (Directors Drawings) | $300.00 |
2-9001 (Andy and Nat Macquarie) | $260.00 |
2-1028 (Steve Interest Ironbark) | $500.00 |
Total | $4,398.16 |
297 The Impugned Payments can be contrasted with the wages and salaries paid to employees of the Company as recorded in account 6-2430 that was named “Wages & Salaries” in the general ledger in the MYOB files. Further, I note that in both FY2013 and FY2014, debits were included in account 6-2450 that was named “Employee Superannuation” in the general ledger in the MYOB files with the notation “Wages” for both Andrew Mizzi and Stephen Mizzi but no entries for the defendants were made in that account for the period 1 July 2014 to 6 February 2015.
298 I am satisfied that the $89,056.96 increase in the shareholder loans to the defendants made by the Impugned Payments, at a time when the Company was insolvent, gave rise to the following contraventions of the defendants’ statutory directors’ duties.
299 First, a contravention of s 180(1) of the Corporations Act by failing to act with due care and diligence by causing or failing to prevent the Company from entering into transactions that did not produce any benefit to the Company. The inability of the Company to meet its substantial debts to the ATO as and when they had fallen due gave rise to a serious and imminent risk of insolvency and for claims to be brought by creditors. A reasonable person in the position of the defendants, particularly given their limited financial knowledge, would have sought specific legal and financial advice as to the financial position of the Company. A reasonable person would not simply rely on an accountant to tell them if there were any matters for concern that might be relevant to whether the Company could or should continue to trade and incur further liabilities and continue to make significant payments and advances to the defendants or on their behalf.
300 Second, a contravention of s 181(1) occurred when there was a real and substantial possibility of a conflict between their personal interests and the best interests of the Company and therefore, the defendants were not acting in the best interests of the Company.
301 Third, a contravention of s 182(1) of the Corporations Act, in that the defendants improperly used their positions as directors to gain an advantage for themselves. In my view, their conduct breached the standards of conduct that would be expected of a person in their position by reasonable persons with knowledge of the duties, powers and authority of their position as a director, given that the further advances on the shareholder loans were made at a time when the Company was insolvent. Further, it is significant that the payments were not characterised as wages or the payment of dividends, thus avoiding the need for the defendants to declare them as income.
302 The plaintiffs contend that in the period between 29 April 2013 and the appointment of a liquidator to the Company on 6 February 2015 (Relevant Period) the defendants caused the Company to incur debts in an aggregate amount of $396,845.44 at a time when the Company was insolvent and that a reasonable person in the position of the defendants would have suspected that the Company was insolvent during that period.
303 The defendants deny that the Company was insolvent in the Relevant Period, deny that a reasonable person in the position of the defendants would have suspected that the Company was insolvent during that period and otherwise submit that the plaintiffs have failed to prove that the debts alleged by the plaintiffs were incurred by the Company or remain outstanding.
304 Section 588G of the Corporations Act relevantly provides:
(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.
…
(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.
305 In order to establish a contravention of s 588G(2) of the Corporations Act against a person, it is therefore necessary to prove at the time that a debt is incurred by a company:
(a) the person was a director of the company when the company incurred the debt;
(b) the company was insolvent or would become insolvent by incurring the debt;
(c) there were reasonable grounds for suspecting that the company was insolvent or would become insolvent by incurring the debt;
(d) the debt was incurred after the commencement of the Corporations Act; and
(e) the person was aware that there were grounds for suspecting that the company was insolvent or would become insolvent by incurring the debt or a reasonable person in a similar position to the person would be so aware.
306 The inquiry in s 588G(1)(c) of the Corporations Act is not concerned with the particular director. It is an inquiry into the objectively formed state of mind of a person of ordinary competence. The director’s knowledge of and participation in the incurring of the debts plays no part in the inquiry: Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831 at [249] (Barrett J).
307 Suspecting is one of suspicion, which is something less developed and less well formulated than expectation: Edwards at [250].
308 “Reasonable” in this context imports the standard of reasonableness appropriate to a director of reasonable competence and diligence, seeking to perform their duties as imposed by law, when viewed as a whole, and capable of reaching a reasonable informed opinion as to the company’s financial capacity: Smith v Bone (2015) 104 ACSR 528; [2015] FCA 319 at [367] (Gleeson J).
309 Section 588G(2)(a) of the Corporations Act requires proof of a subjective awareness by the director of grounds, whether or not the director had a subjective suspicion of insolvency, which may be objectively characterised as reasonable grounds for suspecting insolvency. In the alternative, it must be established that a reasonable person would be aware of the existence of reasonable grounds for suspecting insolvency. It does not matter that a particular director was not so aware: Australian Securities and Investments Commission v Plymin [2003] VSC 123 at [426] (Mandie J).
310 Reasonable grounds is more than a mere idle wondering whether it exists, it is a positive feeling of actual apprehension amounting to a slight opinion, but without sufficient evidence: Plymin at [427], citing Queensland Bacon Pty Ltd v Rees (1965) 115 CLR 266 at 303 (Kitto J).
311 Section 588H(2) of the Corporations Act provides:
(2) It is a defence if it is proved that, at the key time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.
312 An expectation for the purposes of s 588H(2) requires a higher degree of certainty than mere hope or possibility. The defence requires an actual expectation that the company was, and would continue to be solvent, and the grounds for expecting so are reasonable: Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581 at [67] (Austin J).
313 Section 588M provides that the liquidator of a company may recover from a director, as a debt due to the company, an amount equal to the amount of the loss or damage suffered by reason of a contravention of s 588G(2).
F.3. Was the Company insolvent during the Relevant Period?
F.3.1. Plaintiffs’ submissions
314 The plaintiffs rely upon both actual insolvency and presumed insolvency.
315 As to presumed insolvency, the plaintiffs submit that the Company contravened s 286 of the Corporations Act by failing to keep sufficient financial records to correctly explain its transactions, financial position and performance and to enable true and fair statements to be prepared.
316 As to actual insolvency, the plaintiffs rely on Mr Stone’s solvency reports dated 19 November 2021 and 28 November 2022. The defendants relied upon the solvency report of their forensic accountant, Ms Lindsay, dated 17 August 2022.
317 The plaintiffs submit that to the extent that Ms Lindsay disregarded or discounted debts to the ATO on the basis that the Company had entered into a payment plan or a file note of the ATO suggested there was a chance of a payment plan, she was mistaken because payment plans do not vary the time at which a liability to the ATO is due and payable.
F.3.2. Defendants’ submissions
318 Notwithstanding the evidence of Ms Lindsay, the defendants deny the Company was insolvent in the period between 29 April 2013 and 6 February 2015.
