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Queensland Maintenance Service Pty Ltd (in liquidation) v Zullo[2016] QDC 228

Queensland Maintenance Service Pty Ltd (in liquidation) v Zullo[2016] QDC 228

DISTRICT COURT OF QUEENSLAND

CITATION:

Queensland Maintenance Service Pty Ltd (in liquidation) v Zullo [2016] QDC 228

PARTIES:

QUEENSLAND MAINTENANCE SERVICE PTY LTD (IN LIQUIDATION)

(applicant)

and

FRANK GERARD ZULLO

(respondent)

FILE NO/S:

4712 of 2015

DIVISION:

Civil

PROCEEDING:

Application

ORIGINATING COURT:

District Court of Queensland

DELIVERED ON:

6 September 2016 - Ex tempore

DELIVERED AT:

Brisbane

JUDGE:

RS Jones DCJ

ORDER:

  1. Applicant granted leave to discontinue proceedings.
  2. Save as for the cost of today’s proceedings, each party is to bear their own costs to date.
  3. The registry release the sum of $20,000 together with any accretions thereon to the solicitors for the Applicants.

COUNSEL:

C Wilson for the applicant

D Williams for the respondent

SOLICITORS:

McInnes Wilson lawyers for the applicant

Acuity Legal for the respondent

  1. [1]
    HIS HONOUR: In this proceeding, the applicant, Queensland Maintenance Services Proprietary Limited (in liquidation) seeks the following relief: first, for leave to discontinue the proceeding against the respondent pursuant to rule 304 subrule (2) of the Uniform Civil Procedure Rules; second, that the respondent pay the applicant’s costs up to 15 December 2015; and third, each party bear its own costs from 16 December 2015. The company also seeks an order that the moneys paid into Court as security for costs be released to the company.
  1. [2]
    The respondent does not oppose the discontinuance, but seeks orders to the following effect: that leave be granted for the discontinuance, pursuant to rule 307, subrule (2) of the Uniform Civil Procedure Rules; the applicant pay the respondent’s costs of and incidental to the proceedings, including the costs of its application, filed 12 August 2016, on the standard basis; also that the cost order be satisfied by the payment to the respondent of the $20,000 paid into Court by way of security for costs, and in the event that there be a shortfall, then the respondent have liberty to apply for an order that the liquidators pay the shortfall personally.
  1. [3]
    The applicant company is, of course, in liquidation, and on 3 December 2015 it commenced proceedings seeking relief in these terms, and I note that there was an amendment on 3rd June 2016, but I will come to those amendments in due course. The originating application filed 3 December 2015 sought a declaration to the effect that the respondent holds 42.5 per cent of a Ferrari motor vehicle on trust for the applicant. Further, that pursuant to section 41 of the Property Law Act 1974, a trustee be appointed to sell the vehicle and to distribute the proceeds of the sale in the following way: 42.5 per cent of the proceeds to the applicant; and the balance of the proceeds, first in payment of the trustee’s remuneration costs and expenses, and finally, the balance, if any, to the respondent.
  1. [4]
    The background to the commencement of these proceedings can be summarised in the following way: the company was ordered to be wound up in insolvency in September 2012. One Peter Lucas and one Glen Shannon were appointed as the liquidators. The principal business of that company whilst solvent was to provide building and maintenance services to the childcare facility ABC Childcare. The demise of that particular childcare facility is, of course, well known to most. The respondent was the sole director of the company, until it was wound up in 2012. In February 2007, the respondent purchased a Ferrari sports car at a price of $447,106, and I will come to the terms of that purchase in a moment.
  1. [5]
    Before going further, I should observe that, pursuant to section 307 of the Uniform Civil Procedure Rules:

A party who discontinues or withdraws is liable to pay:  (a) the costs of the party to whom the discontinuance or withdrawal relates up to the discontinuance or withdrawal;  and (b) the costs of another party or parties caused by the discontinuance or withdrawal.

  1. [6]
    And, perhaps of more relevance, subrule (2) provides:

If a party discontinues or withdraws with the Court’s leave, the Court may make the order for costs it considers appropriate.

