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Hambleton v Finn[2017] QDC 61

DISTRICT COURT OF QUEENSLAND

CITATION:

Hambleton & Anor v Finn [2017] QDC 61

PARTIES:

DAVID JAMES HAMBLETON AND JAMES MARC IMRAY AS LIQUIDATORS OF MARY FINN’S NURSING RECRUITMENT PTY LTD

(plaintiffs)

v

MARY DELORES FINN

(defendant)

FILE NO/S:

BD 2294/2016

DIVISION:

 

PROCEEDING:

Civil trial

ORIGINATING COURT:

District Court at Brisbane

DELIVERED ON:

17 March 2017

DELIVERED AT:

Brisbane

HEARING DATE:

25 January 2017

JUDGE:

McGill SC DCJ

ORDER:

Judgment that the defendant pay the plaintiff $166,547.80, including $13,463.55 by way of interest.

CATCHWORDS:

CORPORATIONS LAW – Director’s liability – insolvent trading – whether company insolvent when debts incurred – whether section applies if debt to director – statutory set off – whether director to be excused.

Corporations Act 2001 (Cth) ss 553C, 558G, 558M, 1317S.

re Ashington Bayswater Pty Ltd [2013] NSWSC 1008 – cited.

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 – cited.

Chan v First Strategic Development Corporation Ltd [2015] QCA 28 – applied.

Commissioner of Taxation v Croft & Anor [2016] QSC 190 – cited.

Daniels v Anderson (1995) 37 NSWLR 438 - cited.

Duncan v Vinidex Tubemakers Pty Ltd [1999] SASC 157 – cited.

Edenden v Bignell [2007] NSWSC 1122 – cited.

Hall v Poolman (2007) 65 ACSR 123 – considered.

International Cat Manufacturing Pty Ltd v Rodrick [2013] QCA 372 – applied.

Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657 – applied.

Moore v Australian Security and Investment Commission (No 2) (2011) NSWCA 110 – cited.

Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 – followed.

Mulherin v Bank of Western Australia Ltd [2006] QCA 175 – applied.

Re Parker (1997) 150 ALR 92 – cited.

Rexel Electrical Supplies Pty Ltd v Morton [2015] QCA 235 – applied.

Sandell v Porter (1966) 115 CLR 666 – applied.

Smith v Offermans [2015] QCA 55 – cited.

re Swan Services Pty Ltd [2016] NSWSC 1724 – cited.

COUNSEL:

D J Topp for the plaintiffs

The defendant appeared in person

SOLICITORS:

Patane Lawyers Pty Ltd for the plaintiffs

The defendant was not represented

  1. [1]
    At all relevant times the defendant was the sole director of a company, Mary Finn’s Nursing Recruitment Pty Ltd (“the company”). The company was ordered to be wound up on 10 July 2015 by the Federal Court, which appointed the plaintiffs as liquidators: Exhibit 1. By this proceeding, the plaintiffs allege that the defendant is liable to the company for an amount of $368,487.83 as compensation for loss resulting from insolvent trading. The defendant, who has not been legally represented, denied that one of the debts relied on by the plaintiffs was owing by the company, and in her defence sought to set off against the claim an amount owing by the company to her for money she lent to the company, and alleged that in all the circumstances of the case she ought to be excused from any contravention established, under s 1317S of the Corporations Act 2001 (Cth) (“the Act”). 