319 In summary, they submit that the Company (a) continued to trade and generate cashflow up to the winding up of the Company on 6 February 2015, (b) traded at a profit in all years between 2010 and 2014, other than a $41,762 pre-tax loss in 2013, (c) consistently paid all its creditors over that time, (d) as at 30 June 2012, had an adjusted current ratio of greater than 1, (e) after 30 June 2013 obtained more debt capital from a factoring provider, Omniveta and a hire purchase for $53,678 for a Ford Ranger, (f) a winding up application on 27 June 2013 by the Workers Compensation Nominal Insurer was defeated because the outstanding debt of $17,182 was paid by the Company, (g) the rent paid by the Company fell from about $18,000 to $22,000 per month to about $4,300 following the sale of the Partnership’s premises, (h) the Partnership began financially supporting the Company after the sale of the Factory and in FY2014 made net advances to the Company of approximately $200,000.
320 The defendants seek to address the Company’s outstanding liability to the ATO by submitting that (a) its financial position had improved significantly since its move to the new leased premises following the sale of the Factory, as outlined in its letter to the ATO on 13 August 2014, (b) its only debt of concern was its debt to the ATO, but (c) it had not “got back on its feet” at the time it received a winding up application from the ATO in November 2014. They submit that the Company could not meet the ATO debt at that time because of its inability to recover an amount of $60,000 to $80,000 from Integrated Construction Management Group, a delay in the payment of a retention amount for a contract with Mirvac for the Harold Park Precinct and moving costs associated with its move to the new factory. They submit that it was only because of those matters and a “hardening” of the ATO’s position that the Company was not “able to draw on all its resources, pay the ATO at that particular moment and continue trading what was otherwise a profitable business”.
321 I am satisfied that the Company contravened s 286 of the Corporations Act by failing to keep written financial records that correctly recorded and explained its transactions, financial position and performance and that would enable true and fair financial statements to be prepared and audited.
322 Mr Stone gave evidence of the nature and scope of the enquiries and requests he made to seek to obtain access to the Company’s financial records. After reviewing the material produced in response to those enquiries and requests, the unchallenged evidence of Mr Stone is that the Company failed to have or keep the following documents:
(a) lease(s) for the Company’s trading premises;
(b) documents regarding debtor factoring arrangement entered into with Omniveta;
(c) loan agreements;
(d) correspondence with the Company’s accounting and legal advisors;
(e) electronic backups of Company emails, computers and servers;
(f) debtor records including invoices, statements and correspondence;
(g) creditor files including trade credit account applications, purchase orders, delivery dockets, invoices, statements and correspondence;
(h) fixed assets register;
(i) depreciation schedule;
(j) stock listings;
(k) cash records including cash receipts journal, bank deposit books, cash payments journal, cheque butts and petty cash records;
(I) bank statements prior to 2010;
(m) bank reconciliations;
(n) MYOB management account file backups prior to the 2012 financial year; or
(o) working papers and other documents needed to explain the methods by which the financial statements are made up and adjustments to be made in preparing the financial statements.
323 For present purposes, the absence of bank statements prior to 2010 and MYOB management account file backups prior to FY2012 are not determinative, but the absence of the balance of the financial records in my view is sufficient to constitute a contravention of s 286 of the Corporations Act. In turn, the contravention of s 286 of the Corporations Act gives rise to a presumption of insolvency pursuant to s 588E(4) of the Corporations Act, including during the Relevant Period.
324 Further, I am satisfied that at all times during the Relevant Period, the Company was not able to pay all its debts as and when they became due and payable and thus it was insolvent pursuant to s 95A(2) of the Corporations Act.
325 While the Company was generally profitable during the period 30 June 2010 to 30 June 2014 (with the exception of the year ended 30 June 2013), the Company held insufficient funds to meet its tax liabilities. Further, the Company held a negative net asset position during the period 30 June 2010 to 30 June 2014 (with the exception of the year ended 30 June 2012).
326 Moreover, the amount outstanding on the Company’s integrated client account with the ATO (Integrated Client Account) increased from $78,524.84, at the commencement of the Relevant Period, to $235,473.42, at the end of the Relevant Period. In the same period, the amount outstanding on the Company’s Income Tax Account 551 (Income Tax Account) reduced, but $21,700.82 remained outstanding as at 5 February 2015.
327 On 4 and 5 March 2013, the ATO agreed to enter into payment arrangements with the Company for it to pay its outstanding tax liabilities on the Income Tax Account and the Integrated Client Account, respectively. By 29 April 2013, however, the Company had defaulted on the Income Tax Account payment arrangement. The Company also failed to comply with Integrated Client Account payment arrangements shortly after the ATO had agreed accept those arrangements. Although the Company paid the first two monthly instalments of $1,000 in March and April 2013, it failed to pay the May 2013 instalment when it was due. On 15 May 2013, the ATO accepted a request from the Company for a new payment arrangement for the Integrated Client Account but on 6 June 2013, the ATO refused a request by the Company for a further payment arrangement with respect to both the Income Tax Account and the Integrated Client Account. On 1 July 2013, the ATO informed the Company that it has issued a garnishee notice to the CBA with respect to its then outstanding liability to the ATO of $180,439.48. On 9 September 2014, the ATO formally refused another request from the Company to pay the debts outstanding on the Income Tax Account and the Integrated Client Account by instalments.
328 I am satisfied that at no time during the Relevant Period was the Company in a position to pay its outstanding tax debts in full or make any material reduction in the amounts outstanding. Ms Lindsay, the defendants’ expert, concluded in her principal report that the insolvency of the Company from 6 June 2013 to 9 September 2014 and 9 October 2014 to 6 February 2015 was largely determined by what she described as “the ATO’s intention to classify the Company’s debt as immediately payable”. Ms Lindsay excluded the period between these two periods on the basis that during that period “the ATO was prepared to enter into another payment plan arrangement”.
329 The Company’s outstanding indebtedness to the ATO, however, remained due and payable throughout the whole of the Relevant Period, in the absence of any formal agreement to defer or stay the debt. Moreover, as explained at [327] above, for much of the period the ATO declined requests from the Company to enter into agreements for payments to be made by way of instalments.
330 The agreements for payments to be made by way of instalments were entered into pursuant to s 255-15 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TA Act).
331 Section 255-15 is contained within Subdiv 255-B of Sch 1 of the TA Act. That subdivision is headed “Commissioner’s power to vary payment time” and contains the following three sections:
255-10 To defer the payment time
Deferrals for particular taxpayers
(1) The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a *tax-related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly.
