Hambleton v Featherstone[2014] QDC 20

DISTRICT COURT OF QUEENSLAND

1. [1]
   This proceeding is concerned with an application made pursuant to s 588M of the Corporations Act 2001 (Cth) seeking damages for insolvent trading against the respondent in circumstances where he was not an appointed director pursuant to the Corporations Act, but was alleged to be a shadow and/or de-facto director of Ashala Pty Ltd (Ashala). For the reasons set out below the application is successful and the orders of the court are:

1. That the respondent pay the sum of $198,151.14 to the applicant pursuant to s 588M of the Corporations Act 2001 (Cth);

2. That the respondent pay the applicant interest on the sum of $198,151.14 from 10 July 2013 to the date of judgment pursuant to s 58 of the Civil Proceedings Act 2011; and

3. The respondent is to pay the applicant’s costs of its application.

4. The respondent’s application filed 9 January 2014 is dismissed.

5. The respondent is to also pay the applicant’s costs of that application.

2. [2]
   I had intended to deliver these reasons on 14 January 2014. However, that was delayed because of an application filed by the respondent on 9 January 2014. That application is dealt with below in paragraphs 66 to 78.

The relevant legislation

3. [3]
   Section 588G of the Corporations Act relevantly provides:

“Directors duty to prevent insolvent trading by company

1. (1)
   This section applies if:

1. (a)
   a person is a director of a company at the time when a company incurs a debt; and

2. (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

3. (c)
   at that time, there are reasonable grounds for suspecting that the company insolvent, or would so become insolvent, as the case may be; and

4. (d)
   that the time is at after the commencement of this Act.

3. (1A)
   For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.

3. (2)
   By failing to prevent the company from incurring the debt, the person contravenes this section if:

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

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

4. [4]
   Section 588M provides:

“Recovery of compensation for loss resulting from insolvent trading

1. (1)
   This section applies where:

1. (a)
   a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

2. (b)
   the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and

3. (c)
   the debt was wholly or partly unsecured when the loss or damage was suffered; and

4. (d)
   the company is being wound up.

Whether or not:

5. (e)
   the director has been convicted of an offence in relation to the contravention; or

6. (f)
   a civil penalty order has been made against the director in relation to the contravention;

3. (2)
   The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage;

3. (3)
   The creditor may as provided in subdivision B but not otherwise, recover from the director as a debt due to the creditor, an amount equal to the amount of the loss or damage;

3. (4)
   Proceedings on this section may only be begun within six years after the beginning of the winding up.”

5. [5]
   Section 9 relevantly provides:

“Director of a company or other body means:

1. (a)
   a person who:

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

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

Regardless off the name that is given to their position;

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

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

2. (ii)
   the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes;

Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in a proper performance of function detaching to the person’s professional capacity, or the persons business relationship with the directors or the company or body. …”

The applicant relies on the extended definition given to the term “director” under s 9(b) of the Act.

6. [6]
   On behalf of the applicant it was submitted that there were four fundamental matters to be decided:

1. Was the respondent a de-facto or shadow director of the company;

2. Was the company insolvent between 30 June 2008 and 9 September 2010;

3. Did the company incur $208,770.33 in debts during that period; and

4. Are there any defences available to the respondent.

7. [7]
   Generally speaking, I agree with those four broad propositions. Turning to each of those matters, but not necessarily in order:

Did the company incur $208,770.33 in debt during the relevant period

8. [8]
   The damages sought is comprised of four unsecured debts:

• $158,756.18 due and owing to the Australian Taxation Office in respect of goods and services tax, PAYG and interest thereon;
• $26,357.76 due and owing to the ATO as employee superannuation;
• $13,037.20 due and owing to Queensland Plumbing Pty Ltd for work done;
• $10,619.19 alleged to be due and owing to one Mr Marshall for building works.

9. [9]
   Proofs of debt have been lodged in respect of each of those debts alleged against the company. During final submissions, I asked the respondent a number of questions concerning these debts. He did not dispute the tax debts of the company nor the quantum of the plumbing debt. He did take issue with quantum and liability concerning the debt claimed by Mr Marshall. Somewhat oddly, during the course of the evidence it came out that the respondent had offered to pay both Mr Marshall and the plumber the full amounts claimed. During the course of his cross-examination of Mr Marshall he said this:

“Are you aware that when this company went into an administration after you had seen Mr Hambleton, are you aware that I sent an email to Mr Hambleton where I offered to take responsibility for the debt that you had claimed.”

And later:

“I’ll try to reword it, your Honour. I did send an email to Mr Hambleton where I offered to Mr Hambleton to accept responsibility for the debt that you had claimed.”

And later:

“And I will put it to you this way. If I was to make an offer to you today where I said to you ‘hey, I’ll accept responsibility for that debt,’ is that something that would be of interest to you?”^[1]

10. [10]
    In final submissions, the respondent also indicated that he would accept responsibility for the plumber’s debt.^[2]I should point out here that these concessions were not made by way of any admissions on the part of the respondent that he had in fact been acting as an officer or director of the company. As I understand it, he felt responsible for the payment of those debts as they involved work carried out on the floor owned and controlled by his family trust, level 1, 138 Albert Street, Brisbane.

11. [11]
    Initially, I had some reservations about the amount claimed by Mr Marshall having regard to his evidence given in cross-examination, which was to the effect that when asked what he thought the value of his work was, he responded to the effect that it would be somewhere between $5,000 to $10,000. However, it seems tolerably clear that that response was made in circumstances where he did not expect to receive any money due to the financial position of Ashala at the time. It would appear that that was his “best guess” at the time. On the other hand, the proof of debt lodged with the liquidators sets out in some detail the work carried out by Mr Marshall and its worth, and he was not cross-examined on any particular detail contained in the proof of debt in any serious way.

12. [12]
    The real difficulty with the debt of Mr Marshall is determining whether it was in fact a debt due and owing by Ashala. There can be no reasonable doubt from the evidence of Mr Marshall that the work was done at the direction of the respondent. The difficulty is that Mr Marshall tended to see the respondent and Ashala and the other various corporate entities as effectively one and the same.^[3]And, when referring to Ashala and another entity “Ashala Models” Mr Marshall said, “I have no idea which one it was.”^[4]When Mr Marshall’s evidence is considered in its entirety, I must agree with the respondent’s submission to the effect that Mr Marshall did not know which entity the work was requested by and carried out for. Accordingly, I am not satisfied that Mr Marshall’s debt can be reasonably sheeted home to Ashala.