Background

  1. [2]
    According to the defendant the company was set up in 2008, and she was the only shareholder: p 35. The company operated an agency business placing casual nursing staff in hospitals and nursing homes in the Brisbane area: p 36. That is, a hospital or nursing home which had a need for extra nursing staff could arrange for the company to provide suitably qualified persons who would work on a temporary basis in that hospital or nursing home: p 36. The hospital or nursing home paid the company, and the company paid the nurse, though what normally happened in practice was that it was necessary to pay the nurse before the money came through from the hospital or nursing home.
  1. [3]
    The plaintiff put in evidence a document from the Australian Tax Office (“ATO”) giving the history of a running balance account for the company which showed that the company for the 2007-2008 financial year had sufficient income to justify a payment of income tax on 4 June 2009 of $8,853.30.[1]In the 2008-2009 financial year however, it appears that the company made less income, and tax of only $100.20 was assessed. Thereafter, it does not appear that the company ever made a taxable profit.[2]
  1. [4]
    Nevertheless, the company accrued substantial obligations to the ATO. It was necessary for the company to deduct tax instalments in respect of wages paid to nurses by the company, and goods and services tax liabilities accrued, and these amounts are required to be remitted to the ATO. According to the liquidator, the ATO lodged a proof of debt in respect to the running balance account as at 10 July 2015 for an amount of $153,084.23, all of which was said to have been incurred after 1 July 2012, and remained due and owing.[3]  
  1. [5]
    The liquidators obtained, from external accountants, copies of the profit and loss statement and balance sheet for the company for the financial years ending 2013 (which included for comparison the figures for the previous financial year), 2014 and 2015.[4]These showed that in 2012 the company made a loss of $56,305.60 for the year, which brought the accumulated losses of the company to $133,327.49. As at the end of the financial year, there was $107,990.50 owing to the ATO, an amount of just under $29,000 owing on an overdraft to a bank, a few hundred dollars owing to the defendant, and just over $28,000 said to be owing to “trade creditors”, with a total of over $165,000 in liabilities. On the other hand, trade debtors came to a little over $14,000. In 2013, the loss had become $78,275.90, the trade creditors at a little over $3,000 much lower, the overdraft had increased to over $42,000, the Tax Office debt was down to a little more than $30,000, but there was said to be a loan account owing to the defendant of over $172,000.
  1. [6]
    The 2015 financial statements showed that in 2014 the company made a net loss of $26,259.16, and as at the end of the financial year owed $53,620.33 to the ATO, and just over $47,000 to the bank and $153,060.07 to the defendant. There were trade creditors owed $769.02, while no amount was recorded for trade debtors. Nothing was recorded in these accounts as income or expenses for the 2015 financial year, and the balance sheet entries are simply duplicated for that year.
  1. [7]
    It appears from a copy of the bank statements in evidence for the company’s business cheque account (Exhibit 12) that the overdraft, which was then over $48,000, was paid out on 29 August 2014 “as per customer consent.” The defendants said that the money used to clear the overdraft was her own money: p 38. The defendant did not know whether that was part of the debt said to be owing by the company. It appears that the last payment into the account which could be identified as a payment for the services of the company’s nurses was made on 2 May 2014, though on 26 May there was a cheque or cheques deposited worth $1,369.10, which may also have been such a payment.[5]
  1. [8]
    A statement of the running balance account maintained by the ATO shows regular significant payments being made by the company in the second half of 2009, though the balance owing seems to have remained generally around $40,000 to $50,000.[6]In early 2010 there continued to be regular payments, but they seemed to be less than previous amounts, and the balance increased to over $90,000 by April 2010 and, after dropping a bit, went up to over $100,000 by the end of the financial year. In the latter part of the year there were regular substantial self-assessment amounts, and still payments being made from time to time, but not keeping up with the amounts required, and the balance reached almost $175,000 by the end of the year.
  1. [9]
    In May 2011, a payment of $100,000 was received, and it seems that thereafter for a time the payments were keeping up with the additional self-assessed amounts though there remained a balance of around $80,000 owing, which had been reduced by September 2011 to just over $60,000. The balance crept up to over $80,000 by the end of 2011, and reached $100,000 in June 2012, although it was brought back down again to over $80,000 in August that year. A payment of $7,000 on 16 August 2012[7]was however the last payment made that year, and by the beginning of February 2013 the balance was over $160,000, though it was then substantially reduced by two payments totalling $134,000.
  1. [10]
    From February 2013 further self-assessments which were not fully paid meant that a debit balance increased during that year. Indeed, it seems that the last payments were made in late March and early April 2013, totalling $8,000; in January 2014 the balance had increased to over $100,000, and further to $137,000 following what seems to have been the last self-assessment amounts returned, in June 2014. Thereafter, general interest charges produced a further increase in the balance to the point where the winding up order was made in June 2015, and a proof of debt was lodged: Exhibit 10. According to the defendant’s report to the liquidators, the company when it was wound up had no assets: Exhibit 2.[8]
  1. [11]
    The bank statements Exhibit 12 show that the payment of $129,000 made on 4 February 2013 was the bulk of an amount of $140,000 transferred into that account on 1 February 2013, from an account identified as “Maryfinn.” There was also an internet transfer the same day of $10,000 from the account “Mary Finn.” I have noticed that the business cheque account statements include internet transfers from accounts called “Maryfinn”, “Mary Finn” and “Maryfinnsnursing.” The distinction between these was not explored in cross-examination of the defendant. The defendant said that she made a payment (of $140,000) to the ATO in February 2013: p 44. As at 30 June 2013, the total amount owed by the company to the defendant was, according to the balance sheet, $172,389.03. That is consistent with the proposition that the source of this payment was the defendant.
  1. [12]
    The payment in February 2013 was not quite sufficient to clear the balance owing to the Tax Office, but a remission of the general interest charge then put the account briefly into credit. $11,000 was used for other payments: there were 16 other payments made from the account on 1 February or 4 February 2013: Exhibit 12. Overall, on 1 February 2013 it appears that the defendant put $150,000 of her own money into the company, all of which was promptly used to pay debts. After the credit by the ATO, so far as I know only the overdraft remained outstanding. The failure of the defendant to make further payments thereafter for passing on to the ATO as the debt to the ATO grew again, other than the amount required ultimately to clear the overdraft from the business account, suggests that either the defendant did not have the resources to continue to prop up the company in this way, or that the defendant was unwilling to do so. She did pay out the bank overdraft after the business closed down,[9]and made small payments from time to time to the business account, so there remained some willingness and capacity to provide support. The defendant admitted however that she did not have the funds to pay the ATO.[10]

Legislation

  1. [13]
    The Act provides in s 588G:

“Director's duty to prevent insolvent trading by company

(1) This section applies if:

  1. (a)
    a person is a director of a company at the time when the company incurs a debt; and
  1. (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
  1. (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
  1. (d)
    that time is at or after the commencement of this Act.
  1. (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
  1. (b)
    a reasonable person in a like position in a company in the company's circumstances would be so aware.”
  1. [14]
    Section 588M of the Act then provides:

“Recovery of compensation for loss resulting from insolvent trading

(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
  1. (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
  1. (c)
    the debt was wholly or partly unsecured when the loss or damage was suffered; and
  1. (d)
    the company is being wound up;

whether or not:

  1. (e)
    the director has been convicted of an offence in relation to the contravention; or
  1. (f)
    a civil penalty order has been made against the director in relation to the contravention.
  1. (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.
  1. (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.
  1. (4)
    Proceedings under this section may only be begun within 6 years after the beginning of the winding up.”
  1. [15]
    A number of matters relevant to the application of these provisions are straightforward enough. It was not disputed that the defendant was the director of the company at all relevant times, that she failed to prevent from being incurred any debts incurred, that anything done by the company occurred after the commencement of the Act, that any debts were unsecured, and that the company is being wound up. The issues that need to be established by the plaintiff are:
  1. (a)
    the company incurred debts;
  1. (b)
    the company was at that time in fact insolvent;
  1. (c)
    at that time there were reasonable grounds for suspecting that the company was insolvent; and
  1. (d)
    the defendant did suspect that the company was insolvent, or a reasonable person in the position of the defendant would have suspected that the company was insolvent, at the time the debts were incurred.