Note: General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5-15(a) of the Income Tax Assessment Act 1997.
(2) The Commissioner must do so by written notice given to you.
Deferrals for classes of taxpayers
(2A) The Commissioner, having regard to the circumstances of the case, may, by notice published on the Australian Taxation Office website, defer the time at which amounts of a *tax-related liabilities are, or would become, due and payable by a class of taxpayers (whether or not the liabilities have already arisen).
(2B) If the Commissioner does so, that time is varied accordingly.
(2C) A notice published under subsection (2A) is not a legislative instrument.
Deferral does not affect time for giving form
(3) A deferral under this section does not defer the time for giving an approved form to the Commissioner.
Note: Section 388-55 allows the Commissioner to defer the time for giving an approved form.
255-15 To permit payments by instalments
(1) The Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a *tax-related liability by instalments under an *arrangement between you and the Commissioner (whether or not the liability has already arisen).
(2) The *arrangement does not vary the time at which the amount is due and payable.
Note: Despite an arrangement under this section, any general interest charge or other relevant penalty, if applicable for any unpaid amount of the liability, begins to accrue when the liability is due and payable under the relevant taxation law, or at that time as varied under section 255-10 or 255-20.
255-20 To bring forward the payment time in certain cases
(1) If the Commissioner reasonably believes that you may leave Australia before the time at which an amount of a *tax-related liability becomes due and payable by you, the Commissioner may bring that time forward. If the Commissioner does so, that time is varied accordingly.
Note: General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5-15(a) of the Income Tax Assessment Act 1997.
(2) The Commissioner must do so by written notice given to you.
332 An arrangement made pursuant to s 255-15 of the TA Act does not vary the time at which a liability to the Commissioner is due and payable, as is made clear by s 255-15(2): Clifton (Liq) v Kerry J Investment Pty Ltd t/as Clenergy (2020) 379 ALR 593; [2020] FCAFC 5 at [504]-[505] (Besanko, Markovic and Banks-Smith JJ). In contrast, s 255-10 of the TA Act permits the Commissioner to defer the time at which a tax related liability “is, or would become, payable” and s 255-20 of the TA Act provides that the Commissioner may bring forward the time at which a tax related liability becomes “due and payable”.
333 The reasoning of the Full Court in Clifton with respect to s 255-15 of the TA Act was obiter, as made clear by their Honours at [207]-[208] but it was a considered statement of principle by an intermediate appellate court. In Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036 at [39], Black J accepted that Clifton supported the proposition that in the absence of a formal deferral of a debt due to the Commissioner, the debt remained due and payable, and on no view, could it be regarded as plainly wrong, given the express terms of s 255-15(2) of the TA Act.
334 The Full Court in Clifton rejected a submission by the respondent that the term “due and payable” in s 255-15 of the TA Act had a narrower meaning than the term when used in s 95A of the Corporations Act for the purpose of assessing insolvency. Their Honours stated at [515]:
The description of debts as due and payable is used widely in the TA Act in the context of when a liability to pay tax accrues and when payment of that liability is due. We agree with the primary judge that the term due and payable is well known. Section 95A of the Corporations Act provides that A person is solvent if, and only if, the person is able to pay all the persons debts, as and when they become due and payable. Nothing in s 95A of the Corporations Act qualifies the meaning of the term. As is well recognised, part of the exercise required by s 95A in assessing solvency is a consideration of the terms of each relevant debt and whether it is due and payable at the relevant time the subject of consideration. Part of that consideration includes ascertaining and reviewing the contractual terms relevant to any obligation that arises under contract and a consideration of the relevant statutory terms where, as here, an obligation arises under statute. Section 255-15 clearly informs the question of when a liability is due and payable where there is a payment arrangement, just as s 255-10 informs the question of when a liability is due and payable where there has been a deferral granted by the Commissioner. There is nothing in that process that requires or suggests that due and payable in s 255-15, or indeed Subdivision 255-B of the TA Act, has any particular or confined meaning.
335 Much of the defendants’ submissions seeking to contest insolvency by reason of the outstanding tax debts could be best characterised as an appeal to commercial reality, hardship and implied waiver. Similar submissions were rejected in Clifton. As their Honours stated at [517]:
One can well understand that directors of a company might find it incongruous that having secured an arrangement for payment by instalments they remain obliged to take the full liability into account when considering whether the company is able to pay all of its debts on a particular date. At least in the case of contractual debts some latitude in the time for payment might influence the question of whether a debt is due and payable at a certain time: Lewis v Doran at [106]. However, here we are concerned with a debt arising under statute and where the only relevant arrangement as to payment arises in accordance with statutory terms (that is, s 255-15).
336 In the course of considering arguments based on commercial reality or waiver advanced by the respondent in Clifton, their Honours referred at [525] to the statement by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473; [2008] HCA 41 at [44] (Gummow ACJ, Heydon, Crennan and Kiefel JJ) that perceived hardship to a taxpayer in treating them as having to pay tax that has been assessed when an objection has not yet been decided upon was not a basis for the Court to narrow the operation of a statute by reference to business convenience or similar considerations. Their Honours also referred at [520] and [523] to the statements by Palmer J in Hall v Poolman [2007] NSWSC 1330 at [91] and [110] that a director could not disregard a clear and unequivocal statutory statement that a debt remained due and payable by an appeal to commercial reality, and absent an agreed deferment or stay, the debt could not be treated only as a contingent liability.
337 Their Honours concluded in Clifton at [534]-[537]:
We accept, as noted by Palmer J, that the approach in s 255-15 reflects a deliberate legislative policy that regardless of entry into an arrangement, the debt remains due and payable. This is particularly clear where, in contrast, the surrounding provisions permit deferral of liability (s 255-10 and s 255-20).
We do not consider the fact that insolvency is to be determined for the purpose of or in accordance with the Corporations Act justifies any different result. Although the Court in both Hall v Poolman and Broadbeach considered the statutory liability under the tax legislation in the context of different provisions of the Corporations Act, it is relevant that those Corporations Act provisions related to insolvency.
Further, in both cases the Court referred to the perception that a result might be harsh in circumstances where there remains a pending review process as to disputed liability. Regardless, the Court found in those cases that potentially deleterious consequences, where there might ultimately be no liability at all, did not justify departure from a strict application of the statutory provisions.
We note that in both Hall v Poolman and Broadbeach the Court considered hardship in the context of a challenge to underlying liability. In this case, liability is accepted (at least for current purposes), and the alleged hardship relates to the consequences on an assessment of solvency where the debts are considered due and payable regardless of the conditional permission granted to pay the liability over time. We do not regard that distinction as justifying any different outcome. Hardship by way of threats to solvency or pressure upon cash flow might arise from treating a liability as due and owing when it might ultimately be found to be not owing (and hardship might arise even where such payment is later reversed), and similarly might arise from treating a debt as immediately due and payable although it might be paid over time.