13. [13]
    For the reasons given, I conclude that between 30 June 2009 and 9 September 2010 Ashala incurred unsecured and unpaid debts in the amount of $198,151.14.

Was the respondent a de-facto or shadow director of Ashala

14. [14]
    In dealing with this matter it is useful to set out a chronology of events:

• 10 December 2003 - Ashala Bar, café and Restaurant Pty Ltd registered and respondent appointed as sole director and secretary.
• 10 March 2004 – Ashala Pty Ltd (the subject company) is registered and the principal place of business and registered office is 1/138 Albert StreetBrisbane and the respondent is both the sole director and secretary.
• 24 May 2005 – Ashala Model Agency Pty Ltd is registered.
• 7 October 2005:

_

ASIC receives notice from one Kristy Marks that the respondent was no longer a director or secretary of Ashala Pty Ltd, Ashala Bar, Café and Restaurant Pty Ltd and Ashala Hair and Beauty Pty Ltd;

_

Kristy Marks is appointed to the company as director and company secretary of all three of those companies.

• 19 October 2005 – Ashala Pty Ltd’s principal place of business changes to 42/53 Edward Street, Brisbane.
• 26 October 2005 – Ashala Pty Ltd’s registered office changes to 42/53 Edward Street, Brisbane.
• 14 November 2005 – Respondent is added as a concurrent director of Ashala, Bar Café and Restaurant until 3 July 2006.
• 28 November 2005 – Respondent appointed as a Director of Ashala Pty Ltd.
• 12 December 2005 – Respondent retires as a director of Ashala Pty Ltd.
• 9 March 2007 – Ashala Pty Ltd’s principal place of business changes to 39/53 Edward Street, Brisbane.
• 15 March 2007 – Ashala Pty Ltd’s registered office changes to 39/53 Edward Street, Brisbane.
• 6 July 2007 – Malcolm Marshall appointed director of Ashala Modelling Pty Ltd.
• 16 August 2007 – Cash cheque drawn on the account of Ashala Modelling Agency in the amount of $435,010 and cashed by the respondent for rent owed by that company to the family trust.^[5]
• 11 August 2008 –Ashala Pty Ltd’s principal place of business changes to 1/138 Albert StreetBrisbane.
• 12 October 2008 – Ashala Model Agency Pty Ltd deregistered.
• 10 December 2009 – Restaurant and bar equipment sold.
• 22 February 2010 – Company’s bank account with Suncorp Bank closed with nil balance.
• 15 March 2010 – Company incurs debt to Malcolm Marshall for building works.
• 1 August 2010 – Kristy Marks resigns as director of Ashala Pty Ltd.
• 26 August 2010 – Kristy Marks appointed as alternate director of Ashala Pty Ltd.
• 9 September 2010:

_

Ashala Pty Ltd placed into voluntary administration;

_

Ashala Pty Ltd incurs further debt to Queensland Plumbing.

15. [15]
    In support of the case that the respondent during the material times acted as a “director” of Ashala, the applicant identified five pieces of evidence in particular:^[6]

1. The absence of records;

2. The improbable explanation given to the form and content of the transfer of the businesses from the respondent to Marks and of the subsequent so called letters of employment purporting to employ the respondent as an employee of Ashala;

3. The evidence of Mr Marshall;

4. Admissions made by respondent in oral examination;

5. The circumstances of and statements made by the respondent during an interview with Mr Hambleton (in the presence of Ms Moore and Mr Hambleton) on 14 September 2010 at 1/138 Albert Street.

16. [16]
    It was extremely difficult to know exactly how the various companies associated with the respondent, operated within themselves and how they interacted one with the other. That was so because of the shambolic management of the companies including the chronic failure to keep any meaningful company records.^[7]

17. [17]
    That said, as I understand the evidence, the respondent’s family trust owned the first floor of 138 Albert Street.^[8]According to the respondent Ashala then entered into two leases on properties of the ground floor of 138 Albert Street. It then sub-leased these two properties to Ashala Hair and Beauty Pty Ltd (AHB) and Ashala Bar, Café and Restaurant Pty Ltd (ABCR). The respondent was the sole shareholder and director of Ashala, AHB, and ABCR at that time. According to the respondent, Ashala was never meant to trade in any way at all. It was simply to be a corporate vehicle to “hold” the various leases and sub-leases.^[9]Ashala Model Agency Pty Ltd (AMA). AMA was in the business of training models and arranging for them to do modelling and promotion work. AHB provided hair and beauty services to the models, but also to the general public.

18. [18]
    However, notwithstanding what might have been the respondent’s initial intention for Ashala, it became clear that that company became actively involved in the business affairs of the other companies. But, according to the respondent, not under his stewardship, but when under the control and direction of Kristy Marks (Marks). The respondent did not dispute that Ashala had traded between about mid-2008 and 9 September 2010. During his oral examination, the respondent gave evidence that Ashala would have started trading around mid-2007.^[10]

19. [19]
    In late 2005, the respondent wanted to sell all of these businesses, but was not having any success. According to him at or about late 2005, he was approached by Marks who was then “running” AMA and “excelled” at it.^[11]At the time, Marks was a 19 year old young woman who had started a modelling course with AMA and later became the respondent’s secretary and then the manager of AMA. According to the respondent, they had also been involved in an “off and on” personal relationship.^[12]

20. [20]
    On 7 October 2013, the respondent purported to sell his interest in Ashala, ABCR and AHAB. On that date a document was created and signed by the respondent and Marks. It stated:^[13]

“Dear Darrell

This letter is to set out our agreement on the transfer of the following three companies:

Ashala Pty Ltd;

Ashala Bar, Café and Restaurant Pty Ltd; and

Ashala Hair and Beauty Pty Ltd.

