Federal Court of Australia

Hayes (liquidator), in the matter of Container Freight Services Pty Ltd (in liq) v Sinadinos [2024] FCA 885

ORDERS

THE COURT DECLARES THAT:

1.    Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), the first defendant was a director of the second plaintiff within the meaning of the Corporations Act 2001 (Cth) (Corporations Act) between 18 July 2016 and 18 March 2020.

2.    Pursuant to s 1317E of the Corporations Act, the first defendant, by causing or allowing the following:

(a)    payments from the second plaintiff to the first defendant between 4 October 2016 and 7 February 2020, in a net amount of $4,536,409.11;

(b)    payments from the second plaintiff to the second defendant between 10 August 2017 and 1 October 2018, in an aggregate amount of $27,361.34;

(c)    payments from the second plaintiff to ANZ Equipment Rentals Pty Limited (deregistered) between 17 November 2017 and 23 January 2020, in an aggregate amount of $241,780.16; and

(d)    withdrawals from the bank account of the second plaintiff, in an aggregate amount of $173,117,

in circumstances where the payments and withdrawals were made with no discernible commercial or otherwise justifiable reason, contravened:

(e)    s 180(1) of the Corporations Act by failing to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the first defendant’s circumstances, and occupied the office held by and had the same responsibilities within the corporation as the first defendant;

(f)    s 181(1) of the Corporations Act by failing to exercise his powers, and discharge his duties, as a director of the second plaintiff, in good faith and in the best interests of the second plaintiff, or for a proper purpose; and

(g)    s 182 of the Corporations Act by improperly using his position as a director of the second plaintiff to gain an advantage for himself, the second defendant and/or ANZ Equipment Rentals Pty Limited, and to cause detriment to the second plaintiff.

3.    Pursuant to s 1317E of the Corporations Act, the second defendant, by causing or allowing the following:

(a)    payments from the second plaintiff to the first defendant between 4 October 2016 and 7 February 2020, in an aggregate amount of $4,536,409.11;

(b)    payments from the second plaintiff to the second defendant between 10 August 2017 and 1 October 2018, in an aggregate amount of $27,361.34;

(c)    payments from the second plaintiff to ANZ Equipment Rentals Pty Limited (deregistered) between 17 November 2017 and 23 January 2020, in an aggregate amount of $241,780.16; and

(d)    withdrawals from the bank account of the second plaintiff, in an aggregate amount of $173,117,

in circumstances where the payments and withdrawals were made with no discernible commercial or otherwise justifiable reason, contravened:

(e)    s 180(1) of the Corporations Act by failing to exercise her powers and discharge her duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the second defendant’s circumstances, and occupied the office held by and had the same responsibilities within the corporation as the second defendant;

(f)    s 181(1) of the Corporations Act by failing to exercise her powers, and discharge her duties, as a director of the second plaintiff, in good faith and in the best interests of the second plaintiff, or for a proper purpose; and

(g)    s 182 of the Corporations Act by improperly using her position as a director of the second plaintiff to gain an advantage for herself, the first defendant and/or ANZ Equipment Rentals Pty Limited, and to cause detriment to the second plaintiff.

4.    Pursuant to s 1317E of the Corporations Act, the first defendant contravened s 588G(2) of the Corporations Act with respect to the second plaintiff by failing to prevent the second plaintiff from incurring debts in an aggregate amount of $1,619,746.90 at a time when he was a director of the second plaintiff, in circumstances where the second plaintiff was insolvent and there were reasonable grounds for suspecting that the second plaintiff was insolvent.

5.    Pursuant to s 1317E of the Corporations Act, the second defendant contravened s 588G(2) of the Corporations Act with respect to the second plaintiff by failing to prevent the second plaintiff from incurring debts in an aggregate amount of $1,619,746.90 at a time when she was a director of the second plaintiff, in circumstances where the second plaintiff was insolvent and there were reasonable grounds for suspecting that the second plaintiff was insolvent.

tHE COURT ORDERS THAT:

6.    Pursuant to s 1317H of the Corporations Act, by reason of the defendants’ contraventions of s 180(1), s 181(1) and s 182 of the Corporations Act, the defendants are to pay to the second plaintiff, compensation in the amount of $4,978,667.61.

7.    Pursuant to s 588M(2) of the Corporations Act, by reason of the defendants’ contravention of s 588G of the Corporations Act, the defendants are to pay to the first plaintiff, as a debt due to the second plaintiff, the amount of $1,619,746.90.