The plaintiff’s case - debts

  1. [16]
    The plaintiff in this proceeding relied on three debts as having been incurred: the debt of $153,084.25 owed to the Deputy Commissioner of Taxation, the debt of $211,759.97 owed to the defendant and a debt of $4,105.97 owed to Telstra Corporation Ltd. The defendant did not dispute that the debt to the Deputy Commissioner of Taxation was owing, or that a debt was owing to her, though she said she was not pressing for payment, and no proof of debt by her had been lodged in the winding up. A proof of debt had been lodged by Telstra Corporation Ltd, but that this money was owing was disputed by the defendant.[11]
  1. [17]
    The defendant pleaded that after the company ceased to trade, she had the telephone service disconnected, but it seems Telstra continued to send her bills in relation to the service. She telephoned Telstra about this on a number of occasions, and was told that that was correct, that the bills had been issued in error and that there was no money owing. Nevertheless, the bills kept coming, and a proof of debt was lodged by the company. There are copies of some Telstra bills in the material (Exhibit 11), but all of these relate to bills in 2015. None of them record any actual usage of any telephone services; in some there are no new charges, in others there is a monthly charge for a “business line complete” and an internet data ADSL connection, and generally a charge for overdue payment. None record any payment off the account, but apart from suggesting that some of these debts were incurred after the defendant had closed down the company’s business, there was no information about when the bulk of the relevant debts were incurred, or the circumstances under which that occurred.[12]In that situation, it is impossible for me to be satisfied that this was a debt incurred in circumstances where the legislative provisions are satisfied.

Insolvency

  1. [18]
    The first question therefore is whether at the relevant time the company was insolvent. Under s 95A of the Act, a person is insolvent if the person is not able to pay all of the person’s debts as and when they become due and payable. The effect of the definition is to enshrine in the Act what is called the cash flow test of insolvency, the practical effect of which is that, even if a company has an excess of assets over liabilities in the balance sheet, if the assets are not readily realisable and the company is unable to pay debts as they fall due it will not be solvent.[13]It is necessary to assess the financial position of the company on the basis of commercial reality,[14]and having regard to any source of funds available to the company from its own resources, or which others were prepared to provide to it.[15]A temporary lack of liquidity does not constitute insolvency, bearing in mind that creditors will not always insist on payments in accordance with their terms of trade, but that will not apply in the case of insurmountable endemic illiquidity.[16]This can extend simply to directors being prepared to continue the support of company by lending it money.[17]
  1. [19]
    In the present case, on the face of the balance sheet the company was insolvent and had been for a long time. That is supported by the fact that its operations had been consistently losing money since it seems the 2010 financial year. By the end of the 2012 financial year there were accumulated losses of over $130,000, the company had virtually no assets, had a significant bank overdraft just under $29,000 and owed over $100,000 to the Australian Taxation Office, and some $28,000 to “trade creditors”.
  1. [20]
    The company depended for its income on being able to place casual nurses with institutions that had need of casual nurses. It appears from the profit and loss accounts that in the immediate sense this was a profitable exercise, in that the amount received from customers was well above the amount paid to nurses, but there were evidently a good deal of expenses and the gross profits were more than exhausted by them. As turnover fell from 2012 to 2014, expenses also fell, but never by enough.
  1. [21]
    For practical purposes, the plaintiff needs to show that the company was insolvent from the time the final debt to the ATO first began to be accrued, in February 2013.

Defendant’s evidence

  1. [22]
    The defendant had had some experience with this business, having been a director between 2001 and January 2007 of another company, Finn’s Nursing Agency Pty Ltd, which engaged in the same business: p 39. In evidence the defendant claimed that the difficulty for the company was that it took customers of the business too long to pay their accounts, whereas she would pay the nurses every week for the work they did, and that this was reflected in the negative equity in the company: p 36. The difficulty with this is that something of that nature is not supposed to be reflected in negative equity, but rather in trade debtors. The accounts were prepared by accountants, and in two of the balance sheets there was a reference to trade debtors, but the amount involved was relatively small. If there was a large amount owed by customers of the business, this should have been reflected in the balance sheet as an asset of the company, and would have been, at least if what the defendant said was true, and the accountants had been told about these amounts outstanding.
  1. [23]
    The defendant said this was aggravated by the Queensland Health payroll problem, and claimed that there was still money owing to the company from that source (p 36) though no such debt was disclosed in the report as to the affairs of the company that she submitted to the liquidators, Exhibit 2. She said as well that after a change of government in Queensland the use of casual nurses in hospitals was greatly reduced, which impacted adversely on her business: p 37. This had a flow-on effect in that there were fewer vacancies and less need for agency nurses in other hospitals, and more nurses without full-time employment looking for such positions. This explanation does not fit the fact that the company made only very little profit in 2009 and evidently no profit thereafter, suggesting that it had financial difficulties causing unprofitability prior to the change of government and the change in Health Department policy about hiring casual nurses. She said that she stopped trading around the end of 2013 to early 2014, and ceased completely in May 2014: p 37.
  1. [24]
    At one point during the cross-examination, the defendant appeared to admit that the company was not able to pay its debts as and when they fell due from July 2012 onwards: p 45. She said that they were regularly chasing up clients to find out whether they needed staff, and in that way constantly trying to improve the business, but essentially her position seems to have been that she was hoping that things would pick up and that the company could trade its way out of trouble: p 46.