What we have agreed to are:

1. (a)
   You will transfer to me the shares in the three companies and that I replace you as the sole director of each company;

2. (b)
   You will assist me as may be reasonably required to operate these three business but I do acknowledge and agree that you are not a director or involved in any capacity in the management of the company;

3. (c)
   I acknowledge and agree that you (as trustee for Morgan) are the lawful owner of all fixtures and fittings currently located in the leased premises of the companies on the ground floor 138 Albert Street, Brisbane by an earlier loan agreement between you (as trustee for Morgan) and Ashala Pty Ltd;

4. (d)
   Ashala Pty Ltd is entitled to use the fixtures and fittings and with your prior approval the fixture and fittings may be used by other entities;

5. (e)
   If in the future I wish to sell either or both of the business I undertake to advise you of such and you agree to assist me in any way you can so the loan money owing to you can be repaid;

6. (f)
   I agree to lodge all necessary documents and notification with all government authorities and agencies to transfer the ownership of the companies to me and to replace you as sole director of the companies at my cost and expense;

7. (g)
   The contents of this letter shall be enforceable by law. …” (emphasis added)

Morgan was the daughter of the respondent.

21. [21]
    No consideration for the disposal of these three companies was recorded, but the respondent gave evidence that Marks paid him $100 for the transfer of each of the companies, $300 in total. That such a nominal price was allocated to each of the sales was, according to the respondent, because the companies had no assets other than their own respective good will.

22. [22]
    On 22 June 2007, a so called letter of employment was executed by the respondent and Marks and was witnessed by the respondent’s then solicitor Phillip Leach. This document provided:^[14]

“Dear Darrell

This letter confirms your employment as training and events coordinator with Ashala Pty Ltd… To start on 1 July 2007 and to continue until terminated by either party.

Your annual wage will be $150,000 gross per annum and your duties are to coordinate all model training and all events conducted by Ashala Pty Ltd.

I take note your wish to clearly distinguish your role as employee from that as landlord that you hold as trustee of the Darrel Featherstone Family Trust who own the premises we work from. In particular I note that should any claim for compensation for injuries from models become an issue that will be the responsibility of your employer being Ashala Pty Ltd.

You do not hold a formal role with Ashala Pty Ltd and have no responsibility or rights or powers as a director, secretary, officer or manager of a company. You will not be involved in any decisions that substantially affect the operation of Ashala Pty Ltd.

As an employee I my at times ask for your opinion or advice that I believe may assist in the operation of Ashala Pty Ltd but it is noted that I will be under no obligation to follow any advice you may give in relation to any matter.

I confirm at no time will I, or any representative of this company, hold you out as holding any official or managerial position with Ashala Pty Ltd and you will not do the same.

I acknowledge your position that you will not have to deal with receiving money or be a signatory or have access to any bank account that is held by Ashala Pty Ltd or set training class schedules or book events.

This letter shall be valid and binding up on both Ashala Pty Ltd and yourself and be enforceable by law…” (emphasis added)

Identical letters were executed on 30 June 2008 and 30 June 2009, but by June 2009 the respondent’s wage had dropped from $150,000 per annum gross to $52,000 per annum gross. Wages were usually paid in cash with little or no record of payment.

23. [23]
    One might well wonder why in the document dated 7 October 2005 it was necessary to specifically state that the respondent was not to be a director nor involved in the management of Ashala when the whole purpose of the transaction was to facilitate the transfer of all of the shares in the companies involved to Marks, and to install her as the sole director. After that, it would be entirely for her to decide what if any role the respondent might play in each of the companies, if they were truly under her control.

24. [24]
    The same could be said for that part of the employment letters emphasised. I cannot imagine any circumstance where a person employed by a company, and acting in that capacity, might be perceived by others as in some way having the rights and powers of a company director or other formal office holder of the company, absent some form of representation to that effect either by the company or the employee.

25. [25]
    AMA was not a company concerned with the transaction between the respondent and Marks on 7 October 2005. That was so because Marks was already the sole director and shareholder of that company. However, the shares in AMA were held by Marks on trust for the respondent.^[15]

26. [26]
    The respondent’s explanation for the inclusion of those highlighted parts of the documents was essentially to the effect that he wanted to be certain of avoiding any potential liability that might arise out of any injury sustained by a model either working or training on the premises. In respect of the letters of employment the respondent said:^[16]

“At this time I was studying law at university and I was well aware of the potential of my being sued if a public liability issue arose and it became known that I owned the property where it happened. I was taught very early in my studies that unscrupulous solicitors and liquidators will always sue the person they believe has the deepest pockets and will run up as much costs as they can for themselves while the debtors get nothing. We were taught that the liquidation industry was very corrupt and we were given horror stories of conduct of liquidators and I was very conscious of what I had been taught when accepting the offer of employment due to my owning the premises.”

27. [27]
    In cross-examination he said:^[17]

“I was concerned when I accepted a role as training these models, and they were – I also note they were apparently going to be going off and doing fashion parades on other premises and so forth, but my main concern was if they were going to catwalk, which has happened several times, they fall over in their high heels, they twist their ankle, one girl broke an ankle once and there was – I had to give evidence once in a court case in relation to it. I was well aware of the potential for models to claim damages. I can remember specifically giving evidence in the Townsville Court, I think I was, in relation to exactly that and that was well before – probably five years before this happened. So I was well aware of the potential to be – as a trainer and also as an owner of the floor to make sure that I was protected.”

And later in response to some questions by me, the respondent gave the following evidence:^[18]

“Question: So as I understand it, that clause or that paragraph in Exhibit DMF3?

Answer:  Yes.

Question: Was inserted – you required it to be inserted or – either on the advice of Mr Leach because you as an employee of the company thought that you might be sued in the capacity as an office holder, director, secretary or manager of the company. Is that what you were…

Answer: I was.

Question: Is that the purpose of that clause; is that what you’re saying?

Answer: Perhaps not as a director (of) a company; more that – it was a very broad insertion. My concern was that I was the trainer so there may be some fall back on me as to whether I conducted classes in an efficient, proper manner or not. But also my concern was that it would very easily be found out that I owned the floor because it’s owned by the Darrell Featherstone Family Trust, and it may affect my – their ability to come after assets that I owned. So I’ve done it my whole life, your Honour. I’ve done it as – Mr Leach said this morning, every property I’ve ever owned has been in a trust and …”

28. [28]
    I cannot accept this evidence of the respondent, the explanation is illogical and implausible. At the time the employment letters were signed the respondent was acting with the advice of a then practicing solicitor. Accepting for the moment that the intention of the respondent was to avoid being sued by an injured model either as an employee of Ashala and/or as the owner of the premises, that issue was addressed in the first of the highlighted paragraphs of the employment letters. The balance of the highlighted portion of the employment letters have nothing whatsoever to do with the risk of being sued for personal injuries either as an employee, owner or occupier. In my view, the only conclusion reasonably open is that the transfer document dated 7 October 2005 and, in particular, the employment letters of 2007, 2008 and 2009 were nothing more than attempts to create self serving evidence in the event (which has turned into fact) that the respondent was sued as a consequence of his involvement with the subject companies.