8.    The defendants are to pay the plaintiffs’ costs of the proceedings.

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

REASONS FOR JUDGMENT

HALLEY J:

A.     Introduction

1    The first plaintiff, Alan Hayes (Liquidator), is the liquidator of the second plaintiff, Container Freight Services Pty Ltd (in liquidation) (Company).

2    The Company was wound up by an order of this Court on 18 March 2020 (Winding Up Date) as a result of winding up proceedings against the Company commenced on 5 February 2020.

3    The first defendant, Peter Sinadinos, and the second defendant, Patricia Kalantzis, also known as Patricia Sinadinos and Yiota Sinadinos, are the former directors of the Company. Mr Sinadinos and Ms Kalantzis are a married couple.

4    The plaintiffs contend in these proceedings that the defendants:

(a)    breached their statutory duties as directors, officers or employees of the Company under s 180(1), s 181(1) and s 182 of the Corporations Act 2001 (Cth) (Corporations Act) and seek compensation for those breaches pursuant to s 1317H of the Corporations Act;

(b)    were involved, within the meaning of s 79 of the Corporations Act, in each other’s contraventions of the statutory duties under s 180(1), s 181(1) and s 182 of the Corporations Act and seek compensation for that involvement pursuant to s 1317H of the Corporations Act; and

(c)    breached their duty to prevent insolvent trading under s 588G of the Corporations Act and seek compensation pursuant to s 588M of the Corporations Act.

5    The plaintiffs rely on an affidavit from the Liquidator sworn on 12 February 2024 together with Exhibit AH-1 to that affidavit, and detailed written and oral submissions from their counsel, Mr R Notley. I have found those submissions to be of considerable assistance in preparing these reasons for judgment. Unsigned transcripts of the public examinations conducted at the request of the Liquidator of the defendants are included in Exhibit AH-1 to the Liquidator’s affidavit. The plaintiffs rely on admissions made by the defendants recorded in those transcripts and they were admitted into evidence only on that basis.

6    The defendants were notified of the hearing but chose not to appear or file any evidence in response to the causes of action advanced by the plaintiffs in these proceedings. Given the seriousness of the allegations advanced by the plaintiffs in the proceedings and the quantum of the claims made against them, the defendants’ failure to advance any evidence in response to the affidavit of the Liquidator and their unexplained failure to attend the hearing is inexplicable.

7    The defendants had been represented by Martin Woods of M J Woods & Co Solicitors. On 16 July 2024, the defendants provided written confirmation to Mr Woods that they had withdrawn their instructions for him to act for them in the proceedings. The defendants made no application or request for any adjournment of the hearing because of their decision to withdraw their instructions to Mr Wood.

8    Further, I note that at a case management hearing of these proceedings on 14 June 2024, Mr L Ang of counsel, who appeared for the defendants on that occasion, advised the Court that the defendants did not propose “at this stage” to lead any evidence in opposition to the relief sought by the plaintiffs in these proceedings.

9    On 28 June 2024, at a further case management hearing, Mr Ang, who again appeared for the defendants, advised the Court that “[w]e’ve been informed that the defendants will be self-represented”, he had been instructed that the defendants are not “contesting the substantive proceedings at this stage” and he had been instructed “to take any day” for the listing of the hearing. Given that indication by Mr Ang, orders were then made at the case management hearing for the exchange of written submissions and for the matter to be listed for hearing on 30 July 2024. No submissions were subsequently filed by the defendants.

10    I note, however, that Mr Notley drew my attention to an affidavit of Mr Woods affirmed on 14 June 2024 that had been filed in response to a foreshadowed but ultimately withdrawn contempt application against the defendants because of the defendants’ failure to comply with orders made by Lee J on 15 February 2024 requiring them to provide asset disclosure affidavits. The affidavit included potentially exculpatory statements relevant to the relief that the plaintiffs are seeking in these proceedings. Given the hearing proceeded in the absence of the defendants, in my view I should have regard to that evidence.

11    As a preliminary matter, the plaintiffs also contend that although Mr Sinadinos was recorded in the records maintained by the Australian Securities and Investments Commission (ASIC) as only being a director of the Company in the period between 18 July 2016 and 3 February 2017, he remained a de facto director or shadow director of the Company in the period between 3 February 2017 and the Winding Up Date. Alternatively, the plaintiffs contend that Mr Sinadinos was an officer or employee of the Company during that period.