  1. [7]
    Relevant features for the contract for the purchase of the motor vehicle are as follows: the heading is in the name of Euromarque Prestige Vehicles. The customer is identified as one Frank Zullo, who, of course, is the respondent in this proceeding. The make and type of the car is also identified, and it is also stated that the total purchase price was to be met in two ways. The first was that the respondent was given a trade-in value of $257,106.15 for a vehicle he already owned and was trading in. I understand that vehicle was also a Ferrari. The balance, in the sum of $190,000, was required to be settled by way of:

Direct deposit 5/02/07.

  1. [8]
    A bank statement from Westpac records that on that date, that is the 5th of February 2007, $190,000 was withdrawn from one of the accounts of the company and was used to pay the balance of the Ferrari’s purchase price.
  1. [9]
    However, in a document described as a “bank register” of the company, on the same day, the transaction in the company books was recorded, not as a motor vehicle purchase, but as “playground renovations”. Another company document went so far as to show a break up of the so-called playground renovations as involving two amounts, $172,727.27 and $17,272.73, by way of GST. Those two figures, of course, conveniently total the amount of $190,000. It would appear, from more recent material, that the transaction might, in fact, have been initially recorded as motor vehicle expenditure, but was later changed to “playground renovations” at some intervening period. But it would appear that that information only came to light at or about July or August of this year.
  1. [10]
    The respondent was, not surprisingly, subjected to a public examination. During the course of that examination, the following exchanges took place between Mr Zullo and Mr Wilson, counsel acting for the liquidators. And this, of course, is by no means meant to represent a majority of the cross-examination, but it was parts that I was taken to and parts that I have considered to be of some significance. At page 117 of the transcript, the transaction was discussed between Mr Wilson and the respondent. At about line 32, this exchange took place:

Okay. And the price, as I’ve said, was four hundred and forty-seven and some dollars. It seems that that was paid for partly with a trade in of another Ferrari, a 2001 360 con – I don’t know whether that means convertible – Spider three litre;  is that right?   That’s correct.

And the balance, $190,000, at least according to the handwritten note, was going to be a direct deposit? --- Yes.

Is that how it was paid for, that you recall? ---  Privilege. I have no idea how it was paid. I threw the invoice on Marty’s – Martin Gallagher’s desk, and I said can you take care of this?  I want to go and pick it up.

  1. [11]
    Then at page 118 of the transcript, Mr Zullo’s attention is drawn to the entry of “playground renovations”. He is asked whether he sees that entry and he says that he does. This – the following exchange takes place:

Is that the entry that relates to the purchase of the Ferrari? --- Privilege. I have no idea whatsoever.

Do you think it might be? --- Privilege. Again, I have no clue whatsoever.

All right. Keep those two documents, and I will give you another document to look at. It should be a copy of a page from a statement, Westpac bank statement number 194, Business Cheque Plus Account for Queensland Maintenance Services. Do you see that?  --- I do.

And you will see, for 5 February two thousand and – there’s an entry of $190,000, being online banking.

  1. [12]
    Then there is the following question:

What instructions did you give to Mr Gallagher? --- Privilege. I think I’ve answered that question that you are just about to ask. I threw the invoice on his desk and told him to take care of that.

Did you have any discussion with him about how that would take place? --- None whatsoever. I didn’t need to.

Do you think, now, that maybe you should have?  ---Why?  He was my CFO.

So that we’re clear here, it appears that the payment of $190,000 to buy your personal Ferrari was put through the books of QMS as playground renovations – sorry, playground equipment? --- Privilege.

  1. [13]
    Then there is a correction:

Playground renovations.

And then the respondent answers:

That’s clearly what it shows there, but again, it’s not my doing. This is Martin Gallagher’s entry. If you check the numbers with Westpac as to who actually went into Westpac to deposit that money, you’ll find that they were Marty’s passwords. As I’ve told you, I didn’t pay for anything.

No. Would you consider it appropriate for Queensland Maintenance Services to be paying for your sports car? --- Privilege. Marty might have put that down as a loan to me at that time or a dividend to me.

Are you aware if that happened? --- No, but that’s what his job would have been.