29. [29]
    Turning to the other evidence, I found Mr Marshall to be rather vague due to the lapse of time sometimes, but otherwise found him to be an honest and reliable witness. I accept his involvement with Ashala, even as a director for a short period of time, was such that it would not have given him much direct involvement with the respondent. However, his evidence that I accept is, that from his observation it was really the respondent who pulled the strings in respect of the operation of Ashala and indeed all the other related companies. According to Mr Marshall nothing happened at 138 Albert Street unless the respondent “okay’d it”^[19]and that “nobody done anything unless it was okay’d by you. Now how you want to decipher that, Darrell, is your way. That’s the fact you were in charge of everything” and later “you had your own office. You were the man. Everything was okay’d or not okay’d by you. Everybody answered to you and everybody was terrified of you.”^[20]

30. [30]
    I accept Mr Marshall’s evidence about this not only because he appeared to be an honest and reliable witness, but also because it is corroborated by other evidence. To a lesser extent by the conduct of the respondent and the information he provided to Mr Hambleton at a meeting at 138 Albert Street on 14 September 2010^[21], which revealed a level of knowledge of the operation of Ashala more consistent with that of an officer of the company rather than a mere employee. But more importantly, Mr Marshall’s evidence was corroborated by a number of admissions made by the respondent during his oral examination conducted on 12 February 2013.

31. [31]
    At the very outset of the respondent’s evidence during his oral examination, after he was sworn he was advised by the Registrar that during the course of his examination he would be asked questions about the affairs of Ashala Pty Ltd and “Ashala Model Pty Ltd” and during the course of the examination those companies would be referred to as Ashala and Ashala Model. The respondent acknowledged that he understood that.^[22]Upon commencing his examination of the respondent, Mr Copley repeated that that would be the process and again the respondent acknowledged that he understood. And, indeed, the respondent himself began to adopt if not identical then very similar terminology.^[23]During the course of the examination the following questions and answers occurred:^[24]

“Question: Okay. Well, do you recall being a director of Ashala after 2005?

Answer: No.

Question: And once you resigned as a director of Ashala in 2005 did you have any further involvement in that company?

Answer: Yes.

Question: And what was that?

Answer: I continued to run the day to day – be involved in the day to day affairs of everything that was happening.

Question: Even though you aren’t a director?

Answer: Correct.

….

Questions: Okay, and when she (Marks) became a director of Ashala did she acquire any interest or ownership in Ashala?

Answer: For Ashala, I don’t remember exactly when she took the shares and that all the shares were always held on trust for me.

And then later in the examination:^[25]

“Question: And would you say that your role was a fulltime role?

Answer: The reason Kristy (Marks) came into the company was because I had to work – I was doing work with – I would tour and would leave Brisbane for periods of time, and rule – ASIC Rules, I believe, stated that you have to be involved in the running of the company, which is why Kristy was the main person. I also had an ex girlfriend who was causing me problems. I had to take out domestic violence orders against her and I wanted to prevent her from knowing where I was as well.

Question: Okay. So after you resigned as a director and Kristy became the director am I right in saying that you were still involved in Ashala and the day to day operations of it?

Answer: Yes. (emphasis added) 

32. [32]
    Questions and answers to similar effect can also be found at pages 46 and 47 of the transcript of the respondent’s oral examination.

33. [33]
    Parts of those extracts from the transcript were contained in Mr Hambleton’s first affidavit.^[26]During the cross-examination of Mr Hambleton, a number of questions were put to him and statements made to me to the effect that when responding to the questions in the way that he did, the respondent thought he was dealing with questions concerning the Ashala Model Agency and not Ashala Pty Ltd.^[27]I do not accept that proposition. As already has been stated it was made abundantly clear to the respondent at the very outset of the examination that Ashala Pty Ltd would be referred to as Ashala and “Ashala Model Pty Ltd” would be referred to as Ashala Model. It is also clear that the respondent fully understood that that was the way the proceeding would be conducted. When read with the surrounding questions and answers there is little room for doubt that when responding as he did, the respondent knew that he was answering questions concerning Ashala.

34. [34]
    Any objective reading of the transcript of his oral examination makes it abundantly clear that the respondent had the real control of all the companies and in particular Ashala. In addition to the evidence already referred to:

• Notwithstanding that Marks was the director of AMA, she would do whatever the respondent told her to do,^[28]including drawing a cash cheque for $435,010 for him to cash.^[29]
• The respondent was responsible for the appointment of Mr Marshall as a director of AMA to be a “front” for the operation of the bar located on the ground floor. In this regard, I prefer the evidence of Mr Marshall and that given by the respondent during the oral examination^[30]to the evidence of the respondent given before me, where he denied involvement with the appointment of Mr Marshall.^[31]The absence of any bona fides in making Mr Marshall a company director is also reflected by the absence of any real business experience or acumen on his part and the fact that the respondent had always acted on the basis that he could not be trusted.^[32]
• All the profits of the companies “ended up in my (the respondent’s) hands”.^[33]

35. [35]
    In addition, to his own evidence, the respondent relied on the evidence of Mr Gutwirth,^[34]Mr Surman,^[35]Mr McIntosh,^[36]Mr Leach,^[37]Ms Rowan,^[38]and Ms Sroka.^[39]After successfully objecting to various paragraphs of the affidavits of those witnesses attempting to, in effect, swear the issue, Mr Copley only required Mr Leach and Mr Surman for cross examination.