12    For the reasons that follow, I have concluded that:

(a)    at all relevant times Mr Sinadinos was a director or de facto director of the Company and Ms Kalantzis was a director of the Company;

(b)    the defendants breached their statutory duties as directors of the Company under s 180(1), s 181(1) and s 182 of the Corporations Act and the plaintiffs are entitled to an order for compensation for the defendants’ contraventions pursuant to s 1317H of the Corporations Act;

(c)    it is to be presumed that the Company was insolvent at all times between its incorporation and its winding up pursuant to s 588E(4) of the Corporations Act by reason of its failure to keep or retain financial records as required by s 286 of the Corporations Act; and

(d)    the defendants breached their duty to prevent insolvent trading under s 588G of the Corporations Act and the plaintiffs are entitled to an order for compensation pursuant to s 588M of the Corporations Act.

B.     De facto or shadow director

B.1.     Overview

13    It is first necessary, as a preliminary matter, to determine the status of Mr Sinadinos in the period between when he is recorded as no longer being a director in ASIC’s records and the winding up of the Company.

14    The Company was incorporated on 20 January 2015 (Incorporation Date).

15    According to records maintained by ASIC:

(a)    Mr Sinadinos was the sole director and secretary of the Company between 18 July 2016 and 3 February 2017; and

(b)    Ms Kalantzis was the sole director and secretary of the Company from 3 February 2017 until the Winding Up Date.

B.2.     Statutory provisions and legal principles

16    Section 9AC(1) of the Corporations Act provides the following definition of a director:

(1) A director of a company or other body is:

(a)     a person who:

(i)     is appointed to the position of a director; or

(ii)     is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position; and

(b)     unless the contrary intention appears, a person who is not validly appointed as a director if:

(i)     they act in the position of a director; or

(ii)     the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation).

17    Section 9AC(1)(b)(i) of the Corporations Act extends the definition of a “director” to include a person who is not validly appointed as a director, if they “act in the position of a director”, generally referred to as a “de facto” director. Section 9AC(1)(b)(ii) of the Corporations Act extends the definition of a director to a person where the directors of the company are accustomed to act in accordance with that person’s instructions or wishes. Such persons are generally referred to as a “shadow” director: In the Matter of ACN 092 745 330 [2017] NSWSC 241 at [33] (Barrett AJA).

18    The Full Court of this Court in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [62]-[76] (Finn, Stone and Perram JJ) provided extensive guidance on the meaning of “de facto” director. The principles identified by the Full Court in Grimaldi were helpfully summarised by Barrett AJA in ACN 092 745 330 at [110]-[113], and can be distilled as follows:

(a)    to be a de facto director, a person must be shown to have assumed or performed functions which only a de jure director or board can properly perform, or which are the sole responsibility of a director or board;

(b)    any comparison of what an alleged de facto director does, however, with the things that are done by duly appointed directors, must take into account the fact that what is to be done in the field of management of business and affairs by an individual director will vary from company to company, according to the particular company’s circumstances;

(c)    the existence of active directors or a properly constituted and apparently functioning board does not preclude a finding that an alleged de facto director was a director;

(d)    whether the company has held the alleged de facto director out as a director will be a relevant, but not decisive, consideration;

(e)    the focus of the consideration is on the way the alleged de facto director operates within the particular corporate governance context, the degree of autonomy exercised, and the appearance (and reality) of authoritative operation as a primary level decision maker for the company;

(f)    it may be useful to direct attention to the following considerations:

(i)    whether the person has assumed responsibility to act as a director;

(ii)    the nature of the corporate governance structure and the position the person occupies within it;

(iii)    what the person actually did, as distinct from any job title;

(iv)    the cumulative effect of the activities relied on, with the whole of the circumstances being looked at “in the round”;

(v)    whether the company regarded the person as a director and held them out as such;

(vi)    whether third parties considered that the person was a director; and

(vii)    whether the person was consulted about or participated in directorial decisions.

B.3.     Submissions

19    The plaintiffs rely on admissions made by Mr Sinadinos and Ms Kalantzis in their respective public examinations to submit that the manner in which Mr Sinadinos operated within the corporate governance structure of the Company, including the degree of autonomy that he exercised and the appearance, as well as the reality, of him having authority as a primary level decision maker for the Company, inescapably leads to the conclusion that he remained a de facto director after he resigned as a de jure director on 3 February 2017 in the period up until the Winding Up Date. Alternatively, the plaintiffs submit that Mr Sinadinos had sufficient influence to control Ms Kalantzis, and was therefore a shadow director.

B.4.     Consideration

20    The Liquidator has not been able to obtain any records of any board minutes or board papers, taxation returns of the Company, or other taxation records. Hence the issue of whether Mr Sinadinos was a de facto director or a shadow director falls to be determined as a matter of inference from admissions made by Mr Sinadinos and Ms Kalantzis in the course of their public examinations.