  1. [14]
    Following that examination on 11 November 2015, solicitors for the liquidators wrote to Mr Zullo’s solicitors setting out the background facts as they saw them, and that correspondence also included a demand in the following terms:

In light of the above circumstances, we consider that QMS –

(d)  is entitled to compensation from Mr Zullo in the sum of 190,000 and/or

(e)  has an equitable interest in the vehicle.

We are instructed to demand that Mr Zullo pay to our client the sum of 190,000 (including GST) by 12 midday, Wednesday 25 November 2015.

  1. [15]
    It was also suggested in that correspondence as an alternative that if Mr Zullo would prefer he could deliver the vehicle to the liquidators with a view to negotiating an acceptable agreement concerning its sale and distribution of the proceeds. That correspondence also indicated that in the event that the demand was not met, it was expected that proceedings would commence without further notice.
  1. [16]
    The solicitors for the respondent were asked at some stage to clarify the respondent’s position. In a letter dated 23 November 2015, solicitors for the respondent said as follows:

We refer to your letter dated 18 November 2015. We can confirm we continue to act on behalf of Mr Frank Zullo. Our client maintains his position as stated during his public examination.

  1. [17]
    It needs to be borne in mind at this stage that Mr Zullo’s position at the public examination was to the effect that he did not really know how the transaction was treated. He simply threw it on Mr Gallagher’s desk and left it to him – because, as I understand Mr Zullo’s evidence from the public examination, that was the way things usually occurred.
  1. [18]
    At its very highest, at this stage, all that could be said is that another alternative might have been that Mr Gallagher might – and I stress the word might – have put the transaction down or treated it as a loan to Mr Zullo personally or as a dividend to Mr Zullo. That appears at page 119, about line 5 of the transcript of the proceedings.
  1. [19]
    It also needs to be borne in mind that those assertions made by Mr Zullo’s solicitors on the 23rd of November 2015 had to be seen in the light of the transaction being wrongly recorded as being for playground renovations. I should note, at this stage, that Mr Gallagher has unfortunately passed away and, it would appear, passed away before he was able to provide any statement or insight as to what might have occurred when Mr Zullo threw the motor vehicle invoice onto his desk.
  1. [20]
    Relevantly, then, on 11 December 2015, solicitors for the liquidators, in response to a letter from Mr Zullo’s solicitors dated 9 December 2015, provided certain information about aspects of the liquidator’s claim against Mr Zullo. That letter – the response letter of 11 December 2015 proceeds under various headings including “interest held on resulting trust”. And at page 2 under the heading “no factual dispute” it asserts that, as a matter of law, given the factual background, a presumption arises pursuant to the principles in Calverley v Green (1984) 155 CLR 242, that Mr Zullo held a 42.5 per cent interest in the vehicle, being the percentage of the company’s funds paid towards the purchase price on what was said to be a resulting trust in favour of the company. Under the heading “no factual dispute” the letter said:

This matter does not involve any contested issues of fact. The cause of action is proved on the documentary evidence which has already been filed and served on your client. Your client has, under oath, stated that he has no explanation for the transaction, and your correspondence of 23 November 2015 confirmed that position. There is no requirement for pleadings for points of claim.

  1. [21]
    On 1st September 2016, Mr Zullo and one Mr Whimp, an accountant, filed affidavit material. In a later affidavit, Mr Zullo referred to his earlier affidavit which relevantly deposed as follows – and this affidavit was filed on 15 December 2015 – that, of course, is some 12 days after the filing of the originating application.
  1. [22]
    In paragraph 16 to 24 of that affidavit Mr Zullo asserts that he had no role in entering the relevant transaction in the company’s Mind Your Own Business program or accounts and that he did not give any instructions to Mr Gallagher or anyone else to have the transaction journalised as the playground renovations. He goes on to say that the recording of the transaction and the description “playground renovations” must have been recorded in error, and he was not aware of that error until he had been examined by Mr Wilson during the public examination proceedings. He also then goes on to speak about various financial arrangements which included one Gelding Trust and a company which I take to be a corporate trustee, Gelding Proprietary Limited – but I am not certain of that.
  1. [23]
    He goes on to refer to various advances in the following terms:

There were numerous personal transactions that were paid for by the applicant as an advance to me in my capacity as a beneficiary of the Gelding Trust against end of year dividends. In almost every case that I could recall, I would place an invoice or similar request for payment on Mr Gallagher’s desk and  ask him to take care of it. He would invariably do so by ensuring the payment by the applicant, then communicate with my accountants to allow them to identify which payments the applicants – the applicant were on my behalf as an advance against anticipated end of financial year dividends.