Analysis

  1. [25]
    The fact that the company had a continuing and increasing debt to the ATO, or a debt which had not been paid off, suggests the company was insolvent, since tax debts arising from self-assessment for PAYG deductions and goods and services tax are payable promptly, although it is possible for a situation to exist where that would not be inconsistent with solvency. In International Cat Manufacturing Pty Ltd v Rodrick (supra) the relevant company had an increasing debt to the Australian Taxation Office, but it was held that the company was still at the relevant time solvent, because of an arrangement between the company and one of its customers who was keen to support the company, at least until it had completed building a particular vessel, and was willing and able to cover the company’s debts as and when they fell due, at least until then. Indeed, he said that he had put in place an arrangement to make regular payments into the company’s account which were intended to cover recurrent tax liabilities, though it appears they were not in fact used for that purpose: [90]. In these circumstances, the Court of Appeal held that the failure to make payments to the ATO was not inconsistent with a finding of solvency, just because the arrangement to cover the company’s debts failed in this respect to work, by choice or by neglect: [93].
  2. [26]
    In the present case, there was evidence that a substantial payment had been advanced to the company by the defendant twice in the past for the purpose of paying off a large debt to the ATO, but the company thereafter rebuilt a debt to the ATO, which was not paid off with similar funds. There was no evidence from the defendant that she had a capacity at any relevant time to provide further funds to the company in order to discharge the debt to the ATO, or that she was willing to do so, so this case can be distinguished from Rodrick on this basis. A failure to pay debts due to the ATO as they become due, although not demonstrative of insolvency, is in my opinion a strong indication of insolvency.[18]
  3. [27]
    The defendant said that her payroll was managed by a company which would provide information at the end of the financial year to her accountants for the purpose of preparing the accounts of the company: p 41.[19]  That company also prepared invoices which were sent to hospitals and nursing homes: p 47. The defendant said that the company actually sent the invoices: p 47. She told the accountants what invoices had been sent: p 48. The payroll company should have been keeping records of accounts rendered, and it should not have been difficult for the accountants, by comparing that company’s records with the bank statements, to provide an accurate indication of trade debtors. The defendant said that the payroll company’s records were sent to the accountants, as one would expect. In those circumstances, the absence of any significant amount shown in the balance sheet for trade debtors, and the fact that no amount was shown in the accounts for writing off bad debts at any time, seems inconsistent with the defendant’s assertion that a failure to pay by hospitals and others was a major problem for the company.
  4. [28]
    The defendant was not able to explain the absence of any figure for trade debtors of the accounts at the end of June 2014, but maintained that there was money owing from Queensland Health which was never recovered: p 48. The figures for the earlier years however of about $14,000 and about $19,000 suggest that, at least up until the end of mid-2013, this was not a major problem, since the average weekly turnover in 2013 was about $8,500, so that $19,000 just represents invoices sent out over a period of not much more than 14 days. There are no contemporaneous records to confirm the defendant’s assertion that the problem for the business was that customers, particularly the Queensland Health Department, were not paying bills,[20] as the defendant conceded: p 42.
  5. [29]
    The defendant claimed for example that the reason why it looked as though the company was losing money in the 2012, 2013 and 2014 financial years was that money had not come in from customers: p 51. The defendant sought to explain accumulated losses at the beginning of the 2012 financial year (that is, mid-2011) of over $77,000 on the basis that there was a problem in getting paid on the invoices the company sent out: p 52. That is inconsistent with the information in the company’s balance sheets, which on the defendant’s evidence was based on proper information about what accounts had been sent out and what had been paid. The defendant sought to explain the low figures for trade debtors on the basis that it would not have included outstanding ones that they had been waiting for for months: p 52. There is no accounting evidence to support that proposition, and it is not obvious to me why accounts prepared by accountants would not include such outstanding amounts in that figure, unless they have been written off as bad debts, which also does not emerge from the profit and loss statements.[21] 
  6. [30]
    The defendant claimed that these monies were not included in the trade debtors figure because “we couldn’t recoup the money”: p 58. But at the time when the accounts were prepared soon after the end of the financial year, it could not have been obvious that the money was never going to be paid, and that does not provide an explanation for the failure of the accountants either to include these amounts in the figure for trade debtors, or to include an entry in the expenses of the business for writing off bad debts. Without straying from the true test for insolvency, the inclusion of such a figure as an asset for the business would at least have diminished to some extent the huge deficiency in net assets of this company, which consistently showed “balance sheet insolvency” during the period covered by the accounts in evidence.
  7. [31]
    The company certainly suffered a decline in turnover, with gross receipts in 2012 of $617,000 going to $446,000 the following year and only $279,000 in 2014: Exhibit 4. The information in the material from the accountants supports the conclusion that non-payment of customers was not a significant problem, at least until mid-2013, yet it is apparent that well before then the company was routinely and regularly losing money and was not able to meet its taxation obligations except by the large advance provided to the company in February 2013 by the defendant. Subject to the capacity and willingness of the defendant to continue to provide such advances to the company, of which there is no evidence, other than the discharge of the bank overdraft, that supports the conclusion that the company was insolvent. It also supports a conclusion that the defendant’s explanation for the company’s difficulties, that it was due to non-payment from Queensland Health, was not true.
  8. [32]
    Another proposition which was plainly not true was the defendant’s assertion that the payments being made to the tax office were being paid by the due date up until the last couple of months: p 49. I accept that there can be some delay between when a self-assessment return is lodged and when the money is payable,[22] but the fact that the debt continued to increase after it was discharged in early 2013 demonstrates that the company was not paying everything by the due date; indeed from about April 2013 the company was not paying anything at all to the ATO. That evidence by the defendant was just not true. When pressed on the point however she conceded that in 2012 the company was not making payments each month in respect of the amounts payable that month because the company did not have the money to make those payments: p 50. Her explanation was that they had been in touch with the ATO to let them know and explain that they would pay it off in bulk once they had the money: p 51. She claimed that the accountant spoke to the taxation office and explained that the company would meet the debt at the end of the year, like the previous year, but it just got worse and worse: p 50. Eventually she conceded that the company was running late with payments to the ATO from at least back to July 2009: p 51.[23]
  9. [33]
    It is possible for the ATO to enter into a payment arrangement or otherwise agree to terms for the payment of a taxation liability in a way which has the effect of changing the time when money otherwise due under tax statutes becomes payable.[24]  The difficulty for the defendant in this case is that there is no evidence that the ATO ever entered into any specific agreement which had the effect of deferring the due date for payment of any of the tax liabilities.[25]  She conceded that there was never a formal payment plan entered into: p 61. At another point she conceded that she didn’t have “an agreement with the tax office”, just that she would ring up and explain the situation and what she was trying to do: p 62. At best the position was simply that excuses were offered to the ATO, and in practice the ATO did not take enforcement proceedings, but waited for the money to come in. That would not have the effect of altering the date on which such taxation obligations became due.
  10. [34]
    The defendant said at one point that she had an agreement with the ATO at the end of the financial year before she closed that she would pay the ATO debt and that she just didn’t have the money: p 59. That was evidence of an absence of capacity to provide financial support to the company so as to preserve solvency despite the fact that the company was losing money. See also p 60: “we paid what we could at the time”. She also said that in respect of the money owing to the tax office in June 2013, “I couldn’t pay them”: p 63. At p 64 she conceded that from the beginning of the 2013 calendar year the debt to the ATO grew because the company simply could not pay its debt. Later however she reverted to a sweeping claim that the company always paid its debts to the ATO, even if they were not paid by the due date: p 65. That was plainly not true. Overall therefore I do not regard the defendant as a reliable witness, and I am wary about accepting her evidence, but it will be apparent from these reasons that there are things she has said which I do accept, because they are either supported by other evidence, inherently probable, or statements against interest.
  11. [35]
    In all the circumstances and bearing in mind the evidence as a whole, I am satisfied that the company was insolvent, in that it was not able to pay all of its debts as and when they fell due, after February 2013. That means that the debt to the ATO was all incurred at a time when the company was in fact insolvent. I suspect that prior to then the company had been, for some years, insolvent in the sense that it was not able to pay all of its debts as and when they became due and payable from its own resources, but so long as the defendant remained willing and able to put more money into the company in order to prop it up, it would seem to follow from the approach in Rodrick (supra) that the company was not at that time insolvent. Further, given the relatively simple structure of the company at the time, and bearing in mind that it had been operating at a loss for some years, that on two occasions it had been necessary for the defendant to put in large sums of money in order to clear debts to the ATO, and she was necessarily aware of any capacity and willingness she had to continue to do so, there were at that time reasonable grounds for suspecting that the company was insolvent.
  12. [36]
    As to whether the defendant did suspect that the company was insolvent at the time, there was no direct evidence of that though the defendant did on occasions acknowledge that, in effect, she can see now that the company was unable to pay its debts as and when they fell due. I do not need however to consider whether it is appropriate to draw an inference of actual suspicion on the part of the defendant at the relevant time, because I have no hesitation in concluding that a reasonable person in the position of the defendant would have suspected that the company was insolvent. I arrive at this conclusion bearing in mind that the defendant was the mind of the company and the person who was in control of its business, and that she had had many years experience in this industry, so she ought to have been well aware of the difficulties that the company faced, and the implications of those difficulties for the financial position of the company. I am also conscious of the fact that the test of suspicion of insolvency is less demanding than an actual belief that the company was insolvent at that time.