21    In my view, the admissions made by Mr Sinadinos and Ms Kalantzis make plain that Mr Sinadinos was a de facto director of the Company from the time he was no longer recorded as a de jure director on 3 February 2017 up and until the Winding Up Date.

22    Mr Sinadinos admitted that Ms Kalantzis and he “ran the business together”. He explained that “[w]e made all decisions together unless it was something that was vital that had to be done straight away, with drivers’ trucks, repairs, deliveries”, and admitted that all decisions were made jointly, but there were some more “logistics-based” decisions that he would “solely look after”.

23    Ms Kalantzis made admissions that Mr Sinadinos and she “made decisions together”, and admitted that other than decisions about whether “fulfilling a particular contract was profitable or not”, all key business decisions were made by Mr Sinadinos and her together and for most of the time in “terms of decision making of importance, it was a joint effort”.

24    The admissions are not consistent with Mr Sinadinos being a shadow director. They establish that major decisions were made jointly. There was no suggestion in any of the admissions that Mr Sinadinos gave directions to Ms Kalantzis with respect to major decisions and that she acted in accordance with those directions.

C.     Breach of directors’ duties

C.1.     Overview

25    The Liquidator gives evidence that his investigations into the affairs of the Company, in particular an analysis of bank statements obtained from accounts held by the Company with the Australian and New Zealand Banking Group Limited (ANZ) and an account held by Mr Sinadinos with ANZ, have revealed that the payments made by the Company included the following payments for which he has not been able to identify any commercial justification or reason:

(a)    $4,536,409.11 in the period between 4 October 2016 and 7 February 2020 to Mr Sinadinos;

(b)    $27,361.34 in the period between 10 August 2017 and 1 October 2018 to Ms Kalantzis;

(c)    $241,780.16 in the period between 17 November 2017 and 23 January 2020 to ANZ Equipment Rentals Pty Ltd (deregistered), a company of which Mr Sinadinos was a director and shareholder; and

(d)    $173,117 in the period between 24 October 2016 and 6 February 2020 by way of cash withdrawals.

(together, Impugned Payments).

C.2.     Statutory provisions and legal principles

26    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).

27    I recently summarised the principles relevant to s 180(1) of the Corporations Act in Stone (liquidator), in the matter of Ironbark Blacksmithing Pty Ltd (in liq) v Mizzi [2024] FCA 696 at [262]-[266]. It is convenient to set out those principles below.

28    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).

29    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).

30    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).

31    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 of harm: Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; [2016] FCA 1552 at [397]-[401] (Edelman J).

32    Section 181 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.

33    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).

34    In Bettles, Markovic J 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 ACSR233; [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].

35    Section 182 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)

36    The test of whether conduct is improper is objective: R v Byrnes (1995) 183 CLR 501 at 514, 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).

37    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).

38    A person may also contravene s 181(1) and s 182 of the Corporations Act if they are involved in a contravention by a director or officer of those sections.

39    Section 79 of the Corporations Act provides:

A person is involved in a contravention if, and only if, the person:

(a)    has aided, abetted, counselled or procured the contravention; or

(b)    has induced, whether by threats or promises or otherwise, the contravention; or

(c)    has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)    has conspired with others to effect the contravention.

40    The relevant legal principles were conveniently summarised by White J in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342 at [397]-[411]. His Honour said at [398]-[400]:

In order for a person to be knowingly concerned in a statutory contravention, that person must have been an intentional participant, with knowledge of the essential elements constituting the contravention: Yorke v Lucas (1985) 158 CLR 661 at 670. It is not, however, necessary that a person with knowledge of the essential elements making up the contravention also know that those elements do amount to a contravention: Yorke v Lucas at 667; Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) [1999] FCA 1161; (1999) 95 FCR 302 at [186]; Medical Benefits Fund of Australia Ltd v Cassidy [2003] FCAFC 289; (2003) 135 FCR 1 at [8]-[13]. An accessory does not have to have appreciated that the conduct was unlawful: Giraffe World at [186].

Actual knowledge of the essential elements constituting the contravention is required. Imputed or constructive knowledge is insufficient: Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 at [11].

Proof that a person had actual knowledge of each of the essential elements making up the contravention may be derived from direct evidence but more commonly will be a matter of inference from all the circumstances found to be proved. In some cases, actual knowledge can be inferred from the combination of a defendant’s knowledge of suspicious circumstances and the decision by the defendant not to make inquiries to remove those suspicions. The High Court referred to knowledge in these circumstances in Pereira v Director of Public Prosecutions (Cth) (1988) 63 ALJR 1 at 3-4; 82 ALR 217 at 220:

[A] combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter. In a case where a jury is invited to draw such an inference, a failure to make inquiry may sometimes, as a matter of lawyer’s shorthand, be referred to as “wilful blindness”. Where that expression is used, care should be taken to ensure that a jury is not distracted by it from a consideration of the matter in issue as a matter of fact to be proved beyond reasonable doubt.