338 For the foregoing reasons, I am satisfied that the Company was insolvent at all times during the Relevant Period.
F.4. Were there reasonable grounds for suspecting insolvency?
F.4.1. Plaintiffs’ Submissions
339 The plaintiffs submit that the following factors give rise to reasonable grounds for suspecting the Company was insolvent: (a) the income, gross profit and gross profit margin were decreasing from year to year, (b) the Company was unable to meet its taxation liabilities, (c) the Company had a negative net asset position during the period 30 June 2010 to 30 June 2014 (except for the year ended 30 June 2012), (d) the Company’s cheque account displayed negative balances at various points between 1 January 2010 and 6 February 2015, (e) the Company’s credit cards were “maxed out”, (f) creditors of the Company whose goods and services did not affect the delivery of client outcomes were paid on extended terms, (g) the Workers Compensation Nominal Insurer charged late payment fees, and (h) during the period 1 January 2010 to 6 February 2015, the Company’s bank account balance exhibited a debt balance for approximately 204 days.
340 The plaintiffs submit that the Court ought to find that a person with a state of mind of a person with ordinary competence would have suspected that the Company was insolvent at the time each of the debts that they allege were incurred.
F.4.2. Defendants’ Submissions
341 The defendants otherwise seek to rely on the defence provided by s 588H(2) of the Corporations Act to a contravention of s 588G(2). They submit that they had reasonable grounds to expect, and did expect, that the Company was solvent during the period between 29 April 2013 and 6 February 2015. They submit that in addition to the matters outlined above at [319]-[320], the reasonable grounds for expecting the Company was solvent included they had received no indication from their accountant that the Company was insolvent, the ATO had signalled its willingness to enter into payment arrangements in the past with the Company and the liability to the ATO could be discharged through either an amendment to the due date for the outstanding tax or ultimately if required, the proceeds of a large contract or support from the Partnership.
342 Contrary to the contentions of the plaintiffs, I am not satisfied that either of the defendants was aware at any time in the Relevant Period that the Company was insolvent. Both defendants appear to have simply assumed during that period that the ATO would continue to enter into and extend the time for compliance with payment plans, irrespective of any failures by the Company to comply with those plans, and otherwise appeared to approach solvency of the Company on the basis of only checking if there were sufficient funds in the Company’s bank account or on credit cards to pay liabilities that the Company was incurring. The defendants’ lack of any understanding of the Company’s financial position is illustrated by Andrew Mizzi’s evidence in his affidavit affirmed on 29 April 2022:
The only reason I knew we had a winding up notice is because I wanted to lease a new ute for the business. I went to get a lease of my car. The broker told me that there was a winding up notice on the company. I said, “What?”
This was a very big surprise to me and I contacted the accountant.
They said, “Really”. They did not see it coming. That was the owner Andrew Toumazis.
I cannot recall that we had any correspondence from the ATO before that. The first time I heard was off the broker. Steve was just as shocked.
343 I am satisfied, however, that a director of reasonable competence and diligence in the position of the defendants would have suspected that the Company was insolvent at all times during the Relevant Period. Section 588G(2)(b) of the Corporations Act focuses on the information available to a reasonable director at the time debts were incurred.
344 Solvency turns on an ability to meet all debts as and when they fall due for payment, not simply those debts immediately necessary to enable a company to continue to trade. A material and significant debt of the Company was its outstanding indebtedness to the ATO. As explained above, the entry into payment arrangements with the ATO did not cause those debts to no longer be immediately payable. Rather, the payment arrangements, to the extent that the Company may have complied with them, postponed the date by when the ATO may have taken recovery action against the Company. The payment arrangements did not otherwise inoculate the Company from trading insolvent. The necessity to enter into payment arrangements with the ATO because the Company could not meet those liabilities as they fell due for payment did constitute reasonable grounds for suspecting the Company was insolvent. A conclusion reinforced by the Company’s failure to comply with its obligations under those payment arrangements.
345 The absence of any indication from a company’s accountant that the company was insolvent might well be relevant to the question of whether a director was aware that a company was insolvent but is of limited relevance to the question of whether a reasonable person in the position of the director would have grounds to suspect insolvency. Moreover, I do not accept that a reasonable person in the position of the defendants would not have suspected insolvency on the basis that if the outstanding debt to the ATO was demanded, it could be paid from the proceeds of a large contract or support from the Partnership. The first alternative did not rise above speculation and the second proposition is particularly implausible, given the Partnership did not in fact meet the outstanding debt to the ATO or otherwise provide any or sufficient funds to the Company to enable it to meet all its obligations under the payment plans with the ATO.
F.5. Were the alleged debts incurred by the Company?
F.5.1. Plaintiffs’ submissions
346 The plaintiffs allege in the ASOC at [13] that the Company incurred the following debts during the Relevant Period (Alleged Debts):
Priority Creditors | Amount | |
29 Aug 2014 – 5 Feb 2015 | Australian Super | $3,898.21 |
30 Nov 2014 – 5 Feb 2015 | CBUS Superannuation | $4,986.14 |
Total | $8,884.35 | |
| ||
|
| |
|
| |
|
| |
|
| |
Unsecured Creditors | ||
30 May 2014 | Australian Taxation Office | $257,174.24 |
23 October 2014 | Austech Supplies | $772.75 |
21 March 2014 | Bent & Curved Glass | $3,614.00 |
21 November 2014 | Castlecrest Engineering Pty Ltd | $2,651.00 |
31 Aug 2014 – 31 Aug 2015 | CGU Workers Compensation | $10,337.56 |
10 Oct 2014 – 10 Mar 2015 | Central Monitoring Services Pty Ltd | $2,372.70 |
15 November 2014 | Coregas (Previously Linde Gas) | $296.91 |
26 November 2013 | Elite Glass | $2,503.95 |
5 Sep 2014 – 28 Oct 2014 | Forest Accounting & Taxation Services | $9,917.00 |
20 Nov 2014 – 11 Dec 2014 | Hilti | $293.97 |
10 June 2014 | Macquarie Premium Funding | $1,632.32 |
|
|
|
10 January 2014 | Mario & Sons Steel | $5,050.00 |
30 Apr 2013 – 18 Jun 2014 | Mitre 10 Home & Trade | $993.50 |
31 Aug 2014 – 8 Oct 2014 | NQX Transport | $1,020.75 |
8 May 2014 – 12 Oct 2014 | Office National, Merrylands | $384.75 |
11 Mar 2014 – 19 Nov 2014 | Origin Oz | $47,011.99 |
11 November 2014 | Omniveta Australia Pty Ltd | $33,428.52 |
28 Nov 2014 – 28 Jan 2015 | Precision Oxycut | $4,038.13 |
12 Apr 14 – 9 Nov 14 | Pure Drinking Water | $240.00 |
22 October 2014 | Snap Printing | $192.50 |
29 November 2014 | Track Fast | $121.00 |
10 August 2014 | Toll North | $1,189.72 |
28 November 2014 | ||
15 January 2014 | Unaveave Pty Ltd | 1,360.00 |
15 August 2014 | George Weston & Sons | $1,363.83 |
Total |
$387,961.09 | |
Grand Total |
| |
347 The plaintiffs submit that each of the Alleged Debts is substantiated by proofs of debt, invoices and/or entries in an aged payables summary for the Company as at 11 May 2015 that was produced from the MYOB files (Aged Payments Summary).