36. [36]
    None of those witnesses provided any probative evidence in support of the case for the respondent. Ms Sroka and Ms Rowan are models, who were trained by the respondent. There is nothing to suggest that those two women would have had any knowledge, or any reason to know, who was responsible for the management and operation of Ashala. The same can be said of Mr Gutwirth and Mr McIntosh. Neither of those gentlemen explained the extent of their knowledge, if any, of the management and operations of Ashala. Mr McIntosh stated that he never dealt with the respondent about tenancy issues and it was “very clear” to him that Marks “owned” Ashala.^[40]The “ownership” of Ashala is not to the point. And, as was the case with the previous witnesses there is no evidence that he knew anything about the real management and operations of the company.

37. [37]
    Messrs Surman and Leach were cross examined. It became abundantly clear that Mr Surman’s “management” decisions concerning the company were limited to photography, where fashion parades might be conducted and the creation of a website and that otherwise he had no meaningful knowledge of the affairs of Ashala.

38. [38]
    Mr Leach had acted as a solicitor for the respondent for many years. For reasons it is not necessary to go into, he no longer acts in that capacity. While Mr Leach gave the respondent legal and/or business advice from time to time, Mr Leach provided no evidence about the management and affairs of Ashala.

39. [39]
    Turning then to the evidence of the respondent, for the following reasons I found him to be an unconvincing witness. He repeatedly made scandalous, but groundless allegations against Mr Hambleton and Ms Moore. More importantly in this regard, I found the respondent’s explanations about the creation of the so called letters of employment and his evidence concerning Ashala during his oral examination implausible and unconvincing. Equally, unconvincing was the respondent’s evidence concerning the rent payment by AMA. According to him, he was prepared to permit a company owned and managed by a very young woman with limited, even if successful, business experience to accumulate a nearly three year rent debt of $435,010 on the basis that “they were aware that when I required that it was mine”.^[41]On his version, he would have instructed Marks to draw a cash cheque for $435,010, which he then cashed reducing the deposits of AMA to below $8,000.^[42]When asked about this unusual arraignment the response was to the effect that “there was no law against it”^[43].

40. [40]
    Like those other parts of his evidence already referred to, I found the respondent’s evidence concerning the rent payment implausible and I reject it. However, I do find that evidence to be consistent with the evidence of the respondent’s during his oral examination and the evidence of Mr Marshall that all of the “Ashala” companies were trading under his control and carried on business primarily for his benefit.

41. [41]
    In Grimaldi v Chameleon Mining NL & Anor,^[44]the Full Court of the Federal Court stated that a rigid distinction between what constitutes a de-facto director and that constituting a shadow director cannot be maintained. However, as the nomenclatures might tend to suggest, a de-facto director^[45]is a person who has been shown to have assumed or performed functions, which would usually be expected to be performed by the current director (or board of directors). A shadow director^[46]is one who, while not directly making decisions on behalf of the company, has influence sufficient to ensure compliance by current directors and officers of the company with his wishes and instructions.^[47]

42. [42]
    In my view, the respondent falls into both categories. The evidence to which I have referred establishes that at the material time he took an active part in directing the business affairs of Ashala with the acquiescence of Marks. He performed functions which ought properly been performed by Marks. In this context this is not a case involving casual or occasional involvement. The respondent was actively involved in the daily management and affairs of Ashala.

43. [43]
    The evidence also establishes that the respondent arranged for Marks and Marshall to be registered directors, but expected them to act according to his direction, which they did. That is, the respondent could accurately be categorised as a shadow director.

44. [44]
    In the applicant’s written submissions,^[48]I was referred to the case of Re Hydrodam (Corby) Ltd (In Liquidation) [1994] 2 BCLC 180 for the proposition that the terms shadow and de-facto directors are alternatives and generally should be regarded as being mutually exclusive. Hydrodam, of course was concerned with English law and was decided well before Grimaldi. However, that aside, Millett J in Hydrodam did not finally decide the question. His Honour relevantly said, “ … and, in most and perhaps all cases were mutually exclusive”. I respectfully agree with the observation of the Full Court in Grimaldi^[49] that a rigid distinction between the two terms cannot be maintained. I fail to see why a person could not fall into both categories in certain cases. This is such a case.

45. [45]
    Accordingly, in my view, the respondent was a director of Ashala pursuant to the extended meaning given to the term director by s 9(b)(i) and s 9(b)(ii) of the Corporations Act 2001.

46. [46]
    According to the respondent, the information he gave at the interview recorded by Ms Moore^[50]and Mr Hambleton^[51]on 14 September 2010 was based on his knowledge as the landlord of the premises occupied by the companies, and not as someone actively involved in their operations. The information provided is consistent with that of someone with some intimate knowledge of the operation of the companies, but also is not inconsistent with a well informed landlord also employed by one of the relevant companies. On balance, I did not consider this evidence advanced the applicant’s case in any material way but, on the other hand, did not weaken the case against the respondent.

Was the company insolvent between 30 June 2008 and 9 September 2010^[52] and was there insolvent trading during that period

47. [47]
    There is little purpose in analysing the detailed material put before the court by the liquidator Mr Hambleton. The evidence establishes without any doubt that the company was indeed insolvent between 30 June 2008 and 9 September 2010. Ashala was clearly unable to meet its debts when they became due and payable at the relevant times and it had no prospects of being able to do so. At no stage was Mr Hambleton’s assessment of the financial position of the company seriously challenged.^[53]That Mr Hambleton was not so challenged was perhaps not surprising given that it was the respondent’s primary position throughout the hearing of this matter that he had no material involvement with the affairs, operations and financial matters associated with Ashala. To reveal a detailed knowledge of the actual financial affairs of Ashala would have obviously tended to strengthen the applicant’s case against him concerning allegations that he was a de-facto or shadow director of that company.

48. [48]
    During final submission, I asked the respondent whether he took issue with the allegation of insolvency. He initially responded:^[54]

“No, your Honour, but it would be false if I were found to be a shadow director because…”

I then asked:^[55]

“No, yes, well look, I appreciate that. But I’m just trying to identify at this stage what are the live issues from your point of view and what are not. As I say, I can appreciate from reading the affidavit before the trial started that you took issue with A, but with respect to the bare fact that the company was insolvent between 30 June 2009 and 9 September 2010 do you take issue with that, that Ashala was insolvent – during that period? 

I do your Honour. Based on the – I do, your Honour, based on the fact that the court judgments were not entered into the balance sheet, that was discussed with Mr Hambelton on Monday or Tuesday.”