41    Section 1317H(1) of the Corporations Act relevantly provides that the Court may make an order for a person to compensate a corporation for damage suffered by reason of a contravention of a corporation/scheme civil penalty provision in relation to the corporation.

42    Section 1317E of the Corporations Act relevantly provides that each of s 180(1), s 181(1) and s 182 are corporation/scheme civil penalty provisions.

43    The Court of Appeal of the Supreme Court of New South Wales in Capitallink Pty Ltd v Withnall [2024] NSWCA 172 recently stated with respect to the drawing of inferences, at [59]-[60] (Bell CJ, with whom Leeming and Stern JJA agreed):

In Blatch v Archer (1774) 1 Cowp 63 at 65, Lord Mansfield famously said that “all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted.” That principle continues to be of great importance in the everyday work of Australian courts in the ascertainment of contentious facts and the drawing of inferences. Thus, in G v H (1994) 181 CLR 387 at 391-392; [1994] HCA 48. Brennan and McHugh JJ stated that:

“… when a court is deciding whether a party on whom rests the burden of proving an issue on the balance of probabilities has discharged that burden, regard must be had to that party's ability to adduce evidence relevant to the issue and any failure on the part of the other party to adduce available evidence in response.”

To similar effect, in Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14]-[15], Hodgson JA stated that:

“… in deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision. …

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so…”

44    The ability of the Court to draw inferences is also impacted by the rule in Jones v Dunkel as emphasised by the Court of Appeal of the Supreme Court of New South Wales in Ling v Pang [2023] NSWCA 112 at [21]-[24] (Kirk JA, with whom Leeming and Mitchelmore JJA agreed) in which his Honour stated:

In Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11, Heydon, Crennan and Bell JJ distinguished two types of inferences that can be drawn where Jones v Dunkel applies (citations omitted):

[63] The rule in Jones v Dunkel is that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party's case The failure to call a witness may also permit the court to draw, with greater confidence, any inference unfavourable to the party that failed to call the witness, if that uncalled witness appears to be in a position to cast light on whether the inference should be drawn.

…

The drawing of a Jones v Dunkel inference requires the court to be satisfied that, first, it is expected or natural for the party in question to have called the person; second, the person’s evidence would have elucidated a particular matter; third, the absence of the person is unexplained: Payne v Parker [1976] 1 NSWLR 191 at 201 per Glass JA. …

The Jones v Dunkel “rule” is a principle of judicial reasoning which addresses the drawing of inferences of fact. It only applies “once all the evidence in the case is in”: Manly Council v Byrne [2004] NSWCA 123 at [54] per Campbell J. Whether some inference should be drawn, what inference, and with what significance, are all matters that depend upon the particular case. So much is reflected in the reference to Kuhl at [63] to drawing an inference “in appropriate circumstances”. It is not a rule that can be applied formulaically.

C.3.     Submissions

45    The plaintiffs submit that, given the difficulties the Liquidator has faced in obtaining books and records of the Company and in the absence of any evidence from the defendants providing some commercial justification or reason for the Company making the Impugned Payments, the Court can comfortably infer that each of the Impugned Payments was solely for the benefit of Mr Sinadinos or Ms Kalantzis, or entities controlled by them, and to the detriment of the Company, and therefore a breach of the duties imposed on Mr Sinadinos and Ms Kalantzis under s 180(1), s 181(1) and s 182 of the Corporations Act.

46    Alternatively, the plaintiffs submit that Mr Sinadinos and Ms Kalantzis were involved in the contraventions by the other of s 181(1) and s 182 of the Corporations Act.

47    The plaintiffs submit that it must follow that the Company is therefore entitled, on either basis identified above, to an order pursuant to s 1317H of the Corporations Act requiring Mr Sinadinos and Ms Kalantzis to compensate the Company for the damage suffered by it as a result, being the amount of $4,978,667.61, which is the sum of the amounts of $4,536,409.11, $27,361.34, $241,780.16 and $173,117 referred to at [25] above.

48    The plaintiffs again rely on admissions made by Mr Sinadinos and Ms Kalantzis in their respective public examinations for their breach of directors’ duties claims.

C.4.     Consideration

49    The ANZ bank statements make plain that the Impugned Payments were made to Mr Sinadinos, Ms Kalantzis or companies controlled by Mr Sinadinos.