348 Further, the plaintiffs submit that (a) the Company’s report as to affairs completed by Andrew Mizzi confirms that the Company’s unsecured creditors included the ATO and creditors listed in the creditors ledger and otherwise stated “REF COMPANY BOOK & RECORDS”, and (b) claims by Stephen Mizzi that certain alleged debts were not payable because of the supply of faulty goods or services were not supported by any evidence.
F.5.2. Defendants’ submissions
349 The defendants advance the following challenges to the Alleged Debts.
350 First, the defendants submit that none of the following Alleged Debts appear in the Company’s Aged Payments Summary in the accounts payable system: Castlecrest Engineering ($2,651), CGU workers compensation ($10,337.56), Central Monitoring Services ($2,372.70), Macquarie Premium Funding ($1,632.32), Omniveta Australia ($33,428.52), Toll North ($1,189.72), and George Weston & Sons ($1,363.83).
351 Second, the defendants submit that (a) the proof of debt for CGU claims a debt for workers compensation insurance beyond the period of insolvency through to 31 August 2015, (b) the proof of debt for Central Monitoring Services does not include any documents that substantiate the claim and in particular the reason for the large invoice of $1,815 on 16 December 2014, (c) the Omniveta proof of debt does not substantiate a debt incurred by the company to Omniveta or when that debt was incurred, and (d) the proof of debt for Austech supplies annexed to the 16 June 2023 affidavit of Richard Stone is outside the plaintiffs’ pleaded case.
352 Third, the defendants submit that proofs of debt have not been provided for the following Alleged Debts: Bent & Curved Glass ($3,614), Coregas ($296.91), Elite Glass ($2,503.95), Forest Accounting & Taxation ($9,917), Hilti ($293.97), Macquarie Premium Funding ($1,632.32), Mitre 10 Home & Trade ($993.50), NQZ Transport ($1,020.75), Office National ($384.75), Origin OZ ($47,011.99), Precision Oxycut ($4,038.13), Snap Printing ($192.50), Track Fast ($121) and Unaveave ($1,360).
353 Fourth, the defendants submit that the invoices issued by Forest Accounting that are attached to Mr Stone’s affidavit affirmed on 16 June 2023 do not take into account payments of $500 made by the Company to Forest Accounting on each of 25/07/14, 01/08/14, 14/08/14, 15/08/14, 22/08/14, 12/09/14, 19/9/14, 3/10/14, 10/10/14, 17/10/14 and 20/11/14, and the plaintiffs have included a fee memorandum addressed to “Andrew & Stephen Mizzi” which is not a Company liability.
354 Fifth, the defendants submit that the Court should accept Stephen Mizzi’s evidence that the following alleged debts were not incurred by the Company, principally because the goods or services supplied were faulty: Bent & Curved Glass ($3,614), Office National ($384.75), Origin OZ ($47,011.99), Pure Drinking Water ($240) and George Weston & Sons ($1,363.83).
355 Sixth, the defendants submit that the proof of debt submitted by Australian Super and Cbus Super are based on an estimated payment rate for certain employees for periods up to February 2015, they do not take into account all payments made by the Company, as recorded in the MYOB files, and the Court should accept Stephen Mizzi’s evidence in cross examination that he gave instructions for all superannuation to be paid.
356 Seventh, the defendants submit that not all of the outstanding debt to the ATO was incurred during the period of the Company’s alleged insolvency, in particular a general interest charge that accrued on 17 February 2015 with respect to unpaid amounts that the plaintiffs have not established were incurred during the Relevant Period and general interest charges that were imposed on an income tax assessment as at 3 April 2013.
357 The absence of supporting financial records, in particular, copies of invoices, receipts and contractual documents makes it difficult to reconcile the competing submissions of the plaintiffs and the defendants, and to conclude which of the Alleged Debts were in fact incurred and remain outstanding.
358 Stephen Mizzi gave evidence, unsupported by any documentary evidence, that the debts to Australian Super, Cbus Superannuation and CGU Workers Compensation have been paid, the Alleged Debt to Bent & Curved Glass had not been incurred because the glass supplied was defective and had not been accepted, the balance outstanding to Forest Accounting was incorrect as some payments had been made, the alleged debt to Office National had not been incurred because the goods supplied did not match the agreed description, Origin OZ had agreed to write off the $47,000 cost of the glass to cover the cost of the rectification of the defective glass supplied to the Company, the alleged debt to Pure Drinking Water was not incurred because the goods supplied had not been ordered, and the Alleged Debt to George Weston & Sons was not incurred because the goods supplied were defective and were not accepted.
359 In the circumstances, I have accepted that the Alleged Debts which were recorded in both the Aged Payments Summary and the Report as to Affairs (RATA) were incurred on the dates alleged in the ASOC and remain outstanding.
360 I have approached the determination of the Alleged Debts on this basis because I am satisfied that the Aged Payments Summary in combination with the RATA or proofs of debt supported by invoices are likely to be the most reliable guide to the existence, quantum and current status of each of the Alleged Debts.
361 Further, I accept that Stephen Mizzi has given evidence on oath challenging the existence of many of the Alleged Debts but this evidence is not supported by contemporaneous documents. The absence of any supporting documents and the passage of time since the Alleged Debts have been pleaded to have been incurred significantly diminishes the weight I can give to this evidence. At the same time, I am not prepared to discount this evidence entirely. Hence, in the absence of any evidence from creditors seeking to dispute the defendants’ challenges to Alleged Debts, I am not persuaded that I can reject that evidence where the plaintiffs seek to rely only on the content of proofs of debt, that are not supported by invoices or any other contractual documentation, to substantiate the Alleged Debts.