49. [49]
    In this context, the respondent was not disputing Mr Hambelton’s analysis of the financial affairs of Ashala during that relevant period, but was contending that Mr Hambleton had failed to appropriately deal with a number of court orders and judgements concerning outstanding debts of Ashala. I do not consider there is any merit on this attack on Mr Hambleton’s methodology. They are dealt with in a fulsome way in the solvency report concerning the company and I also accept Mr Hableton’s explanation for the way he treated those judgment debts.

50. [50]
    Before going on any further, I should make mention of the fact that the respondent attacked the credibility and the reliability of all the applicant’s witnesses being Mr Marshall, Ms Moore, and Mr Hambleton. His attack on Mr Hambleton in particular contained a number of assertions of bias, incompetency and outright dishonesty. None of those allegations were made out. In my view, they were entirely groundless. I found all of the applicant’s witnesses to be both honest and reliable, save for some aspects of Mr Marshall’s evidence dealt with below.

51. [51]
    The respondent was actively involved with the day to day affairs and management of Ashala, which began trading in the modelling business sometime in the 2007-2008 financial year.^[56]Because of his involvement he was aware that from sometime in 2008 the global financial crisis effectively ended the modelling industry.^[57]Despite this Ashala continued to incur the debts indentified above.

52. [52]
    On the evidence before me, I am satisfied that at the relevant time:

1. the respondent was a director for the purpose of s 9 of the Corporations Act 2001 (Cth) at the time Ashala incurred the subject debts; and

2. Ashala was insolvent at the time of incurring the subject debts; and

3. At the time the debts were incurred, there were reasonable grounds for suspecting that the company was insolvent; and

4. the respondent was aware that there were reasonable grounds for suspecting that the company was insolvent or, at the very least, a reasonable person in a similar position would be so aware.

53. [53]
    The requirement that there be “reasonable grounds” for suspicion imputes an objective test. In Hall v Poolman,^[58]Palmer J relevantly said:

“[231] Section 588G(1)(c) of the CA provides that a director of an insolvent company is exposed to liability for insolvent trading if, at the time the debts are incurred:

‘… there are reasonable grounds for suspecting that the company is insolvent…’

[232] The test described by s 588G(1)(c) is an objective one (Powell v Fryer 159 FLR 433; (2001) 37 ACSR 589; [2001] SASC 59 at [76]-[77]) per Olsson J (with whom Duggan and Williams JJ agreed):

‘[76] … the state of knowledge of a particular director and any assessment which he may have made as to the ability of the company to pay its debts is irrelevant. The court must make its own judgment on the basis of facts as they existed at the relevant time and without the benefit of hindsight.

[77] By reason of s 588G(2)(b) it is sufficient that a reasonable person in a like position in a company in the company’s circumstances would be so aware. Regard is to be had to the facts and circumstances that the director ought to have known, as well as to the facts and circumstances that were actually known to him: Credit Corp Australia Pty Ltd v Atkins (199) 30 ACSR 727 at 769.’

[233] I must ascertain:

• What facts concerning the ability of Wines and Vineyards to pay their debts as they fell due were, or should have been, known to Mr Irving as a competent director of those companies during the period; and
• Would those facts have constituted reasonable grounds for suspicion of insolvency.

[234] Suspicion of insolvency falls somewhere between a belief that insolvency exists, on the one hand, and a mere wondering whether it exists, on the other. Suspicion is a positive feeling of apprehension, an admittedly tentative belief, without sufficient evidence to form a concluded and supportable opinion: see, for example, Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303; [1966] ALR 855 at 892-3.”

54. [54]
    Whether a company is able to pay all of its debts as they become due and payable is to be determined by the commercial realty surrounding the company at the relevant time. That is, whether as a matter of fact, the commercial realty was that the company could or could not pay all of its debts as they became due and payable.^[59]The ability to pay its debts is not solely dependant on the resources of the company. As a matter of commercial reality regard also has to be had to the ability to secure funds from secured or unsecured borrowings and other outside sources including related companies and unrelated third parities.

55. [55]
    At the relevant times, Ashala was faced with tax debts, which were due and payable in the sum of $185,113.94. Its income and assets^[60]were not sufficient to meet those debts and its associated companies were in no financial position to assist Ashala in meeting its debts. After the respondent cashed his “rent” cheque, AMA as at 24 August 2007 had a bank balance of $8598.40.^[61]The evidence is that it had no other assets and by 12 October 2008 had been deregistered. Further, according to the respondent, all the “businesses”, namely Ashala, ABCR, and AHB were “struggling” from about 2008 onwards,^[62]most likely as a consequence of the global financial crisis and the “fixtures and fittings” of those businesses were sold with the proceeds being paid to the respondent’s daughter to meet a “tax debt”.^[63]

56. [56]
    It is my view that these financial circumstances would give rise to reasonable grounds for suspecting that Ashala was insolvent at the material time. The evidence also satisfies me that the respondent would have been aware of reasonable grounds for suspecting that the company was insolvent at the times the debts were incurred.

57. [57]
    Accordingly, I find that the respondent was in breach of s 588G of the Corporations Act 2001 (Cth).

Are there any defences available to the respondent

58. [58]
    This matter can be dealt with very quickly. There are none. As the respondent acknowledged in final submissions^[64]he was relying primarily on the fact that at no time did he act as a director in any shape or form. No attempt was made to put any evidence before me to ground a defence under s 588H(2) or (3) of the Corporations Act. Also, in the circumstances of this case, I can see no ground for the exercising of any of the discretionary defences of the type envisaged under ss 1317(2) and 1318(1) of the Act. This is not a case where it would be appropriate to excuse an officer of the company because it would be unjust and oppressive not to do so. In my view, the respondent was, from 7 October 2005, involved in a deliberate course of conduct designed to avoid any possible ramifications of being a director or other officer of the company including responsibility for any of its debts and liabilities.

59. [59]
    In the respondent’s written submissions reference was made to the following cases: Re Richstar Enterprises Pty Ltd v Carey & Ors,^[65]Natcomp Technology Australia Pty Ltd v Graiche,^[66]Department Commissioner of Taxation v Austin,^[67]and Grimaldi.