50    Further, each of the defendants admitted in their respective public examinations that they were able to, and did made payments out of, the Company’s bank accounts. Neither suggested that any other person was able to make any payment out of the Company’s bank accounts.

51    Mr Woods, the former solicitor for the defendants, in his affidavit affirmed on 14 June 2024 with respect to the failure of the defendants to comply with the orders of Lee J made on 15 February 2024, states the following:

12.    The Defendants believe that all the money disbursed to them from the company represents funds owed to them.

13.    We have not sighted any documents supporting these instructions.

52    It is conceivable that the Impugned Payments were made by way of drawings, salaries or wages to the defendants, repayment of advances or loans made by the defendants to the Company, or reimbursement of payments made by the defendants from their personal bank accounts or credit cards on behalf of the Company. The defendants, however, chose not to lead any evidence in response to the affidavit of the Liquidator or appear at the hearing of the proceedings.

53    The evidence of the Liquidator, as an experienced liquidator and an officer of the Court, that he is not able to discern any commercial justification or reason for the Company to make the Impugned Payments, combined with (a) the failure of the defendants to appear at the hearing or provide any explanation for the Impugned Payments, and (b) the absence of any documentary records purporting to explain the basis on which the advances were made, in my view, in the light of the principles concerning the drawing of inferences, as recently restated in Capitallink and Ling, provide a sufficient basis to draw an inference that there was no commercial justification or reason for the Company to make the Impugned Payments.

54    For the foregoing reasons, I am satisfied that in causing the Impugned Payments to be made, the defendants:

(a)    did not exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the circumstances of the Company and occupied the same office and had the same responsibilities for making payments as the defendants, in contravention of s 180(1) of the Corporations Act;

(b)    did not exercise their powers and discharge their duties in good faith in the best interests of the Company and for a proper purpose, in contravention of s 181(1) of the Corporations Act; and

(c)    improperly used their position to gain an advantage for themselves and to cause detriment to the corporation, in contravention of s 182 of the Corporations Act.

55    It follows that the plaintiffs are entitled to an order for compensation pursuant to s 1317H of the Corporations Act in an amount equal to the amount of the Impugned Payments.

56    Given the conclusions that I have reached above with respect to the primary liability of the defendants for the contraventions of s 181(1) and s 182, it is strictly not necessary to address the alternative case advanced by the plaintiffs that the defendants were involved in the contraventions by each other of those sections.

57    Nevertheless, I am satisfied given the findings that I have made at [22]-[24] above, in relation to the joint manner in which the defendants conducted the business of the Company and made all key operational and financial decisions together, that to the extent that either director did not contravene s 181(1) or s 182 with respect to the making of any of the Impugned Payments, as I have otherwise found, they aided, abetted, counselled or procured the contravention or by at least omission was directly or indirectly knowingly concerned in or a party to the contravention by the other. I am satisfied that I can infer that each defendant had actual knowledge of the circumstances in which each of the Impugned Payments was made, including that each was made by a director of the Company, to the personal benefit of the other, for no commercial benefit for the Company, was not in the best interests of the Company and was not made for a proper purpose. Each defendant was thereby involved for the purposes of s 79 of the Corporations Act in the contraventions of the other.

D.     Insolvent trading

D.1.     Overview

58    The Liquidator has received proofs of debt from unrelated party creditors in the sum of $1,619,746.90, including a proof of debt from the Deputy Commissioner of Taxation (DCT) in the amount of $1,102,369.71.

59    The Liquidator gives evidence that there are other creditors, including related party creditors, who have not submitted proofs of debt and who he believes are owed $2,211,063.98. For the purposes of these proceedings, however, the plaintiffs only seek to recover from the defendants those debts in respect of which the Liquidator has received a proof of debt.

60    The plaintiffs again rely on admissions made by Mr Sinadinos and Ms Kalantzis in their respective public examinations for their insolvent trading claims.

D.2.     Statutory provisions and legal principles

61    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.

62    As I stated in Mizzi at [305], in order to establish a contravention of s 588G(2) of the Corporations Act against a person, it is 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.

63    Section 588E(4) of the Corporations Act provides:

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

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

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

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

64    None of subsections (5) to (7) of s 588E is presently relevant.

65    In turn, ss 286 (1) and (2) of the Corporations Act provide:

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

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

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

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

Note 1: Section 9 defines financial records.

Note 2: Section 1232A extends this section to keeping financial records for sub‑funds of retail and wholesale CCIVs, and applies this Part accordingly.