362 I am, therefore, not satisfied that the Company incurred the Alleged Debts to Australian Super, Cbus Superannuation and Central Monitoring Services. Each of these Alleged Debts was disputed and the plaintiffs rely only on proofs of debt without any accompanying invoices or other contractual documentation.
363 The Company’s indebtedness to the ATO during the Relevant Period is recorded in the Integrated Client Account and the Income Tax Account.
364 The debit balance outstanding in the Integrated Client Account increased from $78,524.84 as at 29 April 2013 to an amount of $235,473.42 as at 6 February 2015. During the Relevant Period, the Integrated Client Account recorded $349,985.53 in debits and $192,219.22 in credits and the Income Tax Account recorded $7,021.24 in debits and $40,519.62 in credits.
365 The Alleged Debt to the ATO included a general interest charge as at 6 February 2015 of $24,450.65 with respect to the Integrated Client Account and $6,020.02 with respect to the Income Tax Account.
366 Further, as explained by Ms Lindsay, if interest, payments and refunds are allocated to the earliest tax debt incurred, the $21,700.82 closing balance of the Income Tax Account as at 6 February 2015 comprised a general interest charge of $6,020.02 and an amount of $15,680.80 being the amount outstanding on the Company’s $44,451.50 FY2012 income tax liability (which was assessed as at 3 April 2013).
367 The FY2012 income tax liability was incurred prior to 29 April 2013 and the plaintiffs have not demonstrated that the underlying tax debts to which the general interest charges applied were incurred wholly or partly during the Relevant Period. It follows, that these amounts cannot be included in the insolvent trading claim sought to be advanced by the plaintiffs.
368 For the foregoing reasons, it is therefore necessary to deduct the general interest charges and the amount outstanding from the FY2012 income tax liability from the Alleged Debts for the ATO as the plaintiffs have not established those debts were incurred in the Relevant Period. The Alleged Debts to the ATO must be reduced to $211,022.77 ($257,174.24 - $6,020.02 - $15,680.80 - $24,450.65).
369 For these reasons, I have therefore concluded that only the following Alleged Debts were incurred by the Company during the Relevant Period and remain outstanding:
Date of Debt | Unsecured Creditors | Amount |
13 May 2013 - 6 Feb 2015 | Australian Taxation Office | $211,022.77 |
23 October 2014 | Austech Supplies | $772.75 |
21 March 2014 | Bent & Curved Glass | $3,614.00 |
21 November 2014 | Castlecrest Engineering Pty Ltd | $2,651.00 |
31 Aug 2014 – 31 Aug 2015 | CGU Workers Compensation | $10,337.56 |
15 November 2014 | Coregas (Previously Linde Gas) | $296.91 |
26 November 2013 | Elite Glass | $2,503.95 |
5 Sep 2014 – 28 Oct 2014 | Forest Accounting & Taxation Services | $9,917.00 |
20 Nov 2014 – 11 Dec 2014 | Hilti | $293.97 |
10 June 2014 | Macquarie Premium Funding | $1,632.32 |
10 January 2014 | Mario & Sons Steel | $5,050.00 |
30 Apr 2013 – 18 Jun 2014 | Mitre 10 Home & Trade | $993.50 |
31 Aug 2014 – 8 Oct 2014 | NQX Transport | $1,020.75 |
8 May 2014 – 12 Oct 2014 | Office National, Merrylands | $384.75 |
11 Mar 2014 – 19 Nov 2014 | Origin Oz | $47,011.99 |
11 November 2014 | Omniveta Australia Pty Ltd | $33,428.52 |
28 Nov 2014 – 28 Jan 2015 | Precision Oxycut | $4,038.13 |
12 Apr 14 – 9 Nov 14 | Pure Drinking Water | $240.00 |
22 October 2014 | Snap Printing | $192.50 |
29 November 2014 | Track Fast | $121.00 |
10 August 2014 | Toll North | $1,189.72 |
15 January 2014 | Unaveave Pty Ltd | 1,360.00 |
15 August 2014 | George Weston & Sons | $1,363.83 |
Grand Total | $339,436.92 |
370 For the foregoing reasons, I am satisfied that the plaintiffs have established that the Company was insolvent at all times during the Relevant Period, that there were reasonable grounds for suspecting that the Company was insolvent at all times during the Relevant Period and that the defendants permitted the Company to incur each of the Alleged Debts listed in [369] above during the Relevant Period in an aggregate amount of $339,436.92.
G. CLAIM FOR RELIEF UNDER S 1317S AND S 1318
371 The defendants contend if the Court finds that the Company was insolvent and there were reasonable grounds to suspect its insolvency, primarily because payment arrangements with the ATO lacked legal effect, then this would be an appropriate case for relief from liability under s 1317S or s 1318 of the Corporations Act.
372 Section 1317S of the Corporations Act provides:
(1) In this section:
eligible proceedings:
(a) means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317GB, 1317H, 1317HA, 1317HB, 1317HC or 1317HE); and
(b) does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA, 1317HB, 1317HC or 1317HE).
(2) If:
(a) eligible proceedings are brought against a person; and
(b) in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
(i) the person has acted honestly; and
(ii) having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.
(3) In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to:
(a) any action the person took with a view to appointing an administrator of the company or Part 5.7 body or a restructuring practitioner for the company; and
(b) when that action was taken; and
(c) the results of that action.
(4) If a person thinks that eligible proceedings will or may be begun against them, they may apply to the Court for relief.
(5) On an application under subsection (4), the Court may grant relief under subsection (2) as if the eligible proceedings had been begun in the Court.
(6) For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a jury:
(a) a reference in that subsection to the court is a reference to the judge; and
(b) the relief that may be granted includes withdrawing the case in whole or in part from the jury and directing judgment to be entered for the defendant on such terms as to costs as the judge thinks appropriate.
(7) Nothing in this section limits, or is limited by, section 1317QC or section 1318.
373 Section 1318 of the Corporations Act provides:
(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.
(2) Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.
(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.
(4) This section applies to a person who is:
(a) an officer or employee of a corporation; or
(b) an auditor of a corporation, whether or not the person is an officer or employee of the corporation; or
(c) an expert in relation to a matter:
(i) relating to a corporation; and
(ii) in relation to which the civil proceeding has been taken or the claim will or might arise; or
(d) a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation.
(5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.
374 Section 1317S and s 1318 make substantially identical provision for relief of persons who may have contravened a civil penalty provision: Smith at [395] (Gleeson J); Hall v Poolman at [313]-[314] (Palmer J).