Debt to the defendant – proof

  1. [37]
    In the case of the debt to the defendant, there are two additional problems. The first is that the debt is not constituted by a small number of specific advances by the defendant to the company; rather an examination of the bank statements in Exhibit 12 reveals that there were frequently transfers of money to or from an account identified by some variation of “Mary Finn.”  The last payment from the defendant seems to have been on 22 September 2014 when $1,000 was transferred into the business cheque account, putting it into credit. But there were in August 2014 five transfers into that account apparently from the defendant, including the amount paid on 29 August to discharge the overdraft balance then owing, and that month there were also five internet transfers back to accounts identified as “Mary Finn”, most of which were for $800. The details of this were not explored during cross-examination, and it was also not clear how the quantum of the debt said to be owing on which the plaintiff relied was arrived at. The liquidators in their report note that the accounts as at 30 June 2015 simply carried over the loan balance from 12 months earlier, and they had adjusted that figure on the basis of transactions apparently to or from the defendant in the bank statements during that financial year, all of which had been applied against the loan account.[26]
  2. [38]
    Strictly speaking of course, the effect of the defendant’s advancing money to the company in January 2013 was to replace a debt to the ATO with a debt owed to her, but it is apparent from the authorities to which I have referred that, even if this is technically a debt owed to the company, if it is provided voluntarily by someone aware of the financial position of the company in order to support the company and keep it going, and if the true situation was that the defendant did not intend to call for the payment of that debt at least so long as the company remained trading, the existence of that debt is not something which should be taken into account as supporting the conclusion that the company was insolvent. Indeed, the fact that to that extent the defendant was willing and able to support the financial position of the company by helping it to pay its debts is a factor which supports a conclusion that the company was at that time solvent.
  3. [39]
    The analysis in the cases suggest that, so long as there is someone willing to continue to support the company in this way, and with the capacity to do so, the company will not be insolvent, because of the proposition that insolvency is to be assessed by reference to commercial reality. I do not consider therefore that the payment made in February 2013 by the defendant had the effect that the company became insolvent because it incurred that debt. The reason why the company was insolvent after that time was that thereafter the defendant was either unwilling or unable (the admissions made by the defendant under cross-examination suggest the latter) to continue to provide further support to the company in this way so as to prop up its business.  Without that support, the company was obviously in fact incapable of trading out of its difficulties, in circumstances where there was a declining market for its services.
  4. [40]
    The other difficulty with the plaintiff’s claim insofar as it relies on the debt to the defendant is that it is difficult to see how the defendant can be characterised in a broad sense as a person who has suffered loss or damage in relation to the debt to her because of the company’s insolvency. Although in the technical sense she has suffered a loss because of the inability of the company to repay this debt,[27] this debt reflected money advanced by her to the company at a time when she was well-aware of the position of the company, and where in substance she was providing this money as additional working capital with a view to propping up the failing company, in the hope that something would turn up. When it did not and the company went into liquidation, the defendant did not even put in a proof of debt in respect of this loan. In these circumstances, it does strike me as a little artificial to treat the defendant as a creditor who has suffered loss or damage. It would certainly be quite artificial for the defendant to be able to exercise the creditor’s right in s 588M(3), subject to the statutory restrictions, to recover the debt from herself.