Period for which records must be retained

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

66    The presumption in s 588E(4) applies for the purpose of a proceeding for a contravention of s 588G(2) of the Corporations Act in relation to the incurring of a debt by the company: KMS Imports (Aust) Pty Ltd (In Liq) v Wang, in the matter of KMS Imports (Aust) Pty Ltd (In Liq) [2016] FCA 1571 at [58] (Gilmour J).

67    Sections 588M(1) and (2) of the Corporations Act provide that a liquidator may recover from a director as a debt due to the company an amount equal to the loss or damage suffered by the company arising from a contravention by the director of s 588G(2) or s 588G(3) in relation to a wholly or partly unsecured debt at the time that it was incurred.

68    Section 588M(4) provides that a proceeding for the recovery of compensation pursuant to s 588M may only be commenced within six years after the commencement of the winding up of the company.

D.3.     Submissions

69    The plaintiffs advance the following submissions with respect to the five necessary elements.

70    First, the defendants were at all relevant times directors, either de jure or de facto, of the Company.

71    Second, the plaintiffs seek to rely on both presumed and actual insolvency.

72    As to presumed insolvency, the plaintiffs submit that the Company failed to maintain the books and records that would be expected to be maintained for a company in the position of the Company, for the whole of the period between the Incorporation Date and the Winding Up Date, and thereby failed to keep or retain financial records as required by s 286 of the Corporations Act, and was therefore insolvent pursuant to s 588E(4) of the Corporations Act.

73    As to actual insolvency, the plaintiffs submit that the Court can comfortably draw an inference that, at the time the Company incurred the relevant debts, the Company was insolvent or became insolvent by incurring the relevant debts, because (a) the defendants have not served any evidence challenging any of the debts the subject of the proofs of debt that have been received by the Liquidator, (b) the proof of debt from the DCT in the amount of $1,102,369.71 is for various amounts from 1 July 2017 and refers to the Company having, as at 15 July 2020, 20 outstanding activity statements, four outstanding income tax returns and four outstanding PAYG payment summaries, (c) the debt owed to the Australian Taxation Office (ATO) in combination with the various transactions referred to above, resulted in millions of dollars being improperly transferred or withdrawn from the Company’s bank accounts from about late 2017 onwards and for the benefit of the defendants, or entities controlled by them.

74    Third, there were reasonable grounds for suspecting that the Company was insolvent or would become insolvent by incurring the debts having regard to the quantum of the undisputed debts, the number of outstanding lodgements with the ATO and the millions of dollars “improperly ripped” from the Company’s bank accounts.

75    Fourth, the debts were incurred after the commencement of the Corporations Act.

76    Fifth, both defendants were aware that there were grounds for suspecting that the Company was insolvent or would become insolvent by incurring the debts or a reasonable person in a similar position would be so aware having regard to the quantum of the undisputed debts, the number of outstanding lodgements with the ATO and the millions of dollars “improperly ripped” from the Company’s bank accounts, and the fact that the defendants have served no evidence they were not aware that the Company was insolvent during the relevant period.

D.4.     Consideration

77    As to the first and fourth elements of s 588G(2), I am satisfied that at all relevant times the defendants were de jure or de facto directors of the Company and the debts were incurred after the commencement of the Corporations Act.

78    As to the second element of s 588G(2), I am satisfied for the following reasons that the Company can be presumed to be insolvent at the time each debt was incurred.

79    The Liquidator gives evidence that his investigations into the affairs of the Company have been severely impacted by the limited books and records that he has been able to obtain in response to requests for production.

80    The Liquidator gives evidence that he would expect a company operating a business in the nature of the business conducted by the Company to maintain the following records:

(a)    management accounts for the period 20 January 2015 to 5 February 2020, being from the date of Incorporation until the date of Winding Up (including records of the Company's expenses, revenue, assets and liabilities) which:

(i)    correctly record and explain its transactions and financial position and performance, and

(ii)    would enable true and fair financial statements to be prepared;

(b)    financial statements for all periods preceding my appointment, including a signed director's declaration verifying the accuracy of those statements and the solvency of the Company;

(c)    bank reconciliations from the date of Incorporation until the date of Winding Up;

(d)    copies of taxation returns (i.e income tax returns, superannuation, fringe benefits tax, business activity statements, instalment activity statements and all supporting documentation) from the date of Incorporation until the date of Winding Up;

(e)    details of all lease agreements and hire purchase agreements in effect. For example, agreements covering motor vehicles, plant, equipment, premises, maintenance agreements, etc;

(f)    details of all security interests over the Company's assets;

(g)    payroll records in respect of employment entitlements and payment summaries;

(h)    documents of prime entry, including invoices rendered by the Company;

(i)    all invoices issued to the Company and evidence of payment of such invoices;

(j)    employment contracts;

(k)    drivers' log books/ work diary and documentation required to obtain and maintain professional truck drivers' accreditation;

(l)    records with respect to insurance, including workers compensation insurance maintained by the Company; and

(m)    other correspondence between the Company and third parties.