60. [60]
    In respect of Richstar, the evidence in this case is sufficiently clear and cogent to satisfy me that the respondent was a de-facto director and shadow director at the relevant times. Regarding Natcomp, it might well be the case that there was more overt indicia in that case that the respondent had acted or held himself out as a director of the company. However, each case will turn on its own facts. The absence of more overt indicia in this case is a consequence of the respondent adopting a course of conduct designed to conceal his real association with Ashala, ABCR, and AHB. I have considered Grimaldi and do not consider the judgment in Austin assists the case for the respondent.

The Jones v Dunkel Point

61. [61]
    A submission was made that I should infer that, because the respondent did not call Marks, who swore two affidavits filed by the respondent, her evidence would have been adverse to the respondent’s interests. It was said that Ms Marks was within the “camp” of the respondent.

62. [62]
    I do not accept this submission for a number of reasons. First, while I am not aware of the contents of those affidavits it would not be unreasonable to assume that the respondent, when he filed them, rightly or wrongly would have expected that they would assist him or at least be neutral. He might not have been able to predict what happened in cross-examination, but that is another matter.

63. [63]
    Further, in fact arrangements had been made to interpose Marks on the first day of the hearing. However, upon the applicant stating that he did not intend to rely on the transcript of her oral examination she was not called by the respondent. Mr Copley took no objection to that course of action, but as a consequence, objected to her affidavits being relied on.^[68]

64. [64]
    That a Jones v Dunkel^[69]point would be taken was not signalled to the respondent. That in no way is meant to be a criticism of Mr Copley, counsel for the applicant, but I have little doubt that such a subtle potential point would have gone over the head of the respondent. He had completed his law degree by the time of this proceeding, but it was clear that he had no litigation experience and little court craft.

65. [65]
    For these reasons, I am not prepared to draw any adverse inferences against the respondent. But for all the reasons given above, the Jones v Dunkel point raised by the applicant has little, if any, relevance to the outcome of this proceeding.

The Respondent’s Later Application

66. [66]
    On 9 January 2014 the respondent filed an affidavit in support of a purported application sent to my associate by email on the same day. The email said in part:

“I have become aware of information that an affidavit lodged in this matter may have been sworn under a false name which I have detailed in the attached affidavit which has been filed with the court this morning.

…

If your Honour intended to hand down a decision in my favour obviously this further information will be of no use to the court.

However, if your Honour intended to pass judgment against me I would request that before doing so the matter be relisted for Linda Moore/Imray and David Hambleton to be further cross-examined on the matters detailed in my affidavit”

67. [67]
    The affidavit in support stated in part:

“In mid December 2013 the respondent received information that gave grounds to believe that the woman purporting to be Linda Moore (‘Linda’) had sworn a false affidavit and given incomplete evidence in this matter for which judgment is pending.

The information I refer to in paragraph three of this affidavit is that Linda Moore is the incorrect legal name of the opponent to the affidavit said to be sworn by Linda Moore (filed on 22 November 2013) in this matter on behalf of the applicant and that the correct name of that person is Linda Imray.

The affidavit of Linda Moore was witnessed by James Imray as a justice of the peace. The Queensland Department of Justice that is responsible for the administration of justices of the peace has only a disconnected phone number for James Imray so I have been unable to directly speak with him to verify the steps he took to identify the true identity of Linda Moore before her signing the affidavit as he his required to do. I have emailed Mr Imray and requested this information but he has failed to respond.

…

In the affidavit of David Hambleton sworn on 9 July 2013 there is no mention of ‘Linda’ making any hand written notes at any meeting, even though the meeting where those notes were alleged to have been made is mentioned from paragraphs 28 to 34 of Mr Habmleton’s affidavit, nor are those notes exhibited to the affidavit. In his affidavit Mr Hambleton provided no explanation as to why he did not mention the ‘notes’ which, if they were in existence at the time, should have been disclosed.

At trial and under cross-examination ‘Linda’ was asked what her role was in relation to this matter and she replied that she was the case manager only. Had the respondent been aware of the information detailed in this affidavit, namely that her true legal name is Linda Imray and that she is married to and resides with James Imray who is the business partner of David Hambleton, ‘Linda’ would have been subjected to a much more in-depth cross-examination on her honesty and independence and to the legitimacy of the hand written notes mentioned in paragraphs 10-12 above as well as why she found it necessary to use a false name when swearing her affidavit. ‘Linda’ would also have been asked as to why she had attended every single day of every court proceeding to do with this matter even though Liam Copely, Zoe Tornborough and David Hambleton have also been present at those times.

…”

Mr Hambleton is the liquidator of Ashala Pty Ltd. Ms Moore is an accountant employed by the same firm as Mr Hambleton. Mr Imray is a business partner of Mr Hambleton and the husband of Ms Moore. Mr Copely was counsel appearing for the applicant at the hearing of the substantive proceeding and, Ms Thornborough was his instructing solicitor.

68. [68]
    In the process of arranging for a direction hearing a further e-mail was received from the respondent on 4 February 2014 which said in part:

“As advised previously I am suffering from a major depressive disorder as diagnosed by a doctor which is due completely to the court cases before the court brought by the Applicant and the conduct and complete lack of respect for the courts displayed by Irish Bentley lawyers. This conduct continues today. I am astounded that any professional law firm would not consider it necessary to respond to the affidavit I filed with the Court but it appears Irish Bentley lawyers feel they can do as they wish. I am further astounded that they have not responded to your email today.

I have had a severe anxiety attack today and my blood pressure has risen to a dangerously high and life threatening level which is due to the approaching court date and the arrogance being displayed by Irish Bentley lawyers in relation to it.

I have been advised by my doctor not to go to court as to do so would be extremely hazardous to my health. I do not have the money to pay a lawyer or barrister to appear. I am aware that I could ask for a remand but my health is not going to improve while this matter drags on.

To allow this matter to proceed without delay I withdraw any application I may have made and instead request that His Honour make a direction that David Hambleton and the person purporting to be Linda Moore respond to my Affidavit in Affidavit form which may eliminate any need for cross-examination of witnesses. …”

69. [69]
    Not being able to reconcile the respondent’s apparent desire to withdraw his application with him apparently still wanting orders concerning the filing and serving of affidavits and reserving his rights to cross-examine, the matter was listed for 3.00 pm 5 February 2014. The respondent was advised that it was a matter for him whether he wished to appear personally but that if he did not, arrangements could be made for him to be heard by telephone. He elected to appear in person.