-  Set off

  1. [41]
    The defendant in her defence pleaded reliance on a set off under the Act s 553C(1), which is in the following terms:

Insolvent companies--mutual credit and set-off

  1. (1)
    Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
  1. (a)
    an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
  1. (b)
    the sum due from the one party is to be set off against any sum due from the other party; and
  1. (c)
    only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.”
  1. [42]
    At first glance the section appears to be dealing with a different situation, a case where in the course of the winding up there is a creditor to the company who also owes money to the company, in which context it is only the net debt which is relevant to the operation of the winding up. This point was considered recently in Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 049, where Searles DCJ cited authority, including a decision of the New South Wales Court of Appeal, supporting the proposition that s 553C is available to set off pre-liquidation debts against a post liquidation claim under the statute.[28]An application for leave to appeal his Honour’s decision was refused by the Court of Appeal, where the correctness of his conclusion in relation to set off was not in issue: [2015] QCA 235 at [6].
  1. [43]
    I should mention that at one point during cross-examination the defendant appeared to abandon her claim for a set off: p 66. I was not at all sure that she really understood what she was being asked about at that point, and, bearing in mind that she was not legally represented, do not consider that this amounted to an effective election to waive any right of set off she in fact had under the statute.
  1. [44]
    The plaintiff relied on the Act s 553C(2), which provides:

“(2)   A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.”

  1. [45]
    In relation to this point, his Honour followed the decision of the Victorian Court of Appeal in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation [2009] VSCA 319; (2009) 26 VR 657, where it was held that what was required to be shown was that the creditor had notice of facts that would have indicated to a reasonable person the fact that the company was insolvent; constructive notice was not sufficient, nor was it sufficient that the creditor had grounds for suspecting insolvency, but it was not necessary to show that the creditor was subjectively aware of insolvency at that time. His Honour followed that approach, and I consider that I should do so as well. That is a rather more demanding test than the test under s 588M, but in this case it must be applied bearing in mind the effect on the issue of insolvency of the fact that the defendant was willing and able to provide financial support in this way to the company: Rodrick (supra).
  1. [46]
    Certainly at the time of the advance in February 2013, for reasons I have given, I do not consider that the company was shown to have been insolvent, and it necessarily follows that the defendant did not then have notice of facts from which a reasonable person would conclude that the company was insolvent. For practical purposes that conclusion was avoided by the willingness and ability of the defendant to provide financial support to the company in the way that she did. Accordingly, in respect of the $150,000 advanced on 1 February 2013, I conclude that the defendant does have a defence under s 553C, and the exclusion in subsection (2) is not made out.

- Does s 588M apply?

  1. [47]
    There is however I think a broader issue involved here. In the case of a person in the position of the defendant, putting money into this company in order to prop it up and to pay other debts of the company, although perhaps technically recorded as a loan for accounting purposes, it was in practical terms very much an exercise in providing financial support to the business in order to keep it afloat, and with knowledge of the situation the business was in. I really do not think that this was the sort of situation this part of the legislation was intended to cover. Indeed, it strikes me as a perverse operation of the section if a director, who puts his or her own money into a company in order to enable the company to pay debts in the hope thereby of staving off insolvency, is to be required to put the same amount of money in again if ultimately the company does not survive. Why should a director, confronted with what is hoped to be a temporary problem with a company’s finances, be discouraged from dealing with that problem by putting his or her own money into the company, because, if the company ultimately does not survive, the director will be exposed to having to pay that amount of money again?
  1. [48]
    I think the answer is that s 588M(1) speaks in paragraph (a) of one “person”, called the “director” for the purposes of the section, and in paragraph (b) of another “person” called for the purposes of the section “the creditor.” It follows that the section is fundamentally concerned with a situation where there are two persons involved, that is, where there is a creditor (or a number of creditors) who are different from the director, the person in (a). It follows that the director, the person in (a) will not qualify as a “person” for the purposes of (b), and hence the section will not apply to any loss or damage suffered by the director. That would, in my view, be an interpretation supported by the terms of subsection (3), and one which would be consistent with the purpose of the section as a whole, while avoiding an outcome which strikes me as inconsistent with that purpose. In that way I am giving to the section a purposive construction, based on the words of the section.
  1. [49]
    It follows in my opinion that the debt to the defendant was not a debt for the purposes of s 588M, and should be disregarded for the purpose of the recovery provision.