81    The Liquidator gives evidence, however, that he has only been able to obtain the following records:

(a)    Chattel mortgage documents dated 28 March 2018 - Mortgagee: Platnum Direct Finance Australia P/L, Borrower: the Company;

(b)    Email from Macquarie Bank to Paladin Advisory dated 9 March 2020 - advising balance, instalments and arrears of leasing contract;

(c)    Email from ANZ bank to Paladin Advisory dated 26 March 2020 - advising two bank accounts were held by the Company (1 nil balance and 1 negative balance);

(d)    Report on Company Activities and Property prepared by Dino Calvisi of Paladin Advisory dated 1 April 2020;

(e)    Land Title Search dated 15/03/2020 relating to 18 Holdsworth Dr, Mount Annan (folio: 24/1059497);

(f)    Agreements dated 20 October 2016, 26 June 2017, 26 July 2017 and 24 August 2017 between the Company & ACN 603 303 126 Pty Ltd relating to lease of various motor vehicles;

(g)    Access to the Company’s Xero file;

(h)    Extracts of Company’s Xero file:

(i)    Profit & Loss 01/07/2019 - 06/03/2020 (incomplete);

(ii)    Profit & Loss 01/07/2018 - 30/06/2019;

(iii)    Balance Sheet as at 31 March 2020 (incomplete);

(iv)    Balance Sheet as at 30 June 2019.

82    Both defendants admitted in their public examinations that the Company’s physical books and records were thrown into a skip bin because they had nowhere to put them when the Company vacated its leased premises. At the same time both admitted in their public examinations that the Company had only ever retained limited physical records. Mr Sinadinos admitted that these were limited to run sheets or paperwork from customers or “stuff like that”, and no receipts for business expenses were kept. Ms Kalantzis admitted that the only paper records that had been retained by the Company before they were thrown into the skip were drivers’ run sheets and proof of delivery dockets.

83    The books and records of the Company that might have been maintained electronically on its Xero file did not extend beyond the documents identified at [81] above.

84    For the foregoing reasons, I am satisfied that the Company failed to maintain the books and records that would be expected to be maintained for a company in the position of the Company, for the whole of the period between the Incorporation Date and the Winding Up Date, and it thereby failed to keep or retain financial records as required by s 286 of the Corporations Act, and is therefore deemed to be insolvent pursuant to s 588E(4) of the Corporations Act for the whole of that period.

85    In my view, however, the plaintiffs have not also established actual insolvency of the Company. In large part that is because of the absence of sufficient financial records to form any conclusive assessment of the financial position of the Company during the period between the Incorporation Date and the Winding Up Date. The making of significant unexplained payments to directors or the incurring of large liabilities are not sufficient in themselves to infer actual insolvency of a company.

86    The Liquidator gives evidence of each of the proofs of debt that he has received and copies of each proof of debt are contained within the Exhibit to his affidavit. In the course of his oral submissions to the Court, counsel for the plaintiffs provided a schedule listing each creditor who had lodged a proof of debt and which identified for each creditor by reference to their respective proofs of debt the date or dates on which the debts were incurred and the amount of each debt.

87    I am satisfied, by reference to the proofs of debt exhibited to the Liquidator’s affidavit and in the absence of any evidence to the contrary from the defendants, that each debt was incurred within 6 years of the Winding Up Date in the amounts recorded in the proofs of debt, in an aggregate amount of $1,619,746.90, as follows:

88    As to the third element of s 588G(2), I am satisfied that there were reasonable grounds for suspecting that the Company was insolvent because of the ongoing failure of the Company to meet its obligations to the ATO, not least its failure to submit activity statements and the quantum of its outstanding liabilities to the ATO, the cumulative quantum of the amounts outstanding to creditors and the unexplained transfers of significant amounts from the Company’s bank accounts to the defendants or entities controlled by them.

89    As to the fifth element of s 588G(2), I am satisfied that a reasonable person in the position of the defendants would have suspected the Company was insolvent at the time each debt was incurred for the reasons that I have summarised above with respect to the third element.

E.     Disposition

90    For the foregoing reasons, orders and declarations substantially in the form sought by the plaintiffs are to be made.

Associate:

Dated:    9 August 2024