70. [70]
    The respondent’s complaints are essentially that Ms Moore swore an affidavit under her maiden name and not under the name Linda Imray, her married name. And, further that her affidavit was witnessed by her husband, who was a business partner of Mr Hambleton, the appointed liquidator of Ashala Pty Ltd. It was asserted that in such circumstances Ms Moore was not an independent and objective witness and that her affidavit was fraud and a part of a conspiracy or scheme designed to reap unjustified reward. In an email to Ms Moore dated 6 December 2013 the respondent said this:

“I couldn’t figure out why a seemingly respectable young woman would be a party to ignoring requests of the court and fraudulent court applications and making up fake evidence at the last minute when you know you’re going to lose at trial. I just couldn’t put my finger on it but there was something about you that didn’t fit right. Today I found out what it is, you’re married to Hambleton’s partner so when Hambleton makes money you make money. Very clever keeping your old name. What better way to look independent to a court hey?  I can’t wait to cross-examine you next time.”

71. [71]
    Ms Moore’s affidavit was marked as Exhibit 7 during the substantive proceeding and consisted of  one page and one exhibit: Ms Moore deposed:

“On 21 November 2013 I, Linda Moore of level 9, 46 Edward Street, Brisbane in the State of Queensland, accountant, state on oath:

1. I am an employee of the applicant.

2. On 14 September 2010, I attended a meeting at level 1, 138 Albert Street, Brisbane in the State of Queensland (meeting) between:

3. (a)
   Mr Darrell Featherstone;

3. (b)
   Christie Marks;

3. (c)
   Mark Sermon;

3. (d)
   myself; and

3. (e)
   Mr David Hambleton.

3. Exhibited and marked LM-1 are copies of handwritten, contemporaneous notes taken by myself at the meeting.

4. All the facts and circumstances herein deposed to are within my own knowledge save for such as are deposed to from information only and my means of knowledge and sources from information appear on the face of this, my affidavit.

Sworn by Linda Moore on twenty-first day of November 2013 in the presence of …”

72. [72]
    Ms Moore was cross-examined by the respondent on the first day of the hearing of the proceeding. At no time was it suggested or put to her that her notes of the meeting were not hers or were otherwise a fabrication or inaccurate record of what occurred at the meeting. The “legitimacy” of Ms Moore’s notes could have been pursued by the respondent during her cross-examination and/or that of Mr Hambleton during the hearing of the application. There was no such challenge. The respondent was also given the opportunity to address Ms Moore’s notes during the cross-examination by Mr Copely.^[70]

73. [73]
    The fact that Mr Hambleton made no ‘mention’ of Ms Moore making hand written notes of the subject meeting in his affidavit sworn on 9 July 2013 was a matter known to, or should have been known by, the respondent at the substantive hearing. I can see no reason why the respondent should now be allowed to pursue this matter. In any event, this so called “omission” has no relevance to the real issues in the proceeding. No reasonable argument as to why Mr Hambleton was required to be further cross-examined was advanced by the respondent.

74. [74]
    As to one other matter raised by the respondent, if he wanted to ask Ms Moore why she attended court every day he could have done so. In any event the relevance of this escaped me and it was not made clear by the respondent.

75. [75]
    At one stage during the hearing of this application the respondent asserted to the effect that in all but this case Ms Moore uses the surname “Imray”. No evidence to support this allegation was advanced. I have no idea why and when Ms Moore uses the name Imray, but the respondent’s assertion is clearly wrong. Ms Moore’s business e-mail address identifies her as “lmoore”, perhaps to distinguish her from her husband whose business e-mail address identifies him as “jimray”.

76. [76]
    In my view, none of the matters raised by the respondent in his affidavit filed 9 January 2014 or during the hearing of the application warranted the reopening of the proceeding to allow further cross-examination of Ms Moore or Mr Hambleton. Despite the assertions made about motive and wrong doing by the respondent, there was no objective evidence that Ms Moore used her maiden name for any untoward, let alone unlawful purpose. No reason or explanation was identified by the respondent.

77. [77]
    For the reasons given the application of the respondent ought be dismissed.

78. [78]
    At one stage, the respondent appeared to abandon his application to re-open the proceeding on the basis that he had “no desire to attack Ms Moore.”^[71]He instead sought orders only requiring Mr Hambleton and Ms Moore to file affidavits explaining why Ms Moore did not make her affidavit under her married name. The respondent also said words to the effect that he would accept whatever explanations were given.^[72]On the other hand, the respondent continued his assertions that Ms Moore’s motive was to deceive him about her true identity and that she was therefore not an independent witness.^[73]Given this tension, I considered it appropriate to deal with the respondent’s application on the basis that his objective was to have the opportunity to further cross examine at least Ms Moore about the “name” issue.

79. [79]
    I would however, make one further observation. While I was not taken to, and could not find from my own research, any material that prohibited one spouse from taking the affidavit of the other, it does not strike me as a desirable practice in circumstances where both are employed by the same employer and the affidavit is taken for the purpose of clearly controversial litigation. I should also record here that at no time was it suggested that James Imray was not a person who could take an affidavit under the Oaths Act 1867

Costs

80. [80]
    Both sides sought costs based on the presumption that they would be successful in the substantive proceeding. The applicant has been successful in every aspect save for the debt of Mr Marshall. That matter occupied little time and did not materially add to either the complexity or the length of the proceeding. Accordingly, I can see no reason why the usual rule as to costs should not apply. That is, they should follow the event. I can see no reason why that rule ought not also apply in respect of the respondent’s application.

81. [81]
    For the reasons given, the orders of the court are:

1. That the respondent pay the sum of $198,151.14 to the applicant pursuant to s 588M of the Corporations Act 2001 (Cth);

2. That the respondent pay the applicant interest on the sum of $198,151.14 from 10 July 2013 to the date of judgment pursuant to s 58 of the Civil Proceedings Act 2011; and

3. The respondent is to pay the applicant’s costs of its application.

4. The respondent’s application filed 9 January 2014 is dismissed.

5. The respondent is to also pay the applicant’s costs of that application.