  1. [24]
    In paragraph 20 and 21, he deposed:

The total sum of these advances was offset by the declared dividend at the end of the rolling financial year, at least until the end of the 2006/5 year. My Ferrari transaction was in the exact same category, namely, an advance to me of funds in my capacity as the beneficiary of the Gelding Trust.

  1. [25]
    Those assertions are at material variance to the evidence that he gave during the public examination. Also on the 15th of December, the accountant Mr Whimp’s affidavit was filed. I note here that both of those affidavits are wrongly identified as being sworn on 14 December 2014. There does not seem to be any dispute that that is a mistake and they were sworn, in fact, on 14 December 2015 and filed 15 December 2015.
  1. [26]
    Under the heading “the error”, Mr Whimp deposes as follows:

I am aware that during the time when the transaction took place, Mr Martin Gallagher (deceased) (Mr Gallagher) held the role of Chief Financial Officer for the applicant and for entities related to the respondent. The MYOB entries were, as I understand it, entered by clerical staff in the employ of the applicant. From my analysis and based on my review of the documents exhibited to this affidavit, I have formed the view that the entry “playground renovations” which appears on the face of the document exhibited [indistinct]  PAL5 to the affidavit of Mr Lucas and described as “applicant’s internal bank register and internal transaction printout” was a clerical error.

This is supported by the fact that the document exhibited as PAL4, which comprises of page 1 of the applicant’s bank statement number 194, states that the payment made by the appellant on 5 February 2007 was in respect of the part payment of the Ferrari. But for the error, the transaction would have been dealt with from an accounting perspective in the same manner as the applicant had previously in respect of payments on behalf of the respondent. Zullo Family Holdings ATF submitted a proof of debt dated 12 January 2012 to the liquidators of the applicant for the sum of $2,813,479.80, that figure taking into account the transaction should be reduced by $190,000 to $2,623,479.80.

  1. [27]
    With respect to Mr Whimp, his assertion that the entry as playground renovations was a clerical error; at the very best, could only be described as speculative. On the material that I have been taken to, there is nothing to suggest that it was a clerical error or would entitle the reasonable inference to be drawn that it occurred as a clerical error. It has to be borne in mind, that the invoice that was given to Mr Gallagher – and even if it were passed on to a more subordinate staff member – dealt with a Ferrari motor vehicle at a price of just under half a million dollars and was, on its face, clearly, a document concerned with the sale of a motor vehicle. On the other hand, the company documents not only recorded a detailed amount of expenditure concerned with playground renovations, but, also, an entry for GST. As I said, with all due respect to Mr Whimp, I find his assertion to be of little weight, there being no reasonable factual basis to ground the conclusion that he reached about that matter.
  1. [28]
    In any event, in the light of the explanations provided by Mr Zullo and supported – at least, to some extent – by the accountant, Mr Whimp, the liquidators– according to Mr Wilson – although, there was no direct evidence on this point, decided that – to the effect again, I repeat, as I understand it – that, having regard to the – the length of time involved, the versions of events given by Mr Zullo and the accountant, the case would clearly be one which largely turned on matters of credit, and the liquidators reached the conclusion that there was a genuine prospect that the case might fail. I will come back to that point made by Mr Wilson in a moment.
  1. [29]
    In the submissions made by Mr Williams’ counsel for the Respondent, it was asserted as follows in paragraph 11:

In summary, the Applicant company – alternatively, the liquidators (should the security for a cost prove insufficient) – ought bear that cost. The liquidator’s assertion that they conducted reasonable investigations prior to commencing proceedings would be rejected in circumstances where:

  1. (a)
    Despite having possession of the company books and records, they ignored or were unaware of the facts that numerous withdrawals and payments were recorded as a loan in 2007, against which was – against which was offset against dividends for the year, and the balance was repaid by Mr Zullo on 4 July 2007.
  1. (b)
    They appeared to be unaware of the fact that Mr Zullo’s entity had lodged a proof of debt against the company upon liquidation.
  1. (c)
    Mr Zullo told them, under oath, at the public examination in March 2015 that the chief financial officer, Mr Gallagher, was likely to have recorded the Ferrari transaction as a loan or dividend.
  1. (d)
    The Applicant had the benefit of employing Mr Gallagher, yet made no use of the opportunity to clarify the position in relation to the transaction.
  1. (e)
    By their own material filed in Ms Dean’s affidavit, the liquidators knew that the company regularly and openly advanced money to the Respondent for projects unconnected with company affairs, and
  1. (f)
    The resulting trust claim was bound to fail where the only probable characterisation of the transaction, namely, a loan, would constitute a rebuttal at law for any presumption of a resulting trust.
  1. [30]
    A couple of things need to be said about those submissions. First, at no stage during the oral examination did Mr Zullo give evidence that it was likely that the Ferrari transaction would be treated as a loan or dividend or would have been recorded to that effect. The second matter of significance is that – is the assertion that, when one has regard to the financial records – to quote Mr Williams:

The only probable characterisation of the transaction would be to characterise it as a loan.

  1. [31]
    At the heart of the Respondent’s case, at least, before me, is the proposition that, if the liquidators had taken the time to properly look through the company books and records, including the various bank statements, they should have realised that the $190,000 was clearly a loan to Mr Zullo, and ought be treated no differently than many of the other transactions involving disbursements in favour of Mr Zullo. The problem with that is that, while the financial material reveals that large sums of money were indeed, moved from the Applicant company to various entities by means of various loans which were repaid, none of the material to which I was taken, in any way shape or form, reveals in any reasonable way – or indicates in any reasonable way – that the subject $190,000 transaction was clearly – or ought clearly be treated as a loan transaction.
  1. [32]
    As I said, I was taken to numerous financial documents. One in particular was one attached to the affidavit of Mr Whimp, and it is headed Queensland Maintenance Services Proprietary Limited, and under the heading Related Party Transactions, it records as follows:

Queensland Maintenance Service Pty Ltd have borrowed funds by way of a short term non-interest bearing loan from Queensland Maintenance Service (signed) Proprietary Limited, a company fully owned by the director, in an amount of $820,000. This amount was repaid in August 2007.

  1. [33]
    Continuing the quote:

The company has also provided a loan in an amount of $11,178,870 to Bright Horizons Australia Childcare Proprietary Limited, in which the director will have a beneficial interest. This loan is provided on a arms length’s terms and condition.

  1. [34]
    Continuing the quote:

The company also provided a loan to Gelding Proprietary Limited for an amount of $4,850,000. This amount was repaid in July 2007.

  1. [35]
    In my view, the liquidators, when confronted with the financial records in the state that they were in at the time – and bearing in mind the versions given my Mr Zullo during the public examination, and bearing in mind the way the transaction was recorded in the company books – had every right to consider that there was something suspicious about the transaction, and, to put it another way, would be incapable, in my view, of coming to any sensible conclusion that that transaction ought to have been treated as a loan. That, of course, was prior to the filing of the affidavit material on 14 December 2015.
  1. [36]
    During the course of the proceedings, I was referred to a number of cases concerning costs. The first was the matter of the Minister for Immigration and Ethnic Affairs and another; Ex Parte, Lai Qin, being a decision of Justice McHugh, 28 February 1997. At page 3, commencing at about line 42. There, Justice McHugh said:

If it appears that both parties have acted reasonably in commencing and defending the proceedings, and the conduct of the parties continued to be reasonable until the litigation was settled, or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the Court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.

  1. [37]
    His Honour then went on to consider the critical questions in that case. In the decision of the Supreme Court of Queensland, Justice Ann Lyons, In the matter of RG Munro Futures Pty Ltd (in liq) [2011] QSC 405, referred to, among other cases, the Lai Quin decision. After quoting a number of cases with – with which her Honour clearly agreed, at paragraph 22, her Honour said:

I agree with the approach of McHugh J. in Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia ex parte Lai Quin, where he indicated that in cases such as the present, where both parties have acted reasonably, the proper exercise of the Court’s discretion will mean that the Court will make no order as to costs.