375 The sections confer a “very wide discretion” on the Court: Hall v Poolman at [315]. The purpose of the provisions is to “excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making”: Daniels v Anderson (1995) 37 NSWLR 438 at 525 (Clarke and Sheller JJA).
376 There are three stages of inquiry, being (a) whether the applicant for relief had acted honestly, (b) whether having regard to all of the circumstances, the applicant ought fairly be excused, and (c) whether the applicant should be relieved from liability wholly or in part, and if partly, to what extent: Smith at [395]; Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430; [2011] FCA 1003 at [84].
377 When considering whether a person has acted honestly for the purposes of s 1317S or s 1318, the Court should only be concerned with whether the person has acted honestly in the ordinary meaning of that term, that is, whether the person acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for themselves or another, and without carelessness or imprudence so as to demonstrate that there has been no genuine attempt at all to carry out the duties and obligations of their responsibilities imposed by the Corporations Act, or the general law: Hall v Poolman at [325].
378 A failure to consider the interests of the company as a whole, or the interests of creditors, may be of such a high degree as to demonstrate failure to act honestly, however, if the failure is the result of error of judgment, no finding of failing to act honestly should be made, but the failure must be taken into account as one of the circumstances that the Court is to have regard to under s 1317S(2)(b)(ii) and s 1318: Hall v Poolman at [325].
379 The plaintiffs submit that the defendants should not be excused from liability from the insolvent trading claims because they did not act honestly. They point to the defendants continuing to take large sums of money for their own benefit while the Company was insolvent, failing to take any steps to understand or determine the Company’s financial circumstances, failing to seek specific accounting advice or any legal advice, and continuing to operate the Company as if it were not insolvent.
380 The defendants submit that they acted honestly by continuing to trade the Company in the period up to the appointment of a liquidator on 6 February 2015. They submit that they had a reasonable expectation that by reducing the Company’s overheads and putting more money into the Company that they would be able to repay the ATO debt. They submit that the Company was otherwise up-to-date in the filing of its tax returns and the directors were providing “frank information” to the ATO. They submit that the ATO was able to protect itself as the Company’s substantial creditor by agreeing (or not) to the proposed payment arrangements.
381 The defendants submit that in all the circumstances, their conduct in entering into a consensual arrangement with the ATO to work out the Company’s debt to the ATO by way of an informal payment arrangement was honest conduct.
382 More broadly, the defendants submit that they should be relieved from any liability pursuant to s 1317S or s 1318 of the Corporations Act for any contravention that the Court might otherwise find of s 588M of the Corporations Act because (a) they were substantially complying with the terms of a payment arrangement offered by the ATO in relation to the integrated client account balance on 15 May 2013, (b) the Company was mitigating the potential loss to the ATO by continuing to trade, (c) they were making voluntary capital contributions to support the Company, (d) the ATO was receptive to further payment arrangements, accepted the voluntary repayments and did not initiate winding up proceedings until later, (e) the defendants were relying on the advice of their accountant up until at the earliest October 2014, and (f) the Company did not incur debts to other creditors that it did not pay.
383 I am not persuaded that the defendants have established any entitlement to relief under s 1317S or s 1318 of the Corporations Act. Their failure to appreciate that the Company was incurring debts at a time when it was insolvent cannot be characterised as a mere error of judgment.
384 I accept that the defendants may well have assumed that the ATO would continue to extend payment arrangements that they had earlier agreed to enter into with the Company. I also accept that the defendants had taken significant steps to reduce the expenses of the business undertaken by the Company, that the Company paid most of its debts within usual trading terms, it was generally trading profitably except for FY2013 and its cash flow problems were exacerbated by builders not paying debts owed to it and delays in the release of retentions.
385 At the same time, the defendants continued to cause the Company to make significant payments to themselves, with no apparent appreciation of the specific basis on which those payments were being made to them. Moreover, the defendants were aware that the Company was unable to comply with its repayment obligations to the ATO by no later than April 2013, and had entered into but then failed to comply with payment arrangements with the ATO, that were not subsequently extended.
386 The defendants were content to rely wholly on Forest Accounting to attend to the Company’s taxation and financial reporting obligations and their own personal taxation returns. With the benefit of hindsight, they now allege that their reliance on Forest Accounting was misplaced.
387 The evidence given by the defendants, both in their affidavits and in cross examination, demonstrates a reckless indifference to their responsibilities as directors of the Company. In attempting to sheet home responsibility to Forest Accounting for the insolvent trading of the Company, the defendants only highlight their failure to appreciate their responsibilities as directors of the Company. They did not make even the most cursory of enquiries of the Company’s financial position, notwithstanding their evidence that they did not consider Forest Accounting was providing any substantive assistance to them or advice as to the Company’s financial position.
388 Stephen Mizzi gave the following evidence about the work undertaken by Forest Accounting for the Company:
Andrew Toumazis was the principal at Forest Accounting. He was always hard to get. He was on the verge of retirement. It was hard to get information from him.
I feel the accountant was more of a good talker than doing the job for us. He would introduce a new accountant every time we would go there until the last time I recall attending in about 2012, and say this is the person looking after your file. He said that he was the wicket keeper. We were getting the wrong advice from him because there were no alarm bells at no time did he ever advise us of any issues.
We used to go to Forest Accounting for an annual meeting and he would have a report there for us and he would pretty much be telling us that everything was alright. The meetings took about 30 minutes and mostly consisted of Andrew talking about himself. The accountants did not scrutinise what was in the MYOB and were very lazy. I have the impression that the accountants took the MYOB and generated financial statements without any consideration. I remember Andrew Toumazis saying, “All we have to worry about is that we do not set up any red flags with the ATO”.
389 Given Stephen Mizzi’s claimed very limited understanding of financial and taxation issues, it is difficult to place much weight on his observations as to the competence of Mr Toumazis, but if that view was genuinely held it is telling that he took no steps to address the concern. The significance of his failure to make further enquiries as to the Company’s financial position is made even more acute because of his evidence that he did not trust the book entries in the Company’s accounts, he relied on Forest Accounting to correct them and he did not review or finalise any of the “draft” financial statements prepared and none of them were used by anyone at the Company.
390 In cross examination, Stephen Mizzi gave the following evidence in relation to his approach to the Company’s taxation returns:
Did you review your taxation returns before you signed them?---No.
Is the reason why you didn’t review your taxation returns because you were receiving advice from your accountant and you were willing to accept that advice, whatever it was?---Yes.