Defence – s 1317S

  1. [50]
    The other matter I must deal with is the defence raised by the defendant under s 1317S of the Act. That section provides relevantly:

“(2)   If:

  1. (a)
    eligible proceedings are brought against a person; and
  1. (b)
    in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
  1. (i)
    the person has acted honestly; and
  1. (ii)
    having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of the corporation or of a Part 5.7 body) the person ought fairly to be excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.

  1. (3)
    In determining under subsection (2) whether a person ought fairly to be excused for a contravention of s 588G, the matters to which regard is to be had include, but are not limited to:
  1. (a)
    any action the person took with a view to appointing; an administrator of the company or Part 5.7 body; and
  1. (b)
    when that action was taken and
  1. (c)
    the results of that action.”
  1. [51]
    By subsection (1) the term “eligible proceedings” includes proceedings under s 588M. It has been said that the section is to allow the court to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who acted in an environment involving risk and commercial decision making: Daniels v Anderson (1995) 37 NSWLR 438 at 525. It is necessary first to find whether the defendant acted honestly, then to make a value judgment about whether, having regard to all the circumstances of the case, the defendant ought fairly to be excused for the contravention, and finally to decide whether as a matter of discretion the court should exercise the power to relieve the defendant in whole or in part: re Swan Services Pty Ltd [2016] NSWSC 1724 at [237] and authorities there cited.
  1. [52]
    By the section reference needs to be made to any action the defendant took with a view to appointing an administrator of the company, and it is clear the defendant took no such action to the relevant time. The question of subjective honesty is I think not very difficult; the defendant may have been misguided in persisting with the operation of this business in the face of continuing losses and a contracting turnover, but there is in my view no obvious indication of personal dishonesty on her part. As to whether her conduct fell short of the required standard, it does appear that for a long time this company did continue to trade after it ought to have been apparent that continuing to do so was simply going to run up more debts that the company would be unable ultimately to discharge, and in those circumstances there is an obligation on a director in the position of the defendant not to continue to trade, and in that way would continue to run up those debts. Relevantly therefore the defendant’s conduct did fall short of the required standards.
  1. [53]
    The contravention was not serious in terms of the size of the insolvency, but it did persist for a period of almost 18 months, in circumstances where there appear to have been no objective grounds for optimism about any prospect of change. There was no element of impropriety involved, such as deception on the part of the defendant in the conduct of the business, and no question of personal gain; it is clear that the defendant put a large amount of her own money into this business, which was lost when it was wound up, and she has not proved in the winding up for that money. The defendant did appear to be genuinely upset by the situation that had arisen, probably more by the ultimate failure of her business in circumstances where she had been working in that business one way or another over a long period of time. General deterrence is also a relevant factor here, since the function of the section is to discourage and hopefully prevent directors from continuing to trade once a company has become insolvent.[29]
  1. [54]
    In Hall v Poolman (2007) 65 ACSR 123 Palmer J noted at [329] that the decision for a director of whether and when to abandon hope for a company’s future and cease to trade was a difficult one, bearing in mind that a great deal of personal effort may have been expended in the business, but “when confronted with the necessity of making a decision involving these factors, a director cannot afford to procrastinate to avoid confronting realities.”
  1. [55]
    His Honour also noted at [331] that in some cases a reasonable time must be allowed to a director to assess whether the company’s difficulty is temporary and remediable or endemic and fatal. This is not a case where the director can claim an absence of personal responsibility for the affairs of the company, or where she has been the innocent victim of some wrongdoing by someone else: no such claim was advanced. Her continuing optimism about the future of the company can really only be explained by the existence of a strong emotional commitment to its survival.[30]The defendant in evidence referred to difficulties caused by the problems with the Queensland Health payroll system, but as I have noted there is no objective evidence to support this proposition and I am sceptical of it. Nevertheless the defendant’s proposition that the demand for agency nurses fell substantially after 2012 is consistent with the decline in turnover of the business, and is plausible.
  1. [56]
    The defendant said that she would regularly ring her customers to find out if they had any need for agency nurses, and no doubt that was all that she could usefully do if the demand had fallen. The real problem is that the defendant appeared to be unwilling or perhaps unable to confront the situation where the demand for services of the company had declined, which greatly aggravated the difficulties already faced by the company due to the fact that it was apparently losing money before the decline in turnover.[31]The pleading also refers to attempts made by the defendant to get some modification by Queensland Health of its policies, which not surprisingly were unsuccessful. It would have been at least unwise to rely on that approach.
  1. [57]
    The other matters relied on were the fact that, at least towards the end, only a very low salary was taken by the defendant personally, and she put a lot of her own money into the company in the way that I have indicated. This is a factor which is related to one of the matters referred to earlier as relevant, that the financial difficulties of the company were not associated with personal gain on the part of the defendant; rather the reverse, in that they have already caused her a good deal of personal loss.
  1. [58]
    If I am wrong about the correct interpretation of s 588M, and a person can be both a creditor and a director for the purposes of that section, it would seem to me that to that extent the section would work in a way which would cause injustice to the defendant in this case. If that were the true legal position, I consider that, having regard to all the circumstances of the case, the defendant ought fairly to be excused for the contravention to that extent, and I would exercise the power in the section to relieve the defendant in part from her liability under the section, to the extent that it related to loss or damage suffered by her as a creditor of the company. On the view that I take however she is not liable for this amount anyway under s 588M. In respect of the amount owed to the ATO, I am not persuaded that the defendant ought fairly to be excused for the contravention. This defence therefore fails.

Conclusion

  1. [59]
    Accordingly, the amount recoverable by the liquidator is limited to the amount of the debt to the ATO. This was $153,084.25. The plaintiff also claimed interest from the date of a letter of demand on 15 September 2015 to the date of judgment, pursuant to the Civil Proceedings Act 2011 s 58. Interest on the amount of the debt calculated at the rates under the Practice Direction by the court calculator comes to $13,463.55. Accordingly I give judgment that the defendant pay the plaintiff $166,547.80 including $13,463.55 by way of interest. When these reasons are delivered I will invite submissions in relation to costs.

Footnotes

[1]  Exhibit 16 Vol 1 p 249; Exhibit 6.

[2]  See Hambleton, p 24.

[3]  Exhibit 16 Vol 1 p 9; Exhibit 10. In fact it was all incurred after February 2013, when the account was briefly in credit.

[4]  Exhibits 4, 5; Exhibit 16, Vol 1, pp 19-40.

[5]  Unfortunately the June 2014 monthly statement is missing from both Exhibit 12 and Exhibit 16.

[6]  Exhibit 16, Vol 1, pp 218-248, pp 181-187.

[7]  See also Exhibit 12, August 2012, p 2 of 4.

[8]  The liquidators have not identified any, except this claim: p 16.

[9]  The overdraft was generally operated within its $50,000 limit: Hambleton p 17.

[10]  See pp 59, 60, 63, 64, discussed at [34] below.

[11]  Exhibit 11; amended defence para 2(b); Exhibit 17. Mr Hambleton conceded that the account in Exhibit 17 was plausible: p 31.

[12]  Mr Hambleton said he had been told by Telstra that it was for a yellow pages entry which was not cancelled before the cut-off date for renewal: p 29. This is hearsay, and in that situation the debt may have been incurred when the entry was originally arranged.

[13]Rexel Electrical Supplies Pty Ltd v Morton [2015] QCA 235 at [8].

[14]  Ibid, para [9].

[15]International Cat Manufacturing Pty Ltd v Rodrick [2013] QCA 372 at [100]-[111]; Chan v First Strategic Development Corporation Ltd [2015] QCA 28 at [40]-[44].

[16]Sandell v Porter (1966) 115 CLR 666 at 670.

[17]Mulherin v Bank of Western Australia Ltd [2006] QCA 175 at [113]-[115].

[18]  So is making payment in round figures, rather than by reference to the actual amounts payable: Hambleton, p 33.

[19]  See also Hambleton p 11 – they received “payroll records”.

[20]  Hambleton p 19, he was not provided with records of invoices: p 10.

[21]  Exhibits 4 and 5 do not contain any entry for bad debts written off.

[22]  Though commonly payment is made when returns are lodged on the due date: Hambleton p 27.

[23]  See Hambleton p 27: since 1 July 2009.

[24]Commissioner of Taxation v Croft & Anor [2016] QSC 190; Smith v Offermans [2015] QCA 55 at [10]..

[25]  Cf re Ashington Bayswater Pty Ltd [2013] NSWSC 1008, cited in Smith v Offermans (supra) at [51].

[26]  Exhibit 16, Vol 1 p 7.

[27]  Ordinarily a creditor would just have to show that the debt was not paid, and would not be on winding up: Edenden v Bignell [2007] NSWSC 1122 at [30].

[28]Re Parker (1997) 150 ALR 92; Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; Duncan v Vinidex Tubemakers Pty Ltd [1999] SASC 157.

[29]  These are factors discussed in Moore v Australian Security and Investment Commission (No 2) (2011) NSWCA 110 at [44]-[50].

[30]  I did notice at one point while giving evidence at the hearing she became upset when speaking about the company’s situation: p 37.

[31]  Because of the limited history of the company’s accounts available, it is possible that the decline in turnover started prior to 2012.

Close

Editorial Notes

  • Published Case Name:

    Hambleton & Anor v Finn

  • Shortened Case Name:

    Hambleton v Finn

  • MNC:

    [2017] QDC 61

  • Court:

    QDC

  • Judge(s):

    McGill DCJ

  • Date:

    17 Mar 2017

Appeal Status

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

Cases Cited

Case NameFull CitationFrequency
Ashington Bayswater Pty Limited (in liq) [2013] NSWSC 1008
2 citations
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47
2 citations
Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28
2 citations
Commissioner of Taxation v Croft[2017] 2 Qd R 382; [2016] QSC 190
2 citations
Crawford v O'Brien (1997) 150 ALR 92
2 citations
Daniels v Anderson (1995) 37 NSWLR 438
2 citations
Duncan v Vinidex Tubemakers Pty Limited [1999] SASC 157
2 citations
Edenden v Bignell [2007] NSWSC 1122
2 citations
Hall v Poolman (2007) 65 ACSR 123
3 citations
International Cat Manufacturing Pty Ltd (in liq) v Rodrick [2013] QCA 372
2 citations
Jetaway Logistics Pty Ltd & Ors v The Deputy Commissioner of Taxation [2009] VSCA 319
1 citation
Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 26 VR 657
2 citations
Morley v Australian Securities and Investments Commission (No 2) (2011) NSWCA 110
2 citations
Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49
2 citations
Mulherin v Bank of Western Australia Ltd [2006] QCA 175
2 citations
Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724
2 citations
Rexel Electrical Supplies Pty Ltd v Morton [2015] QCA 235
4 citations
Sandell v Porter (1966) 115 C.L.R., 666
2 citations
Smith v Offermans [2015] QCA 55
3 citations

Cases Citing

No judgments on Queensland Judgments cite this judgment.

1

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