  1. [38]
    The final case to which I will refer in this regard is that of The Beach Retreat Proprietary Limited v Mooloolaba Yacht Club Marina Ltd & Ors [2009] QSC 084. There, Justice Martin paid considerable attention to a decision of the Court of Appeal in New South Wales, and, in particular, to some of the observations made by President Kirby as he then was. There were a number of passages that Mr Williams drew my attention to. In particular, to the proposition that, in the absence of some other explanation, the abandonment of proceedings suggests or permits the inference that those advising the party abandoning the proceeding belatedly acknowledged the impossibility or – or the improbability of successfully pursuing the action. The passages – speak for themselves in paragraph 93 of the judgment, and I do not intend to go into them. In my view that case can be distinguished from the facts in this case.
  1. [39]
    At the time the proceedings were commenced, the factual matrix that existed at the time was such that it was, in my view, reasonable for the liquidators to commence proceedings. Had that situation remained as it was, then, in my view, there would have been a good case for making cost orders in favour of the Applicant. However, as I have indicated, as I understood Mr Wilson’s submissions – and, again, I emphasise, there was no direct evidence, on the point that I was taken to the liquidators, having had time to reflect on the material provided by Mr Zullo and Mr Whimp in December of 2015, had now decided that, there being real risks associated with pressing on with the litigation, the most sensible course was to discontinue. Those affidavits, as I have already indicated, were filed on 14 December 2015.
  1. [40]
    Had the liquidators acted more promptly, in my view, the proceedings could have been discontinued earlier. Things did not end there, on 3 June 2016, an amended application and statement of claim was filed, and the relief sought in the amended statement of claim is set out in Court document 22, and I do not intend to set that out. That amended application occurred some six months after the affidavit material of Zullo and Whimp had been in the possession of the liquidators. Some two and a-half months later, the application for discontinuance was filed. There was unchallenged evidence that, from 16 December 2015, Mr Zullo has incurred $2866.60, including GST, by way of legal fees. That amount, in my view – or, at least, most of it – could have been avoided, had the liquidators responded in a more timely fashion to the affidavit material which they say triggered the decision to discontinue with the proceedings.
  1. [41]
    In summary, on the material before me, I have reached the conclusions that it was reasonable for the Applicant to commence and maintain the proceedings against the Respondent from either at the time the demand was made on 16 November, but, more probably, from the time the demand was rejected on the 23rd of November through to 15 December 2015. However, thereafter, in my view, the liquidators failed to act reasonably after receiving the affidavit material, and, thereby, caused the Respondent to unnecessarily incur costs. To, perhaps, put it another way, the Applicant acted reasonably, and, indeed, acted as it should, in the period from 23 November 2015 up to 15 December 2015. On the other hand, the conduct of the Respondent, including the solicitor’s response on 23 November 2015, could only described as being unreasonable conduct on the part of the Respondent. But, as I have already said, from the filing of that material, the Applicants had acted in an unreasonable way, and, by that, I mean unnecessary delay.
  1. [42]
    By way of conclusion, then, both parties, at various times during the conduct of these proceedings, have displayed both reasonable and unreasonable conduct. It also needs to be kept in mind that it is the Applicant who has decided to abandon its case against the Respondent in circumstances where he has incurred not insignificant legal costs.
  1. [43]
    And while by no means a decisive factor, it is not an entirely irrelevant consequence that, by virtue of the discontinuance, the Respondent has lost any opportunity of recovering any of those costs. On balance, I consider that the appropriate order as to costs ought be that, in respect of this – in respect of this application, each party bear their own costs.
Close

Editorial Notes

  • Published Case Name:

    Queensland Maintenance Service Pty Ltd (in liquidation) v Zullo

  • Shortened Case Name:

    Queensland Maintenance Service Pty Ltd (in liquidation) v Zullo

  • MNC:

    [2016] QDC 228

  • Court:

    QDC

  • Judge(s):

    Jones DCJ

  • Date:

    06 Sep 2016

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.

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