391 Stephen Mizzi also gave evidence that he did not recall signing any financial statements or any declarations to give to Forest Accounting and acknowledged:
We did not have a good accountant. It was never cleaned up really. I understand that Andy and I were ultimately responsible. We were focused on work-in, work-out, get the production happening. The paperwork and the rest of it we left that to people who maybe we should not have.
392 When pressed in cross examination about the operation of the Company’s bank account in 2013 and 2014, Stephen Mizzi gave evidence that he did not “remember the ins and outs of the bank account in 2013”, he did not look at the Company’s bank account, he relied on the bookkeeper if he wanted to know how much money was in the Company’s bank account but he cannot recall how regularly he asked the bookkeeper how much money was in the bank account and when he had to purchase something for the Company he “would ask the bookkeeper, “Can we please pay this”, and it would be paid”. Further, in response to a question whether he asked the bookkeeper whether there were sufficient funds in the bank account to enable the payment to be made, Stephen Mizzi responded that he asked the bookkeeper something along the lines of “I want to pay X, do we have enough money to cover it?”.
393 Andrew Mizzi gave evidence in cross examination that he never reviewed the financial reports of the Company and only relied on the Company’s bank statements to determine whether the company could pay its liabilities.
394 The extent to which Andrew Mizzi failed to take any steps to engage with the financial position of the Company is illustrated in the following exchange in his cross examination:
MR RAFTERY: Is it your case that you just had generally no idea about the income of the business?---Yes.
You generally had no idea of the expenses?---Yes.
You didn’t know whether the company was making a profit?---No.
You didn’t know whether the company was making a loss?---No.
395 Rather, Andrew Mizzi was prepared to accept whatever was recorded by Forest Accounting in the Company’s financial statements and tax returns, as the following exchange makes clear:
HIS HONOUR: Sorry, when you say no, do you mean you weren’t prepared to accept that they were and correct without reviewing them, or do you mean that you didn’t review them?---I didn’t review them, yes.
Was that because you relied on your accountant - - -?---Yes.
- - - who told you that they were fine to be signed?---Exactly.
Yes?---Yes.
MR RAFTERY: And on that basis, you were prepared to accept your accountant’s word?---Yes.
Did they - - -?---Yes.
Yes. You felt no need to review the material yourself?---Mmm.
HIS HONOUR: Sorry. Again, if you wouldn’t mind saying the word?---Yes. Yes. Yes.
Thank you?---Sorry. Yes.
MR RAFTERY: And similarly, in respect of the individual taxation returns, do you say that you were willing to solely rely upon what your accountant had prepared?---Yes.
Yes. You didn’t review the individual taxation returns?---No.
You signed the individual taxation returns, declaring that they were true and correct?---Yes.
And you were prepared to represent that they were true and correct to the Commissioner of Taxation?---Yes.
396 The evidence given by Andrew Mizzi in his affidavit is also telling as to the unreasonableness of his approach to his duties as a director of the Company.
397 He gave evidence that he only attended a yearly meeting with Mr Toumazis and only up until 2012. He stated that Forest Accounting did “not really give much advice at the yearly meetings” and “did not give us much guidance about how we should be running the business”. Moreover, he gave evidence that he did not use the “draft financial statements” prepared by Forest Accounting and he could not recall “ever reviewing them or finalising them”.
398 He also gave evidence that:
My sister Kathy Muscat took the bookkeeping on when Fran left. My sister had no idea what she was doing. My daughter was working there as well and she helped a little bit. We had scaled right back. Kathy worked full-time in the business up to the end.
399 In light of this evidence and Andrew Mizzi’s professed lack of financial knowledge, it is remarkable that he was content (a) not to make further enquiries of Forest Accounting as to the Company’s financial position during the Relevant Period, (b) to rely on his sister to act as the Company’s bookkeeper following the departure of the former bookkeeper and (c) not to seek any legal advice as to the potential consequences of the Company’s failures to comply with its payment plans with the ATO.
400 Moreover, contrary to the defendants’ submissions, the Company was not meeting all its debts, other than the ATO debt, as and when they fell due during the Relevant Period. The Company’s outstanding debts incurred in the Relevant Period that remain outstanding were not limited to the ATO debt. Each of the Alleged Debts identified in [369] above, was entered into during the Relevant Period and remains unpaid.
401 Nor do I accept the defendants’ contention that the Company was mitigating its loss to the ATO by continuing to trade.
402 In the course of oral closing submissions, the defendants’ counsel handed up a schedule summarising amounts paid by the Company that were “over” or “under” the payment obligations in the payment arrangements that the Company had entered into with the ATO. Counsel confirmed that the schedule was relied on only for the purposes of the defendants’ s 1317S defence to the plaintiffs’ claim for compensation caused by the alleged contravention by the defendants of s 588M. Counsel for the defendants submitted that the schedule established that the ATO’s loss was in fact being mitigated during FY2014.
403 Counsel for the defendants sought to tender the schedule, which had been marked MFI 7, as a summary pursuant to s 50 of the Evidence Act 1995 (Cth) (Evidence Act) in the course of his oral closing submissions. I deferred ruling on the tender until counsel for the plaintiffs had been given an opportunity to consider the schedule and the accompanying explanation provided in a three page memorandum and submission explaining how the schedule was prepared. In their reply submissions filed after closing oral submissions the plaintiffs submitted that contrary to the summary undertaken in MFI 7. the indebtedness of the Company increased rather than decreased in the Relevant Period and MFI 7 omitted the amount that remained outstanding to the ATO as at the commencement of the Relevant Period.
404 I am satisfied that in all the circumstances that the application to tender MFI 7 as a summary document pursuant to s 50 of the Evidence Act is misconceived. Section 50 provides for the tender of a summary of material not in evidence. Rather than being a summary of documents not in evidence, MFI 7 is a summary of documents that are in evidence. Its probative weight cannot rise higher than the documents it purports to summarise. MFI 7 will therefore be treated as a submission and its tender is rejected.
405 The stark reality for the defendants is that the outstanding debit balance on the Company’s integrated client account with the ATO increased from $78,524.84 as at 29 April 2013 to a figure of $235,473.42 as at 6 February 2015. The $156,948.58 increase in the outstanding indebtedness was only partially offset by the $33,498.38 ($55,199.20 - $21,700.82) reduction in the amount outstanding on the Income Tax Account during the Relevant Period.
406 For the foregoing reasons, judgment is to be given in favour of the plaintiffs on the shareholder loans, breach of directors’ duties and insolvent trading claims. Orders substantially in the form, but not in the amounts, of the orders sought by the plaintiffs will be made.
I certify that the preceding four hundred and six (406) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley. |
Associate:
