Exit Distraction Free Reading Mode
- Unreported Judgment
- Appeal Determined (QCA)
- Tremco Pty Ltd v Thomson[2018] QDC 101
- Add to List
Tremco Pty Ltd v Thomson[2018] QDC 101
Tremco Pty Ltd v Thomson[2018] QDC 101
DISTRICT COURT OF QUEENSLAND
CITATION: | Tremco Pty Ltd v Thomson [2018] QDC 101 |
PARTIES: | TREMCO PTY LTD ACN 000 024 064 (Plaintiff) CAROLYN MARY THOMSON (Defendant) AND BENTLEYS (SUNSHINE COAST) PTY LTD (formerly known as PWA FINANCIAL GROUP PTY LTD) ACN 010 527 876) (First Third Party) AND PETA WENDY GENFELL (Second Third Party) AND ULRIKE BENDLE (Third Third Party) AND CHERYL BLINCO (Fourth Third Party) |
FILE NO/S: | DC No 3868 of 2017 |
DIVISION: | Civil |
PROCEEDING: | Trial |
ORIGINATING COURT: | District Court at Brisbane |
DELIVERED ON: | 12 June 2018 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16, 17, 18, 19, 20, 23, 24, 26 April 2018, 3 May 2018 |
JUDGE: | Porter DCJ QC |
ORDER: |
|
CATCHWORDS: | CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DUTIES AND LIABILITIES OF OFFICERS OF A CORPORATION – OFFICERS OF INSOLVENT CORPORATION – DUTY TO PREVENT INSOLVENT TRADING – where from about March 2010 the Company ceased paying the plaintiff’s invoices – where the Company had one director formally appointed – where the plaintiff alleges the defendant was at all times a de facto director and seeks to recover compensation from the defendant – whether the alleged insolvent trading debts were incurred by the Company – whether the defendant was a director at the time the alleged insolvent trading debt – whether the alleged insolvent trading debt was proved to have been incurred during the relevant period or became insolvent from incurring those debts and others – whether there were reasonable groups for suspecting insolvency during the relevant period – whether the defendant was aware of those grounds or a reasonable person would have been so aware – whether the defendant has a defence – whether the plaintiff is entitled to recover loss or damage in relation to the plaintiff debts suffered because of the Company’s insolvency – whether costs of obtaining judgment for the relevant debt prior to insolvency are recoverable. Legislation Civil Proceedings Act 2011 (Qld) s 58 Companies Act 1981 (Cth) s 556 Corporations Act 2001 (Cth) ss 9, 95A(2) 588G, 588M, 588R, 597(14) Corporate Law Reform Bill 1992 (Cth) Uniform Civil Procedure Rules 1999 (Qld) r 149 Cases ASIC v Plymin [2003] VSC 123 Bank of Australasia v Hall (1907) 4 CLR 1514 Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124 Crema Pty Ltd v Land Mark Property Development Pty Ltd (2006) 58 ACSR 631 Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 Duke Group Ltd (in liq) v Hilmer (1994) 15 ACSR 255 Edenden v Bignell [2007] NSWSC 1122 Elliott and Another v Australian Securities and Investments Commission(2004) 185 FLR 245 Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22 Hatfield v Health Insurance Commission (1987) 15 FCR 487 Hungerfords v Walker (1989) 171 CLR 125 Jelin Pty Ltd v Johnson (1987) 5 ACLC 463 Jones v Dunkel (1959) 101 CLR 298 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 10 ACLR 395; (1986) 4 ACLC 215 M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australia Ltd (1983) 68 FLR 504 March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173 Perrine v Carrello [2017] WASCA 151 Powell v Fryer (2001) 37 ACSR 589 Re Bufalo Corporation Pty Ltd (2002) 172 FLR 382 Re Newark Pty Ltd (in Liq) [1993] 1 Qd R 409 Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 Re Swan Services Pty Ltd (In Liquidation) [2016] NSWSC 1724 Rexel Electrical Supplies Pty Ltd v Morton [2015] QCA 235 Robertson v Hollings [2009] QCA 303 Ross v Hallam [2011] QCA 92 Smith v Boné (2015) 104 ACSR 528 Smith v Offermans [2015] QCA 55 The Duke Group Limited (in liq) v Arthur Young (Reg) & Anor (1991) 9 ACLC 49 Tourprint International Pty Ltd (in liq) v Bott [1999] NSWSC 581 Travel Compensation Fund v Tambree (T/As R Tambree and Associates) & Ors (2005) 222 ALR 263 Wiley v Lo Presti (1997) 16 ACLC 82 Woodgate v Davis (2002) 42 ACSR 286 Other Australia Law Reform Commission Reports, Annual Reports, General Insolvency Inquiry, Report No 45 (1988) Explanatory Memorandum, Corporate Law Reform Bill (1992) (Cth) |
COUNSEL: | M T De Waard for the plaintiff Defendant, C M Thomson, appearing in person |
SOLICITORS: | Mills Oakley for the plaintiff |
Table of Contents
Introduction5
The factual background6
Setting up the Kadoe6
Kadoe begins to trade9
Kadoe’s credit application to Tremco9
Kadoe’s appears to trade successfully11
Kadoe’s early dealings with Tremco12
Kadoe’s difficulties emerge15
Taxation liabilities15
The dispute with Tremco17
Company administration19
The dispute with PWA and the invalid trust issue22
Taxation implications23
The PWA proceedings25
Ceasing operation of the business26
Impact on ANZ and other banks26
The trial of the Tremco claim27
Winding up and subsequent events28
Statutory Framework28
Debts incurred29
Was Mrs Thomson a director in the relevant period?32
Preliminary observations32
Relevant principles32
Grimaldi v Chameleon Mining33
Mistmorn v Yasseen41
DCT v Austin 43
Analysis of the evidence44
Mrs Thomson was responsible for setting up the Company and the Trust44
Mrs Thomson’s role in the Company’s operations46
Mrs Thomson had control of the Company accounts51
Mrs Thomson’s role in dealing with the Company’s creditors51
Mrs Thomson’s self-identification as General Manager52
Mr Thomson’s evidence52
Use of Mr Thomson’s public examination transcript55
Conclusion55
Insolvency56
Preliminary observations56
Relevant principles56
Analysis59
Kadoe was insolvent from March 201059
Mr Hudson’s report63
Challenges to Mr Hudson’s report65
Reasonable grounds to suspect insolvency and Mrs Thomson’s position: s. 588G(1)(c) and s. 588G(2)?67
Requirements relating to suspicion of insolvency are met67
Mrs Thomson’s responses69
The 2010 financial statements69
The disputes about the Tremco debts70
The invalid Trust71
Mrs Thomson has breached s. 588G(2)71
Mrs Thomson has no defence72
Loss in relation to the Tremco debts caused by the insolvency72
Relevant principles72
“in relation to”74
“because of the company’s insolvency”75
The statutory context76
The Tremco debts80
Judgment interest on Tremco debts82
Costs of the trial83
Mrs Thomson’s counterfactual contentions84
Mrs Thomson as a self-represented litigant84
Conclusion85
Introduction
- [1]In about March 2009, Kadoe Pty Ltd (the Company or Kadoe) was incorporated and began carrying on a waterproofing business, trading as Kadoe Commercial Coatings. The plaintiff (Tremco) was the principal supplier of waterproofing products used by Kadoe in its business. Kadoe had one director formally appointed as such, Mr Thomson, the husband of the defendant. Tremco contends, however, that the defendant (Mrs Thomson) was at all times a de facto director of the Company.
- [2]From about March 2010, Kadoe ceased paying Tremco’s invoices. By about December 2010, Kadoe had incurred debts to Tremco totalling $146,410.20 (the Tremco debts). Those debts were never paid. Kadoe subsequently disputed the Tremco debts. Those disputes were resolved in Tremco’s favour by a judgment of this Court given on 27 February 2015 (the Tremco judgment). Tremco incurred substantial costs in the trial. Kadoe was wound up on Tremco’s application on 29 April 2015. It appears there will be no dividend in the winding up.
- [3]By this proceeding, Tremco seeks to recover compensation from Mrs Thomson as a director under s. 588M(3) Corporations Act 2001 (Cth) (the Act) for loss it suffered in relation to the Tremco debts. To recover that loss from Mrs Thomson, Tremco has to establish, in general terms:
- (a)That the Tremco debts were incurred by the Company;
- (b)That Mrs Thomson was a (de facto) director at the time the Tremco debts were incurred (the relevant period),
- (c)That Kadoe was insolvent during the relevant period, or became insolvent from incurring those debts and others;
- (d)That there were reasonable grounds for suspecting insolvency during the relevant period; and
- (e)That Mrs Thomson was aware of those grounds or a reasonable person would have been so aware.
- (a)
- [4]Mrs Thomson disputed each of these matters. She also pleaded by way of defence that she had reasonable grounds to expect the company was solvent at the time the debt was incurred, inter alia, because she relied on information supplied to her by a competent person. (Those defences were not developed to any degree in the evidence nor addressed in her submissions.)
- [5]My conclusions on those matters, and a brief summary of the main reasons for those conclusions, are as follows:
- (a)First, the Tremco debts were incurred by the Company. That issue was admitted on the pleadings;
- (b)Second, Mrs Thomson was a de facto director of Tremco at all times, including the relevant period. Mrs Thomson and Mr Thomson shared the management and control of Kadoe, with Mr Thomson having responsibility for activities on site and Mrs Thomson having responsibility for, and authority over, the balance of the Company’s affairs, operational and administrative;
- (c)Third, I find that Kadoe was insolvent at the time the Tremco debts were incurred and at all times thereafter. The evidence discloses that Kadoe failed to pay Tremco, and its taxation liabilities, because it did not have the funds to pay. This was not an instance of temporary illiquidity. Kadoe never had sufficient capital to fund its operations;
- (d)Fourth, Mrs Thomson had reasonable grounds for suspecting Kadoe was insolvent. The evidence disclosed that she communicated with Tremco and the ATO about payment plans and was familiar with the bank accounts and funds available to Kadoe from time to time;
- (e)Fifth, Mrs Thomson does not make out her defence. She was the person with the overview of the Company’s affairs. Any suggestion that she relied on the Company book-keeper or the Company account in any relevant way is not credible.
- (a)
- [6]Given those conclusions, Tremco is entitled to recover loss or damage in relation to the Tremco debts suffered because of Kadoe’s insolvency: s. 588M(1)(b). In that regard, I accept that that loss includes loss equal to the value of the Tremco debts and the loss comprised in unrecovered costs incurred in obtaining the Tremco judgment prior to the winding up of Kadoe. I reject Mrs Thomson’s contentions that factors other than the insolvency caused those losses. Accordingly, Tremco is entitled to judgment in the amount of $372,016.10.
- [7]Tremco is also entitled to interest pursuant to Section 58 Civil Proceedings Act 2011 (Qld) from the date of the winding up order.
The factual background
- [8]Mr and Mrs Thomson were married in about 1984. They had one son in 2002. Mr Thomson left school at year 10 and is a water-proofer by trade. Mrs Thomson had conducted a knitwear business with some success. That business was apparently sold or discontinued in the period leading up to the introduction of the GST legislation in about 2000. Thereafter, the Thomsons conducted a bed and breakfast in Pakenham Upper in Victoria jointly in their own names, trading as The Gums on Morrison. At some stage around 2003, the Thomsons moved to Queensland. There is no evidence as to their business or activities in Queensland prior to setting up Kadoe.
Setting up the Kadoe
- [9]The circumstances of the setting up of Kadoe were extensively canvassed at trial. Each party had a different reason for doing so:
- (a)From Tremco’s perspective, Mrs Thomson’s involvement in setting up the Company and the structure of the business was said to support its contention she was a de facto director;
- (b)Mrs Thomson on the other hand, focused on the apparent failure of the accountants advising at the time (PWA) properly to create the trust which was intended to be part of the trading structure as relevant to various aspects of the claim.
- (a)
- [10]Mrs Thomson swore to the circumstances of the setting up of the Kadoe structure twice: once in an affidavit in these proceedings while they were underway in the Supreme Court (the Supreme Court affidavit) and once in the Tremco proceedings in this Court (the District Court affidavit).[1] The Supreme Court affidavit was sworn on 8 December 2014. The Kadoe proceedings affidavit was sworn on 13 February 2015.
- [11]The Supreme Court affidavit relevantly states:
- In or about February 2009 I retained the plaintiff and/or PWA Financial Group Pty Ltd ABN 43 659 242 106 (“PWA”), to advise in respect to the required and most suitable business structure for a new business.
- The plaintiff’s and/or PWA’s advice, provided by Cheryl Blinco, an employee account of the plaintiff was to establish a trust with a corporate trustee and that the plaintiff could organize this for the fourth defendant and I.
- Cheryl Blinco, advised the third and fourth defendant to establish a trust with a corporate trustee as taxation under this structure would be minimized with the distribution of profits reducing the amount of tax payable.
- Cheryl Blinco advised that the use of a corporate trustee would limit the liability to the company and reduce the fourth defendant’s personal liability.
- Cheryl Blinco also advised me that the first defendant should not trade in any other capacity other than as a corporate trustee of the trust as there was the possibility of confusion surrounding any private transactions as opposed to transactions of the trust as there may be adverse tax implications if not.
- Based on this advice, the plaintiff and/or PWA was engaged by me to perform those duties which included incorporating the first defendant to act as a corporate trustee of the trust, establishing a discretionary trust, applying for an Australian Business Number and tax file number for the trust.
- The plaintiff has disclosed the documents relating to it performing those duties at documents 194 to 216 inclusive and 223 to 229 of its list of documents dated 18 March 2014 exhibited to this affidavit and marked “CMT-1”.
- The plaintiff and/or PWA incorporated the first defendant on or about 20 March 2009.
- The plaintiff and/or PWA ordered the trust documents from National Tax & Accountant Association (“NTAA”) and Cheryl Blinco telephoned me on or about 21 March 2009 to advise I could collect the trust deeds for executing by the Trustee so that a bank account could be opened in the name of the trust.
- The only document I collected from Cheryl Blinco was four copies of the trust deed. There were three bound copies and one unbound copy of the trust deed. There was nothing else given to me on that day, so the bank account could not be opened at that time.
- By letter dated 25 March 2009 the plaintiff and/or PWA sent a letter enclosing all the documents relating to the incorporation of the first defendant and the establishment of the For Three Trust.
[underlining added]
- [12]In the District Court affidavit, Mrs Thomson swore:
- I was General Manager of the Defendant between 21 March 2009 and 18 November 2014 and was in the position to have knowledge of this matter before the Court. I am duly authorised to make this Affidavit on behalf of the defendant.
- The Defendant was incorporated on 21 March 2009 for the sole purpose of being corporate trustee for The For Three Trust (“the trust”) on the advice of Cheryl Blinco (“Ms Blinco”) an accountant employed by PWA Finance Group Pty Ltd (“PWA”).
- Ms Blinco provided advice to me in or about February 2009 in regard to the appropriate business structure for a new business.
- Ms Blinco’s advice at that time was to incorporate a company to act as trustee of a discretionary trust and that the trustee should not act in any other capacity other than as trustee as there are issues with a corporate trustee acting it in its own capacity as well as that of trustee.
- Ms Blinco advised in that advice in or about February 2009 that she could act as Settlor.
- On or about 20 March 2009, the Defendant was incorporated and four copies of the trust deed for the trust was provided to the defendant for execution.
- I collected four copies of the trust deed from Ms Blinco at PWA’s offices in Caloundra Queensland, three bound copies and one unbound copy.
- When I collected the four copies of the trust deed from Ms Blinco for the trustee to execute, she had not executed the document as Settlor. The signature page of the trust was blank.
- [13]As noted, it was hotly contested as to whether Mrs Thomson was responsible for taking advice and giving instructions for setting up the trading structures, or whether she was merely a conduit for Mr Thomson. The underlined parts are those which were relied upon by Tremco in respect of that dispute.
- [14]Thereafter, the business structure was put in place as described in the affidavits. That is:
- (a)On 21 March 2009, the Company was incorporated;
- (b)On or about that date, PWA provided four copies of a trust deed creating the “For Three Trust” to Mrs Thomson for execution;
- (c)On or about 11 June 2009, Mrs Thomson returned the copies of the trust deed executed by Kadoe as trustee; and
- (d)On 30 July 2009, the business name Kadoe Commercial Coatings was registered.
- (a)
- [15]Mr Thomson was appointed as the sole director of the Company. The Company had 100 shares, 50 owned by Mr Thomson and 50 owned by Mrs Thomson.
- [16]The For Three Trust (the Trust) was a discretionary trust. Mr and Mrs Thomson were the primary beneficiaries of the Trust. As will be seen, it is contended that the Trust was never validly created because Ms Blinco never signed the trust deed as settlor and/or the settlement sum was not paid.
Kadoe begins to trade
- [17]It appears that Kadoe began to trade in the last few weeks of the 2009 financial year. the 2009 Balance sheet shows:
- (a)Trade debtors of $19,619; and
- (b)Liabilities of $6,369 payable as trust distributions to each of the Thomsons.
- (a)
- [18]The balance sheet shows no material liabilities to the Company’s banker (ANZ) nor any other assets. It also shows the settlement sum of $10 as an asset and $10 cash as cash on hand. The Thomson’s have contended in documents tendered at the trial that this amount was not paid.
Kadoe’s credit application to Tremco
- [19]Tremco is a supplier of products used in waterproofing. It was conceded by Mrs Thomson in cross examination[2] that Tremco was the key supplier to Kadoe of the products needed by Kadoe to carry on its business. The relationship was, briefly, a close one.
- [20]While Kadoe might have purchased products from Tremco prior to September 2009, it did not apply for credit until its written application for credit on about 21 September 2009 (the Credit Application).
- [21]The Credit Application relevantly provided (handwritten parts in italics):
STEVE BORZIER APPLICATION FOR CREDIT ACCOUNT
TRADING NAME: KADOE COMMERCIAL COATINGS
POSTAL ADDRESS: PO BOX 3465, CALOUNDRA DC QLD 4551
STREET ADDRESS: UNIT 1, 30 TECHNOLOGY DRIVE, WARANA
PHONE: 07 5437 9872
FAX: 07 5438 8170
MOBILE: 0408 602 049
WEB PAGE:
EMAIL: [email protected]
TYPE OF BUSINESS: TRUST (TICKED)
COMPANY NAME: KADOE PTY LTD ATF THE FOR THREE TRUST
ABN: 95 868 608 864
REGISTERED OFFICE: PETER WILSON & ASSOCIATES
12 BALWIN ST CALOUNDRA QLD 4551
ACN: 135 978 604
BUSINESS ADDRESS OWNED (TICKED), YES (TICKED) REGISTERED:
NOMINAL CAPITAL: $100.00
PAID UP CAPITAL: $100.00
NAME & ADDRESS OF SOLE TRADE, SPOUSE, PARTNERS OR DIRECTORS (ALL DIRECTORS REQUIRED):
FULL NAME: WAYNE ROBERT THOMSON
SPOUSE’S NAME: CAROLYN MARY THOMSON
ADDRESS: 26 BELLABOE CIRCUIT,
PELICAN WATERS QLD 4551
PHONE #: 0408 779 769
DOB: 4/1/1957
LICENCE #: 84 225 953 (QLD)
PLEASE STATE WHETHER APPLICANT IS TRUSTEE FOR ANY TRUST: YES NO (If answer is yes please complete the following):
FULL NAME OF TRUST:
CONTACT FOR ACCOUNT PAYMENT QUERIES: CAROLYN THOMSON
CONTACT FOR ACCOUNT QUERIES: CAROLYN THOMSON
ESTIMATED CREDIT REQUIRED: $10, 000
NATURE OF BUSINESS: WATERPROOFING, EXPOXY FLOORING
BUSINESS LICENCE NO: 1169229
DATE BUSINESS COMMENCED: 19/6/2009
NAME OF TRADING BANK: ANZ
BSB NO: 014 306
TRADING BANK ACCOUNT NAME: KADOE COMMERCIAL COATINGS
ACCOUNT NO: 2536 94637
…
I certify that the above information is accurate to the best of my knowledge and I/we acknowledge that:
- A supply account, if granted, does not oblige Tremco Pty Limited to supply goods, and
- I/we have read and understood the terms and conditions attached to this application for credit; and
- I/we acknowledge that all goods are supplied subject to the terms and conditions of sale of Tremco Pty Limited, which may be varied from time to time.
The supplier may give information about you to a credit reporting agency, but only limited kinds of information allowed by the Privacy Act 1966 (Commonwealth)) Section 18E(8)(0). This includes:
Identity details – It only includes your name, ACN, date of birth, current known address, two previous addresses, your current or last known employer, and your drivers license;
The fact that you have applied for credit and this account;
The fact that the supplier is a credit provider to you;
Payments overdue for at least 60 days when the supplier has taken steps to recover;
Advice that payments are no longer overdue;
Cheques drawn by you which have been dishonoured more than once;
The opinion of the supplier that you have committed a serious credit infringement;
When the credit provided to you had been discharged,
Giving information to a Credit Reporting Agency (Section 18E(8)(c) Privacy Act 1985)
The creditor has informed me that it may give certain personal information about me to the credit reporting agency.
…
SIGNATURES OF COMPANY DIRECTOR/S, SOLE TRADER, OR ALL PARTNERS AS APPLICABLE
Signature: [Signature] Signature Name: Wayne Thomson
Signature of Witness: [Signature] Full Name of Witness: Carolyn Thomson[3]
- [22]I note the reference to a business address in Technology Drive, Warana. However it was not in dispute that Kadoe traded from the home of the Thomsons located at Pelican Waters, though Mr Thomson was usually on site carrying out the waterproofing work of the Company.
- [23]The Credit Application discloses that Tremco was purporting to trade as trustee for the Trust. Much of Mrs Thomson’s pleading and submissions focused on this consideration. As will be seen, she contended that the Trust was never created and as a consequence, amongst other things, Kadoe was not liable for debts incurred to Tremco because Kadoe was not trading in its own right. There is no evidence from which it could be concluded that the terms upon which Kadoe traded with Tremco were such as to limit its liability to the assets of the Trust, much less that Kadoe’s liability was excluded if the Trust had not been created as represented.
- [24]The contention that the invalidity of the Trust excused Kadoe and Mrs Thomson from responsibility for Kadoe’s trading activities was an enduring theme of Mrs Thomson’s case. There was no basis in law for that contention.
- [25]The Credit Application was approved by Tremco with a credit limit of $3000. There were no terms or conditions of credit approval in evidence other than a requirement notified by Tremco that accounts were to be paid “strictly 30 days”.
Kadoe’s appears to trade successfully
- [26]Kadoe appears to have been very active in its first full year of trading, being the 2010 Financial year. The 2010 Financial Statements show that the Company made a profit before tax of $26,853 on sales of $399,729.
- [27]Income adjustments (non-deductible superannuation and other expenses identified in the profit and loss) of $26,465 resulted in a taxable income of $53,318, which was distributed in equal shares to the Thomsons (with a small sum being paid to their son).
- [28]The balance sheet, however, showed a deficiency. In that regard:
- (a)The main assets were some $47,344 in trade debtors and a loan made to the Thomson Family Trust valued at $304,740. There was no cash on hand of any significance;
- (b)The main liabilities were trade creditors ($46,014), and an overdraft account ($75,235) and loan ($200,063) from the ANZ Bank;
- (c)It also recorded a liability of $38,574 in respect of its GST Control Account. The note to that item showed GST paid and collected in reasonable balance but also showed a liability on an Integrated Client Account of $33,243.
- (a)
- [29]Bearing in mind that the solvency of the Company is in issue for the period March 2010 to January 2011 (as explained in paragraph [220] below), it is worth noting a couple of matters.
- (a)First, the Company would be clearly insolvent on balance sheet basis if the loan made to the Thomson Family Trust was not reasonably recoverable. Mr Hudson dealt with this loan in his solvency report. For the reasons given there (at pages 24 to 25), he concluded that the loan to the Trustee of the Thomson Family Trust (Thomson FT) was not recoverable. I find in paragraph [234] below that this loan was not recoverable for this and other reasons.
- (b)Second, the Integrated Client Account of $33,243 is consistent with the evidence that the Company was indebted to the Commissioner of Taxation from at least 3 March 2010, when it owed debts of $11,131. The Company was consistently indebted to the Commissioner from that time and never cleared its taxation liabilities.
- (c)Third, there was no cash available as at 30 June 2010 to pay the distribution to the Thomsons as beneficiaries.
- (a)
- [30]Kadoe’s sudden burst of apparently successful activity in the waterproofing business seems also to be reflected in various awards given by local industry associations to the Company and, notably, also to Mrs Thomson personally.
- [31]The Company received one award: the 2011 Building Manufacturing Small Business Award given as part of the Sunshine Coast Excellence in Business Awards. That Award was included on Company signing blocks.
- [32]Mrs Thomson was more successful in the awards stakes. She received:
- (a)The 2010 Outstanding Business Person of the Year awarded by the Caloundra Chamber of Commerce (the 2010 Award);
- (b)The 2011 Professional Businesswoman of the Year awarded by the Sunshine Coast Business Women’s Network (the 2011 Award); and
- (c)The 2012 winner of the Queensland Telstra Businesswoman’s Innovation Award.
- (a)
- [33]Of particular interest was the 2010 Award to Mrs Thomson. She accepted that her work for Kadoe was a factor in her receiving that award.
Kadoe’s early dealings with Tremco
- [34]Initially, Kadoe dealt with Mr Bozier of Tremco. He was not called as a witness. In February 2010, Mr Bozier left Tremco and Kadoe dealt with Ms Willson. Ms Willson did give evidence. She has 27 years’ experience in the building industry and had worked as a technical sales representative for Tremco for over 12 years.
- [35]She gave evidence that she dealt exclusively with Mrs Thomson in relation to the affairs of Kadoe from February 2010. She said she only recalled meeting Mr Thomson on one occasion in December 2010.
- [36]Mrs Willson described Mrs Thomson as having a good knowledge of the Company’s business and margins. She described how in February 2010, Mrs Thomson negotiated a specific pricing agreement for Tremco which differed from the standard price list. She also described her observations of Mrs Thomson’s role in Kadoe’s business as follows:
- The Defendant managed the operations of Kadoe day to day that I was aware of, including ordering products, ascertaining work in the market place, organising staff, dealing with other contractors and developers, deliveries, accounts, contract tenders, market research, marketing Kadoe, etc. Mr Thomson performed the labour for Kadoe and performed no other role to the best of my knowledge during the entire period that I had dealings with the Defendant and Kadoe.
- From in or around February 2010 until in or around January 2011, I would speak with the Defendant on a very regular basis in relation to the Plaintiff’s products that the Defendant required for jobs for Kadoe.
- The topics of these conversations included, but were not limited to, discussing prices, different types of products of the Plaintiff and the use of such products, product warranties, different types of jobs that Kadoe was performing, different jobsites and different people in the market place.
- Between February 2010 and July 2011, the Defendant discussed with me the work she had personally secured and arranged for Kadoe, which included but was not limited to the following:
- (a)Rive Apartments, 32 Agnew Street, Albion – Vecchio Group;
- (b)Ocean Reach Apartment 53 Grand Parade, Kawana Island – RGD Constructions;
- (c)Gary Cruick Workshop, Owen Creek Road, Forest Glen – Evans Hart Constructions;
- (d)Assisi College, Betty Street, Upper Coomera – Badge Constructions;
- (e)Office building, Commercial Road, Newstead;
- (f)Wacol Taylor – accommodation and forensic secure cluster buildings – project services – Sommer and staff;
- (g)Regis Fairland Manor, 5 Cansdale Street, Yeronga, McNab Constructions;
- (h)Vista Estate, 50 Aspland Street, Nambour;
- (i)Creekwood Street, Caloundra;
- (j)Yalta Street, Clontarf;
- (k)Fairshore Apartment, Hastings Street, Noosa;
- (l)Westholme Circuit, Pelican Waters;
- (m)DES, Credit and Furniture Store, Lloyd Street, Enoggera – John Holland; and
- (n)Jobsites referred to by the Defendant as:
- (i)Leighton Road;
- (ii)Gemlin Street;
- (iii)Ozz Homes;
- (iv)CBD; and
- (v)VOC.
- From around the end of November 2010 until in or around May 2011, I was talking on a regular basis with the Defendant in relation to the Oxygen project. The Oxygen project involved the application of Diamond Hard product to floors located at various newly built Masters stores. These sites were Morayfield, Tingalpa, Nerang and Springfield.
- In or around November 2010, the Defendant expressed immense interest to me in Kadoe securing all four stores work. This work would be very good work as the Oxygen project was being operated by Woolworths.
- The project would also be of interest to the Plaintiff because of the considerable amount of product of the Plaintiff that would be supplied to Kadoe.
- My contact with the Defendant in relation to this project was very regular throughout November and December 2010.
- On 22 November 2010, I received email correspondence from the Defendant in relation to Project Oxygen floor polishing. The Defendant had forwarded on to me email correspondence received from the Defendant on 22 November 2010. Exhibited hereto and marked “MJW-3” is a true copy of the email correspondence received from the Defendant on 22 November 2010.
- On 1 December 2010, I attended a function with the Defendant at the Caloundra City Private School, which commenced at approximately 4:30 pm. Mr Shea also attended this function with me.
- At this function I spoke with the Defendant and Mr Thomson and discussed the Oxygen project and the four different stores.
- Mr Shea from the Plaintiff was in South-East Queensland at that time for the specific purpose of dealing with the Oxygen project and various stores that were going to be involved.[4]
- [37]In cross examination, Mrs Thomson suggested that Mrs Willson had met her husband more often, particularly at the house when Mrs Willson visited there to meet with Mrs Thomson. Mrs Willson did not recall that. Mrs Thomson also sought to establish with Mrs Willson that Mrs Thomson’s dealings with Mrs Willson was limited to tenders. Mrs Willson responded that the role was tenders and pricing.[5] When cross examination directly on paragraph 36 of Mrs Willson’s evidence provided no basis to doubt that it was substantively accurate.[6]
- [38]Mrs Willson was a person with considerable industry experience. She was the principal operational contact between the Company and its main supplier. She presented as a reliable witness of fact who generally confined herself to her own observations and recollections. She did not appear to have any animus to Mrs Thomson. Her evidence was not materially impugned during cross examination. In my view she was well placed to comment on Mrs Thomson’s role in the Company. I accept her evidence. It is of particular importance as it covers the key period of March 2010 to early 2011.
- [39]Mrs Willson also gave evidence about Mrs Thomson’s 2010 Award. She gave evidence that when the Award was conferred, she made arrangements for an advertisement to be published in the Sunshine Coast Daily in the following terms:
Congratulations to Carolyn Thomson of Kadoe Commercial Coatings on winning the Prestigious Award Businessperson of the Year 2010
From Tremco Pty Ltd[7]
- [40]Mrs Thomson responded as follows by email on 9 September 2010:
Hi Bill, Peter, Merle and John,
I just wanted to say thank you for the “congratulations” advertisement that you placed in The Sunshine Coast daily on Tuesday. It is not often that we find suppliers, but most importantly of all, people of the highest calibre, as you and all the staff of Tremco are.
Awards such as the one I was so privileged to be awarded are not the efforts of one person alone. Without the support both professionally and personally that not only myself, but also Wayne, receive from you all is one of the major reasons Kadoe has been able to receive such high recognition but most importantly make a significant mark in the Queensland Construction Industry.
All of your names, along with Tremco should also be engraved on the Award alongside mine.
Each and every one of you are outstanding in your own individual way.
Regards,
Carolyn Thomson[8]
- [41]This email is consistent with the conclusion that the award was related to the success of Kadoe and that Mrs Thomson was happy to share the credit for her success in conducting that business.
Kadoe’s difficulties emerge
- [42]The financial difficulties suggested by the 2010 financial statements manifested themselves when the Company’s two main creditors, the Commissioner and Tremco, began to press for payment. Mrs Thomson handled the dealings with both creditors.
Taxation liabilities
- [43]The starting point is the March 2010 BAS statement. Although that document was not in evidence, it was referred to in an email sent on 19 April 2010 by Mrs Thomson to Ms Blinco (of PWA). That email stated:
Hi Cheryl,
Could you please lodge this BAS asap.
Once it is lodged could be please make a payment arrangement for the total which will be about $36, 500. The arrangement should be for $250 per week. I need to stress the payment arrangement needs to be put in place after this current BAS has been lodged.
If you have any queries could you please let me know.
Regards,
Carolyn Thomson[9]
- [44]Ms Thomson accepted that the March 2010 BAS was attached as described and that she wrote that email. Her evidence continued:
Ms Thomson, that is an email that you sent to Cheryl Blinco of PWA in April of 2010, isn’t it?‑‑‑Yes.
And you’re saying to her:
Could you please lodge this BAS ASAP?
Correct? First line?‑‑‑Yes. Yes.
So you’re directing her to lodge the BAS on behalf of the company?‑‑‑Yes.
And included in the attachments, although it’s not included on this email, is in fact the BAS statement for March of 2010; correct?
HIS HONOUR: Well, perhaps ‑ ‑ ‑
HIS HONOUR: Yes. It is. It says it up the top.
MR DE WAARD: Yeah?‑‑‑It says BAS statement up the top. Yeah.
HIS HONOUR: Yeah. All right.
MR DE WAARD: And that is – using the ATO language, that’s for the first quarter of 2010? So January, February, March, the first quarter. That’s – BAS is paid quarterly; correct?‑‑‑Yes.
So that’s for the first quarter of 2010?‑‑‑I assume so.
And you say, don’t you:
Once it’s lodged could you please make a payment arrangement for the total which will be about 36 and half thousand dollars.
?‑‑‑Mmhmm.
The arrangement should be $250 per week.
?‑‑‑Mmhmm.
I need to stress the payment arrangement needs to be put in place after this current BAS has been lodged.
?‑‑‑Mmhmm.
Why is that?‑‑‑Because that’s what the bookkeeper asked me to do.
That’s what the bookkeeper asked you to do?‑‑‑Mmhmm.
You had no idea why you asked that?‑‑‑No.
And then – so when you say:
If you have any queries could you please let me know.
You – what you actually mean is if you have any queries please let me know so I can pass them on to the bookkeeper?‑‑‑Yes. That's correct.[10]
- [45]The evidence obtained from the Tax Office by Mr Rose contained notes of dealings between the ATO and persons on behalf of Kadoe. It did not have any entry documenting such payment arrangement. The Running Balance Account (RBA) Statement provided by the Commissioner showed that payments of $410.76 per week were made from 7 May 2010 until 6 August 2010. I could find no other evidence of a payment agreement with the ATO which deferred the March quarter BAS payment. There was a payment agreement reached in August 2010, but that was later breached by Kadoe.
- [46]Further, the RBA demonstrates that while regular payments were made between May and December 2010, the amount outstanding grew through that period from the initial $36,529 to $48,347.55 by the end of January 2011. The amount continued to grow until the Company stopped trading in June 2013 (in circumstances discussed in paragraph [74](e) below), when its RBA liability was $65,155.58.
The dispute with Tremco
- [47]It is alleged in the Statement of Claim that the Company incurred the Tremco debts over the period October 2009 to July 2011. That allegation was admitted in the Amended Defence. In the course of the trial, however, it was common ground that the Tremco debts were incurred in the narrower period of March to December 2010 (though I have taken January 2011 as the end of the relevant period). December 2010 period coincides with Tremco taking steps to address Kadoe’s outstanding accounts.
- [48]On about 9 November 2010, Mrs Willson and Mr Boslem were informed by Mrs Thomson that Kadoe’s account with Tremco had been put on hold. Neither Mr Boslem nor Mrs Willson had been aware that Tremco was taking that step. It appears the decision was made in the Sydney office of Tremco. At that time, the outstanding account was some $140,000. Mrs Willson said that Mrs Thomson told her that Kadoe would pay the debt and Mrs Willson assumed that would occur.
- [49]Mrs Willson continued in her affidavit:
- On around 15 November 2010 I spoke with Mr Colin Hooper, who managed the Brisbane warehouse for the Plaintiff at that time, in relation to the Defendant’s Kadoe account with the Plaintiff. The Defendant’s Kadoe account was still on stop as payments had not been made to pay down the account as planned. I was aware, through the Defendant, that Kadoe needed product for the Rive Apartments job at Albion in the State of Queensland.
- At this time, I contacted the Defendant and she advised me that she planned to pay off the Defendant’s Kadoe account with the Plaintiff.
- On or around 16 November 2010 I received a telephone call from the Defendant. She advised me that she had emailed Mr Boslem with a bank transfer receipt for a part payment of the Defendant’s Kadoe account with the Plaintiff. This was to facilitate the Defendant collecting 15 rolls of paraseal for the Rive Apartments located at Albion in the State of Queensland. I said to the Defendant, in words to the effect, that I saw no issue with this if Mr Boslem was happy with her repayment plan.
- Mr Boslem was, at that time, responsible for making decisions in relation to a customer’s account once it is in default for a significant amount.
- On or around 19 November 2010, I spoke once again with the Defendant and discussed all of Kadoe’s current projects, which the Defendant told me that she was managing. In particular we spoke in detail about the Rive Apartments project in Albion. She advised me that as at that day she completed roughly 1, 100 square metres of flooring.
…
- In or around January 2011, I received several telephone calls from the Defendant in relation to various issues. One of the issues was the fact that Brisbane in January 2011 experienced extreme flooding. The Defendant advised me that due to the floods Kadoe had been unable to attend upon various sites to perform work. As a result they were unable to attend to any payments to the Plaintiff.
- A second issue was that the Defendant disputed approximately $30, 0000.00 of Kadoe’s account with the Plaintiff.
- During these conversation in or around January 2011, I would say words to the effect to the Defendant that if she disputed $30,000.00 of the account it made sense that Kadoe would simply pay the remaining (approximately) $110,000.00 of the account and then we could sort out the $30,000.00 balance thereafter.
- The Defendant’s responses to this suggestions were various in nature but always consisted of excuses as to why payment could not be made. Such excuses included the fact Kadoe was unable to perform any work at that point of time due to floods.
- The Defendant would say words to the following effect “I can categorically say that payment will be able to made on x date” or “I can categorically say we will be able to attend further work on x date”.
- Ultimately, I could never get the Defendant to agree to a figure that would be paid in settlement of the account that she was happy with or when that amount would be paid.
- As such Mr Boslem took over negotiations with the Defendant in relation to the payment of the Defendant’s Kadoe account with the Plaintiff from in or around January 2011.[11]
- [50]This evidence was not challenged in cross examination.
- [51]Mrs Willson’s summary of the dealings between Kadoe and Mrs Thomson is also a fair description of the correspondence in evidence covering the period from November 2010 until proceedings were commenced in June 2011. That correspondence was between Mr Boslem and Mrs Thomson. There is no suggestion in that correspondence that Mrs Thomson is negotiating with Mr Boslem on instructions from Mr Thomson. He is not mentioned. Rather, the tenor of the correspondence is that Mrs Thomson is principal in the negotiations.
- [52]It is worth noting the following further aspects of that correspondence.
- [53]On 17 November 2010, Mrs Thomson sent Mr Boslem a detailed explanation to the effect that “the short term problem” (with payment) was the result of one project, the problems with which were expected to resolve shortly. In the meantime, Mrs Thomson requested further credit to complete the job. She also raised the issue of some credits claimed, involving small sums. She then wrote that based on those matters: “I would be able to commit to pay $12,500 by 7th December 2010 and a further $12,500 to be paid by 19th December 2010.”[12]
- [54]The second payment was not made as promised. Rather on 1 February 2011, Mrs Thomson wrote another sophisticated email explaining the impact of wet weather followed by the January 2011 floods on Kadoe’s business. Mr Boslem responded challenging the “flood excuse” and pointing out that Kadoe incurred significant unpaid debts up to December 2010.[13]
- [55]There was thereafter further negotiations in writing in a similar vein up to June 2011, during which time nothing was paid off the debt. It was not until June 2011, in response to an email from Mr Boslem, that Mrs Thomson raised issues as to deliveries of some products invoiced. Her correspondence does not identify any particular sum affected, nor did she offer to pay any amount.[14]
- [56]Proceedings against Kadoe were commenced by Tremco in June 2011.
- [57]There are numerous examples in the correspondence of Mrs Thomson apparently conducting the affairs of the Company in a manner indicative of her having primary responsibility for those affairs and exercising independent judgment in respect of them. The negotiations with Tremco are but one example. As will be seen, Mrs Thomson’s case is that she acted on Mr Thomson’s instructions. However, Mr Thomson’s evidence of such instruction was of the most vague and general kind. Mr Thomson’s evidence of instructions he gave in respect of the negotiations with Tremco, for example, were “Just make contact and see if we could come to …a payment arrangement”.[15] Even if that instruction was given at some point, it is evident that Mrs Thomson carried out the negotiations independently on behalf of the Company and Mr Thomson was willing to acquiesce in any arrangement she reached.
Company administration
- [58]After giving the structuring advice, PWA commenced acting as accountants and tax agents for the Company. It also appears that PWA also acted for Peradena (as trustee of the Thomson FT). It seems to have been contemplated by both PWA and the Thomsons that the Company’s activities were to be exclusively as trustee. The same appears to have been the case for Peradena. Accordingly, the documents sometimes refer to the trusts rather than to the trustees.
- [59]For about 3 years to mid-2012 PWA, relevantly:
- (a)Lodged taxation documents for the Company including its BAS; and
- (b)Prepared financial statements and tax returns for the Company including the financial statements for 2009 and 2010 referred to above.
- (a)
- [60]PWA did not, however, provide bookkeeping services. Rather, as is common practice, the Company kept financial accounts using MYOB. The data entry into the MYOB accounts was done by the Company and the information forwarded to PWA to prepare financial accounts and tax returns. Similarly, the information contained in the Company BAS was prepared by the Company and the figures forwarded to PWA for lodgement.
- [61]The MYOB data was entered primarily by an employee of the Company. From July 2010 to May 2014, this person was Ms Pamela Jeppesen. She gave evidence at the trial.
- [62]Her evidence was important because it went to the disputed question as to who was responsible on behalf of the Company for supervision of data entry and maintenance of the MYOB database and for giving instructions to PWA as to BAS particulars and other matters. Ms Jeppesen gave evidence that Mrs Thomson supervised the maintenance of the accounts and was responsible for instructions to PWA. Mrs Thomson disputed that.
- [63]Ms Jeppesen’s evidence went further than that. She gave evidence that during her employment, Mrs Thomson was primarily responsible for:
- (a)the day to day business activities and finances;
- (b)banking and postage;
- (c)entering Kadoe’s financial data into its computer and accounting software;
- (d)placing orders on behalf of Kadoe with suppliers;
- (e)paying bills on behalf of Kadoe;
- (f)directing the employees of Kadoe;
- (g)processing the payroll;
- (h)paying Kadoe’s employees their wages into their nominated bank accounts;
- (i)dealing with accountants and lawyers on behalf of Kadoe;
- (j)managing the tender process and procurement of new work for Kadoe; and
- (k)managing the contracts performed by Kadoe for customers.[16]
- (a)
- [64]She swore that Mr Thomson was primarily responsible for the labour on behalf of Kadoe and that Mrs Jeppesen took instructions almost exclusively from Mrs Thomson.
- [65]Mrs Thomson challenged Mrs Jeppesen’s evidence, both in cross examination and submissions. I deal with that challenge further below from paragraph [174] below. There I give reasons for accepting the substance of Mrs Jeppesen’s evidence. I consider that Mrs Thomson was responsible for the affairs of the Company identified by Mrs Jeppesen including dealings with, and instructions to, PWA.
- [66]Returning to the financial accounts, PWA was retained by Kadoe (along with Peradena and the Thomsons personally) up until 27 July 2012. Prior to that time, however, PWA had begun to express concerns about unpaid fees. By letter dated 4 April 2011, PWA wrote to the Thomsons in the following terms:
Dear Wayne and Carolyn,
Reminder of Outstanding Accounts
Total amount due - $12, 320
I refer to our conversation late last year regarding your outstanding accounts. You advised that you had almost finished a payment arrangement with one of your creditors and would look to set up a payment plan with us once that was completed. To date we have not received any further payments or notification of when we might receive a payment.
We understand that due to recent economic events some people are finding cashflow a challenge. While we empathise with your situation, we cannot continue to carry this debt and ask that you contact our office to advise when we may expect full payment, or alternatively to arrange a regular payment plan to clear the outstanding amount.
As you are a long standing valued client of our firm we have continued to do work for you in good faith, even though the outstanding invoices date back several years. Unfortunately this is not something we can continue to do. As such until we receive a commitment from you regarding payment of these accounts, we are unable to continue to complete any further work.
Wayne and Carolyn, we would like to work with you to resolve this matter. Please feel free to contact me on 5436 0300 if you would like to discuss your options further.
Kind regards,
PWA FINANCIAL GROUP PTY LTD [17]
- [67]Mrs Thomson made the point at trial that the PWA debt was not, or was not exclusively, a debt of Kadoe. There is merit in that proposition. Work the subject of unpaid invoices as at April 2011 was done by PWA for the Thomsons and both of their trustee companies. It was not clear from time to time what fees were owed in respect of which client, although the pleadings in the PWA proceedings suggest the Kadoe account was for about $2700.
- [68]However, Mrs Thomson apparently made a payment, possibly from Kadoe’s account, on 5 April 2011. I note that the Company overdraft account shows a payment of $50 to PWA on that date. Ms Neven of PWA responded with gratitude. Mrs Thomson replied on 6 April 2011 in the following terms:
Hi Tina,
I did this in response to your letter. I know it is not a lot, as we are still getting over the effect of the floods. In time I will set up a direct debit or something, but at the moment our cashflow is so erratic that it would probably not be the best idea.
I will keep the payments coming through regularly, for as much as I can possibly send through. Even if just for small amounts.
Thank everyone for me for their absolute patience. We are very hopeful that later this year our cashflow will be much improved so we are able to reduce the debt faster.
Regards
Carolyn Thomson [18]
- [69]It is a reasonable inference that Mrs Thomson is speaking of Kadoe’s position. There was no evidence of any other source of income to the family at the time. It is also a reasonable inference that the payment which was “not a lot”, was the $50 payment made.
- [70]Not much progress was made reducing the outstanding fees. In late June 2012, Mrs Thomson (using an email footer identifying Kadoe and referring to her 2010 and 2011 Awards) was exchanging emails with PWA relating to the preparation of the 2011 tax returns for the two trusts and for Mr and Mrs Thomson. This exchange led to PWS terminating its retainer. There were two important consequences of the termination of PWA’s retainer.
- [71]First, the Company ceased to retain accountants. No properly prepared financial statements were created and signed by Mr Thomson for the Company after the 2010 Financial Statements. Only management accounts were able to be prepared from MYOB for the 2012 and 2013 years. Mr Hudson (who provided an insolvency report) considered those management accounts to be inaccurate. Whether that is so or not, it remains the case that there are no financial statements prepared by the independent accountants for the Company after the 2010 accounts.
- [72]Second, PWA purported to return all the documents held for, inter alia, Kadoe on about 6 August 2012. This appears to have included a version of the MYOB database which included entries up until about the time of the termination of the retainer. It also is said by Mrs Thomson to have included three copies of the trust deed for the Trust. This latter event precipitated the dispute over the allegedly invalid creation of the Trust.
The dispute with PWA and the invalid trust issue
- [73]The dispute about whether the Trust was validly created ultimately has little significance for the resolution of the issues raised in this trial. However, given its importance to Mrs Thomson’s pleadings and submissions, it needs to be dealt with.
- [74]On Mrs Thomson’s account[19]:
- (a)When she received the documents from PWA she reviewed them. That included reviewing the For Three Trust Deeds returned;
- (b)There had been four originals, only three were returned;
- (c)Mrs Thomson found that none of those were executed by Ms Blinco as settlor;
- (d)Mrs Thomson appears to have immediately sought legal advice and received advice that there was “no valid operative trust and never had been”;
- (e)She thereafter recounts extensive dealings between PWA, its professional indemnity solicitors and PWA’s debt collectors. The tenor of those dealings is that Mrs Thomson was treating the matter as a crisis not only for the Trust but also for the business of the Company. She says she was advised by the Company’s lawyers, Thomsons Lawyers (no relation) that the Company should cease trading. She says she followed that advice and that the Company stopped trading from 1 July 2013.
- (a)
- [75]It can be seen that the invalidity of the Trust was only an issue from August 2012. Mrs Thomson knew nothing about it before then.
- [76]At least part of the correspondence about this issue between November 2012 to March 2014 involving Mrs Thomson and Thomsons Lawyers (who acted for the Thomson parties including Kadoe in the counterclaim) on the one hand; and variously PWA and their solicitors, along with the underwriters of PWA’s professional indemnity policy and their solicitors on the other, appears in Mr Rose’s long affidavit (amongst other places).[20] Without attempting to fully summarise that extensive correspondence, it includes the following relevant features:
- (a)The correspondence shows that the PWA side consistently maintained that the Trust was validly created and that any problems with formalities could be addressed, while Mrs Thomson cavilled with all these matters. While there might have been some basis for her to do so, in my view her correspondence shows an inclination to expand and extend the dispute rather than to resolve it;
- (b)Mrs Thomson wrote very long and extensive correspondence of on behalf of, at least, Kadoe as putative trustee; and
- (c)Continual efforts to settle the matter failed.
- (a)
- [77]The discovery of the alleged invalidity of the Trust precipitated a number of consequences which are of some relevance to this matter.
Taxation implications
- [78]One consequence of the alleged invalidity was the impact on the administration of the taxation affairs of Kadoe. The events are complicated and difficult properly to understand because the documentary record is incomplete and no direct evidence was led properly explaining what occurred. However, the following summary seems to identify the main points.
- [79]First, a Private Ruling was sought from the Commissioner nominally by Kadoe as to whether the Trust was validly created for tax purposes. That Ruling was delivered on 29 April 2013, addressed to the Trustee for the Trust (the 2013 Ruling). In that Ruling, the Commissioner determined that the Trust existed and made valid distributions.[21] That Ruling seems to have been based on PWA’s version of events: that the settlement sum was paid and that Ms Blinco did sign the Trust Deed. The 2013 Ruling led Thomsons Lawyers to advise that the counterclaim in the PWA proceedings (see from [88] below) had weak prospects. Strangely, Mrs Thomson complained to the ATO about the prospect of some form of fraud or corruption relating to this Ruling. The ATO advised that there was no evidence of any such conduct.[22] Mrs Thomson appeared to accept this result as communicated to Thomsons Lawyers in her email to 19 August 2013.[23]
- [80]Second, for reasons that remain unclear, this Ruling was indirectly challenged by the Thomsons nearly 18 months later. The Thomsons objected to the 2013 Ruling in October 2014, but did not pursue that objection. Rather, they chose to object to their personal assessments to tax as beneficiaries of the Trust in the 2010 year (some $53,010, see paragraph [27] above). I could not locate these objections but I infer from the text of the objection decisions that they were based on the view expressed by Mrs Thomson in correspondence that the $10 settlement sum was never paid.[24]
- [81]These objections were made on 7 October 2014 and the objection decisions were given on 19 November 2014 (the 2014 Objection Decisions). They overturned the 2010 personal assessments to tax as beneficiaries on the basis that because the settlement sum was not paid, there was no trust and therefore the Thomsons could not as a matter of law be assessed to a distribution as beneficiaries. The reasons are brief and contain no detailed legal reasoning. At first blush, the conclusion sounds an odd one (even if the settlement sum was not paid, which has never been properly determined). Given that the settlor plainly intended to create a trust and Kadoe knew that and acted in all respects as a trustee, one would imagine that the possibility of some form of constructive trust should have been at least considered.
- [82]The 2014 Objection Decision relating to Mr Thomson also purports to include the whole of the income assessed to him and Mrs Thomson as beneficiaries in Mr Thomson’s assessable income because he was a sole trader. This surprising conclusion is accompanied by no further reasoning. Mr Thomson swears that an amended assessment was issued on 29 November 2014 giving effect to this conclusion.
- [83]Third, Mr Thomson then objected to his amended assessment on 24 December 2014, submitting that the income in question was assessable in the hands of Kadoe or even Ms Blinco. On 25 March 2015, the relevant Deputy Commissioner gave his objection decision (the 2015 Objection Decision). He concluded again that the Trust was invalidly created because of the failure to pay the settlement sum. He continued that therefore Kadoe could not be liable for the tax, nor could Ms Blinco. But because Mr Thomson held a QBCC licence which could have authorised the work done, and be because Mr Thomson operated as a sole trader, he must be liable for the tax. The reasons show that this conclusion was based on Mrs Thomson’s advice to the ATO in those terms, something which also seems rather odd.[25] Mrs Thomson gave evidence that she informed the ATO of those matters because an officer of the ATO had earlier informed her of the same matters. There is no mention of this in the 2015 Objection Decision.
- [84]Fifth, all the above relates only to the liability for the assessable income of the business for the 2010 year, not the taxation liabilities incurred by Kadoe. In particular, the 2014 and 2015 Objection Decisions do not deal with the GST and Superannuation liabilities of Kadoe, which were the subject of the tax debts incurred by Kadoe. It seems these issues were not considered.
- [85]Following the winding up of the Company, the ATO began to grapple with these issues. Ultimately on 7 December 2017, Deputy Commissioner Hastings wrote to the Liquidators confirming the position that the ATO considered that the Trust was invalid, but that Kadoe was liable for outstanding GST and Superannuation liabilities in its own right rather than as trustee.[26]
- [86]These events are of limited relevance to this case. Mrs Thomson seems primarily to rely on them as showing that Kadoe never traded because it was supposed to trade as trustee and the Trust was invalid, and therefore Kadoe was not liable for any debts. This notion has been an article of faith for the Thomsons all through the winding up process. A great deal of Mrs Thomson’s evidence and cross examination was directed to showing that Kadoe traded expressly as trustee of the Trust and that the various parties including the Liquidators and the Commissioner of Taxation acted on the basis that it did so.
- [87]However, Mrs Thomson’s contention is without merit. A trust is not a legal entity. A legal entity (in this case a company) is liable at law for liabilities incurred by the company, whether as trustee or otherwise. If the company trades as trustee of a trust in the manner of Kadoe and the trust has not been validly created, the company remains liable, inter alia, for debts incurred by the company as putative trustee. Kadoe unquestionably carried on the business which generated the liabilities relevant in this proceedings. It is liable for those debts.
The PWA proceedings
- [88]Proceedings had been brought by PWA in late 2012 against Kadoe for unpaid fees. Ultimately, PWA only sought $2,791.89 from Kadoe in respect of its affairs. It claimed other amounts from the Thomsons individually and from Peradena totalling about $18,000.
- [89]The Thomson parties filed a defence and counterclaim. The defence relevantly raised the invalidity of the Trust but is not otherwise relevant. The counterclaim was brought primarily by Kadoe. Thomsons Lawyers gave negative advice as to the prospects of those claims, based in part on the 2013 Ruling, the consequence of which was that there was no loss arising from the alleged errors by PWA. However, after the 2014 Objection Decisions, the Thomsons amended the counterclaim to allege huge losses, justified on the basis that the invalidity led ANZ to call up the loans to Kadoe resulting in loss to Kadoe of future profits and a sale value in 5 years of some $1.6m. It was also alleged that the Company lost the benefit of other opportunities valued at some $798,000 per year for 5 years starting June 2013. This pleading was signed by Mrs Thomson.
- [90]The Liquidators later settled the counterclaim for $20,000.
- [91]In submissions, Mrs Thomson appeared to rely on these matters as justifying a conclusion that any loss or damage suffered by Tremco was not caused by the insolvency of the Company but by Tremco appointing the Liquidators, who then settled the claim. (That conclusion is rejected below, starting from paragraph [345].)
Ceasing operation of the business
- [92]Mrs Thomson also gave evidence that the alleged invalidity of the Trust caused Kadoe to stop trading on 30 June 2013.
- [93]Mrs Thomson caused two new companies to be incorporated on 10 July 2013 as vehicles for Mr Thomson to provide waterproofing services: Iniv8Z Queensland Pty Ltd and Inniv8z Australia Pty Ltd. Mr Thomson was the sole director of both companies until his bankruptcy in about June 2015. Thereafter, Mrs Thomson became the sole director. Around August 2013, Mrs Thomson completed an application for a QBCC licence for Iniv8Z Queensland and the licence was issued on 3 September 2013.
- [94]Mrs Thomson says she ceased trading on legal advice. The advice itself was not tendered. She also gave evidence that later that year she was advised that Kadoe should be wound up. Again the details of this advice were not in evidence. Mrs Thomson said the advice was based on the invalidity of the Trust.
- [95]All of this is rather peculiar if the explanation for ceasing trading was truly the alleged invalidity of the Trust. The 2013 Ruling seemed to address the problem from the taxation perspective and it appears Thomson Lawyers accepted that. Another explanation for these steps could be that Mrs Thomson and her advisers recognised that Kadoe was insolvent. I make no specific finding to that effect, but there are good grounds for scepticism of Mrs Thomson’s evidence as to the reason Kadoe ceased trading.
Impact on ANZ and other banks
- [96]Mrs Thomson says she informed the Bank of the invalidity issue in about September 2013 and that the Bank then issued a default notice relying, amongst other things, on the invalidity issue. Evidence about this appears in the statement at Trial Exhibit 18 paragraphs 117 to 121 which describe a confessional conversation by Mrs Thomson with Mr Ferguson of the ANZ. This evidence seems odd. At the time, Mrs Thomson had the benefit of the 2013 Ruling. Even if she had doubts about its foundation, she had taken legal advice on the issue. It is strange that she was determined to pursue the invalidity point.
- [97]In any event, there was a notice of default issued by ANZ about the invalidity point on 10 September 2013.[27] That notice asserts a default arising out of a finding by a court that the trust was not properly constituted or the customer conceding that matter. There had been no Court finding. Mrs Thomson must have persuaded the Bank of the second limb (again one wonders why she did that). Further, it refers to the lack of satisfactory evidence of the trust deed, in circumstances where there was evidence the Bank had asked for and obtained satisfactory evidence of the deed when the accounts were opened. (Mrs Thomson eventually tried to pursue the Bank for failing properly to satisfy itself of the existence of the Trust.)
- [98]In any event, the Bank issued further default notices on 21 October 2013 and 7 November 2013[28] which recited the failures of Kadoe to pay sums due under the facilities with ANZ and failure to provide the 2012 Balance Sheet and Company Tax return as additional defaults. On 7 November 2013, the ANZ Bank also gave notice of intention to terminate the Overdraft Facility and to require repayment of the sum advanced some $140,000. No evidence was led as to the ultimate fate of the ANZ facilities, though given the secured guarantees given by the Thomsons, and the lack of any proofs of debt from the Bank in the winding up, it seems likely the Thomsons paid out these sums.
The trial of the Tremco claim
- [99]While the disputes about the validity of the Trust continued, Tremco’s proceedings moved towards trial.
- [100]The Further Amended Statement of Claim[29] was an impressively detailed document, given that is was a claim for goods sold and delivered. It ultimately came to 87 pages with each and every individual invoice pleaded and particularised. Kadoe’s defence was conveniently summarised by Andrews DCJ in his reasons for judgment as follows:
The plaintiff’s claim is for $146,210.28 and for interest for moneys due and owing for goods allegedly sold and delivered to the defendant. The issues are whether goods for which payment is demanded were not ordered, not delivered, not picked up, already paid for, returned or donated. For certain items there was issue about whether, if delivery was proved, the defendant was entitled to credits and whether they were properly brought to account.[30]
- [101]Kadoe was not legally represented in the Tremco proceedings, at least during the later period. Rather, Mrs Thomson represented the Company with the leave of the Court. Mr Thomson’s authority was given in that regard. The plaintiff relies on Mrs Thomson’s role as supporting its contention that she acted as a de facto director.
- [102]As noted above, on 13 February 2015 Mrs Thomson filed the District Court affidavit in which she swore she was authorised to make the affidavit for Kadoe to seek an adjournment. At the hearing of that application, Mrs Thomson tendered a letter from Mr Thomson in which he wrote:
As this morning’s application seeking an adjournment of the trial of this matter set down for Monday 16 February 2015, I give my authority for Carolyn Mary Thomson…to represent the defendant in this matter. As Carolyn has had the care and control of the matters involved in this morning’s application she is the only person who has the knowledge to be able to bring this matter before the court today, as the defendant is self-represented.
- [103]Mrs Thomson sought to adjourn the trial to join PWA as a cross defendant. Samios DCJ refused the adjournment application, inter alia because the issues between PWA and Kadoe, including whether the Trust had been created, were irrelevant to Tremco’s claim.[31]
- [104]The trial was then heard over 16 and 17 February by Andrews DCJ. Mr Thomson’s letter of authority was relied upon at trial and Mrs Thomson appeared. She was the only witness. It is evident from his Honour’s judgment that she challenged the invoices based on a detailed attack on the reliability of the plaintiff’s records. All those attacks were rejected by his Honour. He entered judgment $146,410 plus interest of $44,914.60. He ordered costs be paid by Kadoe on the standard basis.[32] The Tremco judgment was not appealed.
Winding up and subsequent events
- [105]Judgment was given on 27 February 2015. Kadoe failed to comply with a statutory demand based on the Tremco judgment and was wound up in insolvency on 29 April 2015. Terrence Rose and Anne Meagher were appointed as Liquidators.
- [106]Mr Thomson was made bankrupt in June 2015.
- [107]Mr and Mrs Thomson were publicly examined on 16 November and 23 November 2015, respectively.
- [108]These proceedings were commenced on 28 April 2016.
Statutory Framework
- [109]Section 588G(1) of the Act articulates a director’s duty to prevent insolvent trading. It relevantly provides:
588G Director’s duty to prevent insolvent trading by company
- (1)This section applies if:
- (a)a person is a director of a company at the time when the company incurs a debt; and
- (b)the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
- (c)at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
- (d)that time is at or after the commencement of this Act.
…
- [110]Section 588M provides for recovery of compensation for loss resulting from insolvent trading. It relevantly provides:
588M Recovery of compensation for loss resulting from insolvent trading
- (1)This section applies where:
- (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
- (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
- (c)the debt was wholly or partly unsecured when the loss or damage was suffered; and
- (d)the company is being wound up;
whether or not:
- (e)the director has been convicted of an offence in relation to the contravention; or
- (f)a civil penalty order has been made against the director in relation to the contravention.
…
- (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.
- [111]Section 588R(1) deals with liquidator’s consent. It provides:
588R Creditor may sue for compensation with liquidator’s consent
- (1)A creditor of a company that is being wound up may, with the written consent of the company’s liquidator, begin proceedings under section 588M in relation to the incurring by the company of a debt that is owed to the creditor.
- [112]The Liquidators have given consent.
Debts incurred
- [113]Tremco’s case is that the relevant debts incurred were the Tremco debts. The plaintiff pleaded the incurring of the Tremco debts in paragraph 15(a) of the Statement Claim as follows:
Between 30 September 2009 and 29 April 2015, the Company incurred debts to unsecured creditors in the amount of $345,369.74 in the following amounts:
- (a)Between October 2009 and July 2011, the amount of $146,410.20 to [Tremco].
- [114]By her amended defence filed 28 October 2016, Mrs Thomson pleaded:
- The defendant admits that the allegations contained in paragraph 15.a. of the plaintiff’s statement of claim because a judgment was made in favour of the Plaintiff for $146,410.20 in District Court proceedings number 2152/11.
- Further and in the alternative the defendant denies the allegation contained in paragraph 15.a. of the plaintiff’s statement of claim, that that this amount is owing to the plaintiff by the defendant because:-
- [B]y the plaintiff’s own admissions, it was not able to provide proof of deliveries for invoices it had supplied to the trading trust.
- The plaintiff never provided evidence of those proof of deliveries to the court in District Court of Queensland proceedings number 2152/11.
- The plaintiff did not provide evidence of those proof of deliveries to the Court at trial, stating that the courier companies did not keep those proofs of deliveries for longer than six months, when the plaintiff had disclosed documents during the legal proceedings, that proved they could be printed from couriers’ websites more than 12 months after the date of the alleged delivery.
- Those documents were also provided to Rackermann DCJ pursuant to Court orders made by His Honour, during a hearing of a direction’s application made by the Company in February 2014, which hearing spanned several weeks to accommodate the plaintiff time to make the required disclosure.
- [115]By its amended reply filed 4 November 2016, the plaintiff alleged:
- As to paragraph 20 of the Defence, the Plaintiff:
- Adopts the express admission of paragraph 15(a) of the Statement of Claim contained in paragraph 20 of the Defence; and
- will rely upon the express admission at the trial of this proceeding.
…
22 As to paragraph 21 of the Defence, the Plaintiff says that the allegations therein:
- do not amount to a proper pleading;
- are embarrassing in light of paragraph 20 of the Defence;
- are scandalous;
- are contrary to the judgment of Judge Andrews SC in Tremco P/L v Kadoe P/L trading as Kadoe Commercial Coatings [2015] QDC 40; and
e. do not plead any response to the matters alleged in the Statement of Claim; and
- are liable to be struck out.
[underlining in original]
- [116]On the first day of trial, it became evident that Mrs Thomson sought by paragraph 21 to allege that his Honour’s judgment was obtained by fraud (and thereby go behind her admission in paragraph 20). I determined that paragraph 21 did not raise that issue. Mrs Thomson sought leave to amend to plead that the judgment was obtained by fraud. She delivered overnight a pleading particularising the alleged fraud. I refused leave, giving reasons at the time. The key consideration was that there was no arguable case of fraud. The defence therefore remained in the form identified above at that time. On day 4 of the trial, however, Mr de Waard applied to strike out paragraph 21, in effect, on the grounds identified in the paragraphs 22(a) to (c) of the reply. Ms Thomson did not oppose that course. I struck out paragraph 21 of the amended defence.
- [117]As I apprehend her trial submissions Mrs Thomson challenged the incurring of a debt element of the plaintiff’s case in three ways:
- (a)First, she contended that Tremco had failed to establish at trial when the debts had been incurred because they did not identify when each debt became due and owing. She contended that Tremco was required to prove by evidence the date on which each invoice became due for payment and that it had failed to do so;
- (b)Second, she contended that Tremco had failed to establish by evidence in this trial that each debt had arisen: that is that each individual invoice represented goods sold and delivered; and
- (c)Third, she contended that if Tremco was relying on the Tremco Judgment the debt incurred for the purposes of s. 588G(1), Tremco must fail because a judgment debt is not incurred by a company within the meaning of s. 588G(1).
- (a)
- [118]None of these contentions avail the defendant.
- [119]As to the first proposition, the plaintiff submitted that it had proved the date that each of the individual debts comprised in the Tremco debts were incurred by reference to the invoices tendered in evidence and the due date identified in the Statement of Claim in the Tremco proceedings. An allegation in a pleading is not evidence. However, in my view, that does not assist the defendant to make good her submission that the plaintiff has not proved the date the Tremco debts were incurred.
- [120]The effect of the admission of paragraph 15(a) is to admit not only that the Tremco debts were incurred, but also that they were incurred over a specific period, being October 2009 to July 2011. Further, it was common ground at trial that the period in which Kadoe incurred liabilities with Tremco which were unpaid was March to December 2010.[33] This narrowed the period in which the Tremco debts were incurred from that articulated in the pleading. The evidence of the invoices giving rise to the Tremco debts were in evidence. They indicated that some invoices might not have been due for payment until January 2011.[34] For that reason I treat the relevant period as March 2010 to January 2011.
- [121]The precise date within this period in which each individual debt was incurred is irrelevant so long as the plaintiff is able to prove the elements of s. 588G(1) in respect of the period in which the debts were incurred.
- [122]As to the second proposition, it is not open to the defendant to raise this issue given the admission of paragraph 15(a) of the statement of claim in the pleadings.
- [123]In any event, as I have observed, the invoices relied upon to obtain judgment in the Tremco proceedings were in evidence at this trial. Mrs Thomson did not lead any evidence to rebut the inference arising from those business records of the plaintiff that goods were sold and delivered in accordance with those invoices.
- [124]As to the third proposition, it is strongly arguable that a judgment debt is not a debt incurred for the purposes of s. 588G(1).[35] However, that interesting question does not arise on in this case. Paragraph 15(a) of the statement of claim expressly pleads the debts incurred by Kadoe to Tremco. It is the Tremco debts, not the Tremco Judgment debt, which are relied upon by Tremco as comprising the debts incurred for the purposes of s. 588G(1), as is confirmed in the plaintiff’s submissions.
- [125]In my view, the plaintiff has established that Kadoe incurred debts to Tremco totalling $146, 410.20 over the period March 2010 to January 2011.
Was Mrs Thomson a director in the relevant period?
Preliminary observations
- [126]It was not suggested that Mrs Thomson was appointed to the position of director of Kadoe. However, Tremco in its pleading and submissions undertook to demonstrate that Mrs Thomson was a director pursuant to paragraph (b) of the definition of director in s. 9 of the Act.
- [127]Tremco also undertook to prove this from incorporation of the Company in March 2009 until its winding up in April 2015. Proof of that would go beyond what is strictly required. Section 588G(1)(a) requires only that a person is a director of the company at the time when the company incurs the debt. As has been seen, in this case that is the period March 2010 to January 2011. It is this period which is the relevant period for the purposes of this element and the other elements of 588G(1). However, the fact that Mrs Thomson participated as a director in the management of the Company over its whole active life might be relevant to other issues, such as causation of loss claimed.
Relevant principles
- [128]Section 9 of the Act defines “director” as follows:
director of a company or other body means:
- (a)a person who:
- (i)is appointed to the position of a director; or
- (ii)is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
- (b)unless the contrary intention appears, a person who is not validly appointed as a director if:
- (i)they act in the position of a director; or
- (ii)the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.
Note: Paragraph (b) — Contrary intention—Examples of provisions for which a person referred to in paragraph (b) would not be included in the term “director” are:
- section 249C (power to call meetings of a company’s members)
- subsection 251A(3) (signing minutes of meetings)
- section 205B (notice to ASIC of change of address).
- [129]The first limb of paragraph (b) is sometimes characterised as describing a “de facto” director, while the second limb is sometimes characterised as describing a “shadow” director. Tremco relies on both limbs of the definition but appeared to rely primarily on the first limb. No party suggested that s. 588G or s. 588M disclosed a contrary intention. Other cases have proceeded on the basis that the duty to prevent insolvent trading applies to de facto directors and I can see no basis to conclude to the contrary.
Grimaldi v Chameleon Mining
- [130]The leading case of this part of s. 9 of the Act is Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22, a decision of the full Court of the Federal Court. The facts of that case were complicated and only a brief summary is required. It arose out of steps taken in several junior mining exploration companies in putting together and then developing a significant mining project. There were a number of steps involving various corporate entities and individuals. In the words of the Full Court: “Unorthodox steps were taken with little or no regard for corporate forms or for the fiduciary responsibilities of company directors and officers.”[36]
- [131]The proceedings arose out of certain payments made by Chameleon from its own funds to the vendor of certain iron ore tenements which comprised 40% of the consideration required by a third party, Winterfall, to acquire those tenements. The situation is complicated by the fact that Chameleon’s payment was in fact made to another company, Murchison, which had the primary obligation to pay funds to Winterfall to permit completion of Winterfall’s acquisition of the tenements. Murchison then executed a reverse takeover of Winterfell. Messrs Grimaldi and Barnes obtained a significant success fee from the transaction. Mr Barnes was formally appointed as a director of Chameleon at the time. Mr Grimaldi was not.
- [132]Chameleon alleged that the payments of its funds in this way was a breach of fiduciary duty by its appointed directors, including Mr Barnes. It also alleged that Mr Grimaldi was a de facto director of Chameleon and sought, inter alia, relief for breach of fiduciary duty against Mr Grimaldi as well.
- [133]Of relevance to this case is the analysis of principle by the Court in relation to a director under paragraph (b)(i) of the definition, referred to by the Court as a de facto director. That analysis is lengthy, and also deals with issues beyond those which arise here (in particular, the case raised issues of whether Mr Grimaldi was an officer or a fiduciary at general law). However, it is helpful to set out the relevant passages in full.
- [134]The Court started by considering how the development of the law, both by statute and by authority, demonstrates a broadening of the concept of a de facto director, culminating in the form of the current definition. The Court relevantly held:
[34] The current definitions of “director” and “officer” have a provenance in Australia’s corporation’s legislation which illuminates how these terms should be interpreted. Two related themes are evident for present purposes. The first is the definitions of “director” and “officer” have been contrived so as to enlarge the classes of persons concerned in the management and affairs of a corporation, upon whom legislative standards and liabilities ought be imposed. The second is the progressive integration of the standards and liabilities of “officers” with those of directors. The legislative policy of protection of corporations and of those who deal with them from the consequences of the conduct of those who participate significantly in a corporation’s affairs is clearly evident in these developments, even if the desirable scope of that protection remains contentious: see Corporations and Markets Advisory Committee Report, Corporate Duties Below Board Level (2006).
[35] The state legislation — the Companies Act 1961 (Cth) — was both a catalyst to, and a precursor of, the above developments. It was notable for its s 5 definitions of “director” and “officer” and for its early partial integration of the liabilities of “directors” and “officers” in s 124. First, the definitions. “Director” was defined as including: … any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act. The second part of this definition refers to what are known as “shadow directors”. Such a shadow director provision subsists to this day. Its terms will not be repeated hereafter as it has no particular significance in the appeals. What is of present interest is the first part of the definition. Until the decision of the High Court in Corporate Affairs Commission v Drysdale (1978) 141 CLR 236; 22 ALR 161 (Drysdale (No 1)), the view taken of it was that it referred to persons who occupied a position to which were attached the powers and obligations the Companies Act attached to a “director”, but who were differently described under the company’s constitution or governing law: for example Harris v S (1976) 2 ACLR 51 at 54 and 71; Drysdale at CLR 243 and 248; ALR 165 and 169. So, to be guilty of an offence under the director’s duty provision in s 124 of the Act, the person in question had to hold the “office” of director: R v Drysdale (1978) 3 ACLR 680 at 684–5 (Drysdale (No 2)).
[36] While the High Court’s decision in Drysdale (No 2) (reversing that of the New South Wales Court of Criminal Appeal) was not, in the event, concerned directly with the s 5 “director” definition, it altered significantly contemporary understanding of who could be said to be a director for the purposes of director’s duties provisions. It was held that “de facto directors” were directors.
[37] At issue in Drysdale (No 1) was whether a person whose appointment as director was terminated, but who thereafter continued both to occupy the office (albeit without lawful authority) and to discharge its duties, could be prosecuted for breach of the duties of honesty and diligence imposed on a “director” by s 124(1) of the Act. The judges held that the provision applied not only to persons lawfully in office but also to persons (a) whose appointment was defective or otherwise invalid but who none the less exercised the office; (b) who held over after their appointment came to an end; or (c) seemingly, who occupied the office as a usurper (or director de son tort): see further on usurpers Revenue and Customs Commissioners v Holland [2010] 1 WLR 2793; [2011] 1 All ER 430; [2010] UKSC 51 at [82] (Holland) and Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 277 ALR 189; 82 ACSR 703; [2011] NSWCA 109 at [219]–[222]. Such were de facto directors. In reaching this conclusion, it is apparent that the concept of an “office” was integral to the judges’ reasoning. A de facto director was a person who did not have, or no longer had, lawful authority so to do, but who none the less occupied the office of director and discharged the duties attaching to that office: see especially at CLR 242–3; ALR 164–5 per Mason J; at CLR 245; ALR 167 per Murphy J. Observations of Mason J illustrate this and have had enduring significance on the definition of a de facto officer. Having referred to Lindley LJ’s observation in Re Western Counties Steam Bakeries & Milling Co [1897] 1 Ch 617 at 627 (Re Western Counties) that “to be an officer there must be an office” — that is a recognised position with rights and duties attached to it — Mason J continued (at CLR 242; ALR 165): The words of s 124(1) assume that the person in question occupies an offıce (“his office”) and that there are functions (“duties”) attaching to that office which he is discharging. I say “occupies” rather than “holds” because the first part of the definition of “director” makes it clear that a director is a person who occupies rather than holds an office … To say that a person occupies a position or office is to say something more than that he holds the position or office. The first statement denotes one who acts in the position, with or without lawful authority; the second denotes one who is the lawful holder of the office. [Emphasis added.]
[38] To be noted because of its relevance in this appeal is that the High Court did not address directly whether a person performing some only of the functions of a director could be said to occupy the position of director.
…
[41] The legislative response, as revealed by the explanatory memorandum to the Companies Bill 1980 (at [34]), took the Court of Criminal Appeal’s decision into account. The new s 5 definition, in so far as presently relevant, continued the existing shadow director provision, but modified the old definition as follows: (a) any person occupying or acting in the position of director of the corporation, by whatever name called and whether or not validly appointed to occupy or duly authorized to act in the position. [Emphasis added.] This draws upon, and is an obvious elaboration of, the language and concepts used by Mason J in the extract from Drysdale (No 1) which is quoted above. As will later be seen, while the definition of director has subsequently been disaggregated and its language simplified, the essential meaning of it as it relates to de facto directors has not been altered since 1981.
[42] Section 5 retained an amended definition of “officer”. It now referred, for present purposes, to “a director, secretary, executive officer or employee of the corporation”. A new definition, that of “executive officer”, was added. The term meant, in relation to a corporation: … any person, by whatever name called and whether or not he is a director of the corporation, who is concerned, or takes part, in the management of the corporation. This addition heralded a new concern with senior officers in companies beyond directors.
[46] The Corporations Act, while continuing the themes noted of maintaining an expanded definition of “director” and of isolating a group of “officers” who were to be treated similarly to directors for certain duty and liability purposes, made its own modifications.
[47] The s 9(b)(i) definition of “director”, which relates to de facto directors, was simplified but without making any operative change to the 1981 definition. A “director” for present purposes means: … unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director. [Emphasis added.]
- [135]The Court then turned to consider certain UK authorities relied upon by Mr Grimaldi. The Court identified differences between the English and Australian provisions which made those authorities inapplicable. However, the Court made two observations which are helpful here:
[59] We mean no disrespect in commenting that the legislative context of the English decisions on de facto directors so differs from Australia’s, that they should be treated with some reserve. Because of the view we have concerning the present state of Australian law in any event, we do not consider it necessary or profitable to engage upon an extended analysis of the English cases despite the urging of counsel for Mr Grimaldi. None the less we do acknowledge that there are a number of useful lessons to be derived from those cases which for the most part are confirmatory of what is immanent in our own jurisprudence. We note two in particular.
[60] The first — and it has been reiterated regularly — is that there is not one single decisive test of when a person will be found to be a de facto director and judges have, for the most part, cautioned against attempting to formulate one: see Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333 at 343–5; Re Kaytech International plc [1999] 2 BCLC 351 at 423; Hollandat [39]. The cases equally demonstrate that generalisations in this area can often require subsequent qualification: see the comments on In Re Hydrodam in Hollandat [90] and [106]–[108].
[61] Second, once the concept of directors had been taken beyond that of persons who have been appointed (albeit ineffectively) to the position of director, or who have held over after their appointment has terminated — the traditional conception of a de facto director: compare Drysdale (No 1) above — and was applied to persons who performed the functions of directors without any appointment whether or not they were held out as directors, several very obvious difficulties arose, as Lord Collins acknowledged in Hollandat [91]. The distinction between shadow and de facto directors became impossible to maintain as in both instances their real influence in the affairs of a company maybe a measure of the actual role they have in it: compare Re Kaytech International plcat 424. Distinctly, to quote Lord Collins (at [91]):
[91] … the courts were confronted with the very difficult problem of identifying what functions were in essence the sole responsibility of a director or board of directors. We will return to this latter observation below.
- [136]The Court then turned to articulating the relevant principles in determining if a person is a de facto director under (b)(i) of the definition. This analysis is extended and includes analysis of the position of officers as well as directors. Tremco did not allege that Mrs Thomson was an officer. It would not have availed it to do so given that s. 588G(1) relates only to directors. The relevant parts of their Honours analysis is as follows:
[62] In Drysdale (No 2) the High Court found a de facto director could be guilty of a breach of the duty imposed on a “director” by s 124 of the 1961 Act without need to resort to the statutory definition of “director” in s 5 of that Act. While such may well remain the case in relation to contraventions of ss 180–182 of the 2001 Act: Emanuel Management Pty Ltd (in liq) v Foster’s Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205 at [248]–[249] (Emanuel Management); we will confine what we have to say to the statutory definitions of “director” and “officer” in s 9 of the Act. Section 179(2) makes it abundantly clear the legislative intent was that those definitions were to inform the meaning of those terms as used in ss 180–182.
[63] For present purposes a director is a person who is not validly appointed as such if that person “act[s] in the position of a director”: s 9 “director” (b)(i). The following emerges clearly enough from the wording of the definition in its context and from Australian case law.
[64] (i) A person may be a director even without any purported appointment of that person to that position at any time. The definition applies as much to a person who is a true usurper of the functions of a director in a company: see for example Re Valleys Rugby League Football Club Ltd [1997] 2 Qd R 645 at 654 (Re Valleys Rugby); as to a person who takes “an active part in directing the affairs of [a] company” with the acquiescence of de jure directors: for example Austin & Partners Pty Ltd v Spencer (unreported, NSWSC, 1 Dec 1998), Windeyer J; see also International Cat Manufacturing Pty Ltd v Rodrick [2010] QSC 30 (International Cat Manufacturing).
[65] (ii) The formula, “acts in the position of a director”, which mirrors the language of Mason J in Drysdale (No 1)at CLR 242; ALR 165 contemplates that in some degree at least the person concerned, though not appointed a director, has been “doing the work of a director” in that company: compare Re Western Countiesat 630. Or to put the matter more fully, the person concerned, though not a director de jure, has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances.
[66] (iii) The roles and functions so performed will vary with the commercial context, operations and governance structure (to the extent it is operative: see Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173 at 177–8 (Mistmorn) of the company: Austinat 569–70. Their performance by that person may well be at variance with what is permitted by the Act or by the company’s constitution. None the less, whether they suffice in the circumstances to constitute the person a director for the Act’s purposes will often be a question of degree having regard to “the nature of the functions or powers which are exercised and the extent of their exercise”: Austinat 569–70; Natcomp Technology Australia Pty Ltd v Graiche [2001] NSWCA 120 especially at [14]–[15]; Re Valleys Rugbyat 656.
[67] (iv) There is no reason why the relationship of a person with a company may not evolve over time into that of de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time: see Austin.
[68] (v) Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company: see s 9 “director” (a). The fact that a person has been designated a “consultant” for the performance of functions for a company will not as of course mean that person cannot be found to be a director. Whether or not he or she will be a director will turn on the nature and extent of the functions to be performed (both in and beyond the consultancy) and on the constraints imposed thereon. A limited and specific consultancy is unlikely on its own to be caught by the s 9 definition. Not so, a general and unconstrained one which permitted taking an active part in directing the affairs of the company even if not necessarily on a full-time basis: compare Mistmorn at 183: the references there to AS Nominees and to Antico seem mistaken. Though we do not consider that the question actually requires determination in this case and thus we do not need to express a concluded view on it, we consider that if a consultant is a corporation and what it does through its own directors or officers results in “acting in the position of a director”, then, and consistently with the policy of s 201B (which requires a director to be a natural person), it will be a question of fact as to which director (or officer) in the consultant company is (or are) the de facto director(s) of the corporation.
[69] (vi) Though the point seems not to have been authoritatively settled in Australia, we agree with Lord Collins in Holland at [91] that, with the extension of the de facto director concept to persons who have never purportedly been appointed director, a rigid distinction between a de facto and a shadow director cannot be maintained. A person’s power or influence over the directors of a company may provide the capacity to secure as of course compliance with his or her wishes or instructions for “shadow director” purposes: see Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1 at 52–3; 18 ACSR 459 at 509–10 (AS Nominees). But the possession and exercise of such power or influence by a person alleged to be a de facto director may throw direct light on the evaluation of that person’s true position and influence in the affairs of the company. We also consider that like a shadow director whose wishes or instructions need not relate to all facets of the management of the company’s business: see AS Nominees at ALR 52; ACSR 509–10; the functions assumed by a de facto director likewise may be limited in their scope: see Austin. None the less, as Williams J observed (at 656) in Re Valleys Rugby there will commonly be the need to determine “how much a person must do before it can be held that such person is occupying or acting in the position of a director”.
[70] (vii) It has commonly been said in both Australian and English cases (though it has been disputed by Madgwick J in Austin at 569) that to be a de facto director one must be shown to have assumed or performed functions which only a de jure director or board can properly perform: see for example Emanuel Management at [250]; Re Valleys Rugby at 657; see Re Hydrodam at 182 but note the further elaboration in Holland at [111]; or which are the “sole responsibility” of a director or board: see for example Holland at [91]. This shorthand description of what is required to be established may be understandable, but it has the capacity to mislead in that it suggests that the duties or functions that can only properly be performed by de jure directors — or which are their sole responsibility — are capable of a priori enumeration. This may be possible in relation to those functions required by the Act or by the corporation’s constitution to be performed by directors or by the board (assuming the directors’ power of delegation has not been exercised: see s 198D of the Corporations Act and Ford, Austin and Ramsay, vol 1, [7.264]). But when one comes to that most fundamental of functions — managing the business of the company — which in a typical “Table A” type company is entrusted to the directors (see Art 73), a priori classification has no general utility. As we noted in our earlier discussion of officers, there has long been a spectrum of management practices which can result in a company’s business being managed by the board, under the board, by directors individually, by delegates, by some combination of these, by senior managers, by executive committees, etc. In many instances when one asks what can only properly be done by a director (or is the sole responsibility of a director) of a given company, one is actually inquiring whether, in the circumstances of that company, what is being done ought reasonably be regarded as being a responsibility of a director of that company. Or put shortly, was the work done, work for a director of that company? In a given company, this may involve an alleged director in the day-to-day management and business affairs of that company and may require his or her doing many things for reasons of need, expediency or whatever, but which hardly could be said to be things that only a de jure director can properly do: see for example Mistmorn at 183. In another corporate setting, the work done may be simply selective and strategic action. In the end what is being asked for is the making of a value judgment about the proper characterisation of what in its context the person in question had been doing.
[71] (viii) Because the definition of “officer” includes a person (s 9(b)(i)) who, though not a director, “makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation” or (s 9(b)(ii)) “who has the capacity to affect significantly the corporation’s financial standing”, proof that a person exercises senior management functions, while ordinarily “a necessary condition of acting as a director” (to use Madgwick J’s words in Austin at 569) will not necessarily be a sufficient condition: ibid. We would note in relation to this, first, that the Act’s s 9 definition of “senior manager” mirrors exactly that part of the “officer” definition given above; and, second, in many cases (of which the present is one), the application of ss 180–183 to a “director or officer” can eliminate the need to differentiate between a de facto director and an officer (de facto or not) who is not a director: for the sharply contrasting situation in the UK see Re Hydrodam at 182.
[73] (x) The subpara (b)(i) requirement that a person makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation, does not mean that that person does so as one “in ultimate control” or that the decision makers are not subject to the direction and control of the board: Morley at [888]. As was said in Morley (at [893]): [893] … The definition refers to participation in making decisions of a particular character. It does not prescribe that the decisions are made by the board, and it may be that a management decision to present a highly significant proposal will suffice; but wherever the decisions be found, the test is participation in their making. Participation is more than administrative arrangement, and there must be a real contribution from the postulated participation to the making of the decisions, but beyond that it is a question of fact. Likewise the subpara (b)(ii) requirement that a person has the capacity to affect significantly the corporation’s financial standing refers to the character properly to be attributed to that person’s capacity in the circumstances. It may arise from the extent of that person’s participation in investment decisions or financial commitments made, from the dimensions of a decision or decisions, from the nature of that person’s participation in the control and direction of the affairs of the corporation, etc: compare Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; 41 ACSR 72; [2002] NSWSC 171 at [74] (Adler). The question again is one of fact.
[74] There are three additional matters upon which we should make some observations. The first is this. That a company has an active director or directors apart from the alleged de facto director, or has a properly constituted and apparently “functioning” board (whatever that might mean in a given setting), does not preclude a finding that the person in question was a director: see for example Mistmorn (one active director); Austin (functioning board); International Cat (one de jure director). That person’s activities may, for example, have simply been accepted as of course or acquiesced in by the de jure director(s) whatever their formal powers may have been to disavow them. Or they may be acting together “on an equal footing … in directing the affairs of the company”: Re Richborough Furniture Ltd [1996] 1 BCLC 507 at 524 (Re Richborough); Holland at [91]; by for example, sharing (formally or otherwise) responsibilities for the company’s affairs. All this illustrates is that the differing contexts in which the issue can arise can contrive what may or may not be some of the relevant considerations of which account should be taken.
[75] Second, whether the company itself has held the person out as a director will itself be a relevant but not decisive consideration: see Re Valleys Rugby. Similarly, in our view, perceptions of those dealing with the company that the person was a director can themselves be of some contextual evidentiary significance. This is more likely to be so where those perceptions were independently formed, reasonable in the circumstances and support the appearance that the person was acting “under colour of office”. That concept has a long history in the law of de facto officers: see Dixon “De Facto Officers” (1938) 1 Res Jud 285, p 291. Third party perceptions, though, cannot change the reality of the true character of the position in which the person acts: Re Richborough at 526.
- [137]In that case, the trial judge analysed various as factors relevant to whether Mr Grimaldi was a de facto director. It is instructive in this case to note how these principles were applied to some of those matters by the Court.
- [138]The first event of interest relates to Mr Grimaldi negotiating on behalf of Chameleon. The Court observed:
[90] On 16 May 2002 the Chameleon board authorised Mr Grimaldi without any apparent limitation to negotiate and to prepare draft agreements for this purchase. The negotiations were completed in July 2002. His Honour’s conclusion was that it was open to him to find that this was a function which would ordinarily be undertaken by the directors. It was a fundamental part of the rationale for the business operations of Chameleon; it involved the exercise of a discretion as to the form and amount of the consideration to be provided (in the event it was the issue of over 18 million shares and 5 million options); and was not one which would ordinarily be delegated to a person who was not a director.
[91] The Grimaldi contention on the appeal invites us to infer that (i) because Mr Grimaldi was to prepare drafts, he had no authority to bind; (ii) as the consideration agreed was a share issue, a board resolution was required; and (iii) (though there is no direct evidence of this) the transaction was considered at a 9 July board meeting (at which Mr Grimaldi was present by invitation), the minutes merely recording that the Chairman would call a meeting of shareholders to ratify purchases of assets (presumably including the Fijian properties) and agree issues of shares in acquiring the assets (presumably because these involved “related party” transactions). The companies of a then Chameleon director, Mr McLennan, were the vendors of the Fijian interests.
[92] We will give our own views on Chameleon’s board below. We agree with his Honour’s characterisation of Mr Grimaldi’s role in the matter. He may not have had the capacity to bind the company, but in having unconstrained authority to negotiate a contract so significant to Chameleon, he was being entrusted with the work of a director of Chameleon. That he could not formally bind the company does not detract from the significance of what he was authorised to do. Neither does the need to make a share issue to give effect to what he negotiated. In any event, his actions would be consistent with those of an “officer” of Chameleon for the purposes of subpara (b)(i) of the Act’s s 9 definition and probably subpara 9(b)(ii). The share issue negotiated (over 18 million shares) constituted almost a doubling in the issued shares of the company: see the minutes of the Chameleon shareholders’ meeting of 4 November 2002.
- [139]It is notable that:
- (a)Even though the board of Chameleon authorised Mr Grimaldi to negotiate, the Court considered that broad authority independently to negotiate on a matter of significance on behalf of a company was indicative of acting as a director; and
- (b)The Court considered that to be so, even though Mr Grimaldi could not formally bind the company.
- (a)
- [140]As will be seen, I find that Mrs Thomson had independent authority to negotiate and manage matters of importance on behalf of Kadoe; and could go further and bind Kadoe in relation to those matters. I also find that Mr Thomson had little, if any, oversight or involvement in those matters and that, if he did give authority to Mrs Thomson of a general kind, he left executive decision making to her in many areas.
- [141]In paragraph [119], the Court agreed with the trial judge that Mr Grimaldi’s actions in managing a litigious dispute for Chameleon had a “confirmatory, rather than indicative, character” in relation to whether Mr Grimaldi was a de facto director. However, that was in the context of a limited dealing with one dispute which the Board was aware of and involved in. As will be seen that is in stark contrast to the circumstances of Mrs Thomson’s involvement in Kadoe’s numerous disputes.
- [142]At paragraph [130] the Court referred to the evidence of perceptions of others. It observes:
[130] We have already indicated that the perceptions of others can themselves be of some contextual evidentiary significance in arriving at the characterisation that a person is a de facto director: see “The Applicable Legal Principles” at [61]. His Honour properly used such evidence in this matter on a number of occasions as, for example, when he observed that the most telling evidence that Mr Grimaldi was reasonably perceived by outsiders to have acted as a director or officer of Chameleon is to be found in a letter from Chameleon’s auditors that Mr Grimaldi was their main source of information and, although he was not a director, he appeared to them to be “the manager of the company”.
[131] We refer to this matter because it was raised in the Grimaldi reply submissions: at para 2[4]. Accordingly we reject the proposition there advanced that the perception of outsiders dealing with a corporation are only relevant to the extent that the corporation has held out the person as having acted in the position of director.
- [143]The Court ultimately concluded as follows:
[141] Even though not authorised to be a director, Mr Grimaldi was either given, or had arrogated to himself with the acquiescence of at least the two executive directors, Barnes and Robert, functions in the affairs of Chameleon which would properly be expected to be performed by a director of that corporation given its circumstances. Given the extent and the significance of those functions, he so acted in the position of a director as to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director. The trial judge committed no appellable error in his conclusion. We reject ground 1 of the Grimaldi appeal. It is unnecessary to consider ground 2 as it has no bearing on our conclusion.
[142] There is one additional comment which should be made. While some of the acts done by Mr Grimaldi which evidenced his acting in the position of a director, were done at the request or with the authorisation of the board, others were not. The agreed chronology illustrates action being taken without request and on his own initiative. We emphasise this because of its importance, as will be seen, in determining the scope of the “subject matter over which [his] fiduciary obligations [to Chameleon] extend”: Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408; [1929] ALR 273 at 283 (Birtchnell).
- [144]Before turning to an analysis of the evidence in this case, it is useful to review some other authorities dealing with companies of a similar scale to Kadoe.
Mistmorn v Yasseen
- [145]In Mistmorn Pty Ltd (in liq) v Yasseen (1996) 21 ACSR 173, Mrs Hamad was the operator of a perfume business known as “French Corner”. Following a divorce, she took up with a Mr Yasseen. They were not married but presented themselves as husband and wife. Mr Yasseen persuaded Mrs Hamad to put funds from her divorce into establishing Mistmorn. It took over the French Corner perfume business and also (at Mr Yasseen’s urging) obtained licences to conduct a duty free business. Both business were conducted by Mistmorn. Mrs Hamad, was the sole director and shareholder of Mistmorn. Although Mr Yasseen was not appointed as a director, he was responsible for decision making relating to the duty free operations.
- [146]After a series of robberies, Mistmorn’s insurers made a payment of some $400,000. Most of the funds were paid to Mr Yasseen. Following the insolvency of the company, the liquidators and Mrs Hamad sought to recover these funds from Mr Yasseen on the basis that the payments to him were made in breach of his statutory duties as a director or officer of Mistmorn (amongst other things). At the time, s.60 of the Corporations Law contained the definition of director. It was substantively the same as the definition in s. 9.
- [147]Mr Yasseen denied he was a de facto director or officer.
- [148]The evidence established that Mr Yasseen had been responsible for setting up the duty free business. It was disputed as to exactly what his role in its day to day operations were. However, his Honour found:
Very little in this case turns upon the extent to which Mr Yasseen actually worked in the day-to-day operations of the business. But the evidence I have already mentioned shows that he did involve himself to a considerable extent in the day-to-day transactions and affairs of Campsie Duty Free.
What is more, in all those affairs in respect of which one would expect a director to be involved, Mr Yasseen was involved. When funds were required in early 1992 because of the heavy purchases of stock which had occurred, Mr Yasseen arranged for a loan of $130,000 from his brother-in-law, Mr Andy Jackson. When Mistmorn was involved in litigation, Mr Yasseen played a prominent role. Mr Yasseen was active in dealing with the negotiations with the insurance company, FAI, which showed reluctance to pay out on Mistmorn's claim. Mr Yasseen took a leading role in giving instructions in the negotiations with Customs on Customs’ claims for the payment of the excise duty, customs duty and sales tax. It was Mr Yasseen and the solicitor, Mr A Tudhope, who attended a conference with Customs on 3 June 1993 when an offer of settlement was put to Customs which Customs subsequently rejected.
In all these ways, Mr Yasseen involved himself in the affairs of Mistmorn as only a director of the company would have been expected to do. I do not say that he held himself out to be a director, for, as I have said, I think that he intended not to be a director, but he dealt with the matters one would expect a director to handle.
The case put on behalf of Mr Yasseen was that whatever he did was done to assist Mrs Hamad. Thus, Mrs Mardini gave this evidence:
He only helped sell. He was not employed there. He was there as Maha's husband, partner, to help out.
Mr Yasseen and Mr Estephan gave like evidence. It seems to me to be quite inconsistent with Mr Yasseen's personality that he acted as a caring assistant to his partner, Mrs Hamad. My impression of Mr Yasseen is that he is a person who is aware of what is going on around him and that he looks after his own interests.
Mr Yasseen gave evidence that he acted as a “consultant” to Mistmorn or Mrs Hamad. In fact, he so described himself at various times. But the use of the term is of little assistance. In order to determine whether Mr Yasseen acted as a director and officer of Mistmorn, it is necessary to see what he did, not what euphemism he applied to his actions.
Mrs Hamad does not appear to have fully understood what was occurring in relation to the business. A member of the staff of the liquidator, Mr David Maher, has calculated that Mrs Hamad put over $700,000 into the business. Mrs Hamad lost this amount and, presumably, a great deal more. She was a director of Mistmorn and she undoubtedly managed the French Corner side of the business. However, I think it is unlikely that Mrs Hamad either controlled or had a good understanding of what was occurring in the other side of the business, that is to say, the duty free side of the business which involved cigarettes, liquor, electrical and photographic goods. I also think it is unlikely that Mrs Hamad initiated or turned her mind to the large increases in stock which occurred before the two major thefts. It was her financial position that was affected. I think that she would not have approved expenditure on stock which was unwarranted and I think it is improbable that she was in any way involved in any of the thefts which occurred. She would not have stolen from the business which she was funding. I think it is probable that, when Mr Yasseen was working in the duty free side of the business, Mrs Hamad left the decision making in that side of the business principally to him.
My overall impression is that Mistmorn was run as a husband and wife company. Both Mr Yasseen and Mrs Hamad were involved in the day-to-day operations and the business affairs of the company...
I am satisfied that, during relevant periods with which we are concerned, if not during the whole period while Mistmorn traded, Mr Yasseen acted as a director and officer of Mistmorn and owed fiduciary duties and a duty of care to Mistmorn.[37]
- [149]As is made clear in Grimaldi, each case depends on its own circumstances. However, it is to be noted that in this case there was a division of labour in running the affairs of the company between a husband and wife in a small family company. As will be seen, on the findings I make, the situation of Kadoe was similar.
DCT v Austin [38]
- [150]This case involved a claim by the DCT to recover from Mr Austin, group tax payments which the Commissioner had to repay as preferences under s. 588FF to the liquidator of Talljade Pty Ltd. The obligation to pay the amounts was imposed under s. 588FGA on a director of the company. The issue in the case was whether Mr Austin was a director.
- [151]Talljdae was incorporated to provide employees to two restaurants owned by Mrs Austin and her friend Mrs Manassen. Mr Austin had been an appointed director of Talljade for about four months after it was set up. He resigned thereafter (though by oversight he remained on the ASC register). It was common ground that he continued to carry on some functions for the company after he resigned. The question was whether those were sufficient to make him a de facto director liable to the Commissioner in respect of the group tax amount. The remaining director was Mr Manasseh
- [152]The evidence disclosed that despite the resignation, Mr Austin conducted the negotiations with the DCT in response to the issue of notice of liability to penalty equal to the amount of unremitted group tax, including negotiating a payment schedule. It was clear that in negotiations, Mr Austin presented as being in charge of the company. Further, he signed a formal agreement along with Mr Manasseh binding the company without deleting references to “director/secretary”. His Honour found that Mr Austin had authority to negotiate on behalf of the company without Mr Mannasseh’s concurrence. Mr Austin also managed the company’s creditors in a time of financial difficulty. His Honour also noted and accepted that Mr Austin took these steps believing he was not a director and to do his best to help out in a broader family crisis.
- [153]
The variety of commercial and corporate life is such that it seems to me unprofitable to attempt a general statement as to what is meant by “acting as a director”. Whether a person does so act will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned. I have, for example, referred to the circumstance of the size of the company. In a large and diversified company, great discretion to deal with very important matters must be reposed in employees. In the case of a supermarket chain, as in Tesco, it would hardly occur to anyone to suggest that a managerial employee held to have “acted as the company” in breaking a consumer protection law at a particular store was acting as a director of the vast company concerned. As suggested above, in the case of a single person making decisions for a company the business of which was confined to the operation of a corner store, a different view might be taken.
Similarly, the internal practices or structure of the company may be relevant: commonly a director with particular expertise is assigned particular concerns, and has a bare minimum to do with the general affairs of the company. In such a case, the circumstances may bear the conclusion that such work is more done as an expert employee or consultant than as a director cf Mistmorn Pty Ltd (in liq) v Yasseen(1996) 21 ASCR 173 at 183 ; 33 ATR 332 (the cases cited at that reference appear to have been included in error).[40] [Underlining added]
- [154]Mrs Thomson also referred to Re Swan Services Pty Ltd (In Liquidation) [2016] NSWSC 1724. She relied upon that case as supporting a submission that her role was only as wife who became involved in the affairs of the company to address the emergency of the invalidity of the Trust. Neither Swan, nor Austin, provide support for her contention in the context of this case. Both cases recognise that while a brief involvement in an emergency might not make the intervenor a director, where the intervenor’s role objectively demonstrates that he or she acted as a director, the reason for doing so is irrelevant.[41] As will be seen, Mrs Thomson’s contention that she was a wife assisting her husband in an emergency and so not a director, is fundamentally flawed in at least two respects:
- (a)First, her involvement went far beyond emergency assistance and involved conducting the dispute over the alleged invalid trust for the Company over many years;
- (b)Second, her involvement in the affairs of the company is of particular interest in this case is over the period March 2010 to January 2011. There was no emergency at that time. Indeed her evidence and submissions which seek to limit her role to managing the so-called invalid trust emergency (which she appears to have been instrument in causing by challenging the 2013 Ruling) in the face of the other evidence of her involvement, is damaging to her credibility.
- (a)
Analysis of the evidence
- [155]Tremco relies on a number of considerations to sustain the conclusion that Mrs Thomson was a de facto director from the incorporation of the company until its winding up.
Mrs Thomson was responsible for setting up the Company and the Trust
- [156]It is convenient to begin here. Tremco contends that it was Mrs Thomson who was primarily responsible for setting up the Company and the Trust and for taking advice and giving instructions in that process.
- [157]Tremco relies on Mrs Thomson’s own affidavits, being the affidavits referred to in paragraphs [10] to [12] above. Those affidavits plainly communicate in my view that Mrs Thomson was the person responsible for giving instructions to and receiving advice from PWA.
- [158]This conclusion is reinforced by the fact that over the whole documentary record, all correspondence with PWA relating first to accounting issues for Kadoe and the Trust, then in relation to outstanding fees (for Kadoe as well as Mr and Mrs Thomson and Peradena) and finally in relation to the invalidity issue, is addressed to Mrs Thomson and sent by Mrs Thomson. There is no evidence of Mr Thomson being involved.
- [159]This consideration is relevant in itself. However, it also is consistent with the PWA perceiving from the very first that Mrs Thomson was responsible for the affairs of the Company in which PWA was retained.
- [160]Tremco also relies on Mr Thomson’s letter of authority referred to in paragraph [102] above. There is merit in that proposition. The matters the subject of the application are disclosed by the affidavit and Judge Samios’ reasons: they were the dealings with PWA in relation to the Trust and its invalidity, including the circumstances of setting up the Trust and the advice given. This strongly supports the conclusion that Mrs Thomson, to the exclusion of Mr Thomson, was familiar with those events.
- [161]The fact a person was involved in setting up a company is not always an indicator that a person is acting as a director. The role of promoter and director are quite distinct. However, it is relevant in my view as an indicator of the role Mrs Thomson was to play in the affairs of Kadoe, which was always intended to be a small company operating a waterproofing business.
- [162]Mrs Thomson submits that she was not responsible for setting up the Company. She relies on Mr Thomson’s evidence that he initially met with Mr Peter Wilson then instructed her to be the contact with PWA. She also relies on her evidence that advice she received from PWA was communicated to her husband. She suggests she was merely a conduit.
- [163]While it is possible that Mr Thomson was present in the first meeting with PWA, I reject the evidence that Mrs Thomson role was merely a conduit for Mr Thomson to give instructions and receive advice on setting up the Company. I do so for the following specific reasons.
- [164]First, that role is directly inconsistent with the position as sworn to by Mrs Thomson in her affidavits. It is notable that those affidavits were sworn in circumstances where she did not have an incentive to minimise her role in setting up the Company and Trust. Mrs Thomson’s attempts to explain away the plain meaning of the words she used in her affidavits were unconvincing.[42]
- [165]Second, Mr and Mrs Thomson’s evidence about her role in setting up the structure was inconsistent with the letter sent to the Court by Mr Thomson in relation to the adjournment.
- [166]Third, it was inconsistent with the absence of Mr Thomson from the substantive correspondence over the ensuring years with PWA and the detailed correspondence produced by Mrs Thomson in the course of the dispute with PWA.
- [167]Fourth, Mr Thomson’s evidence was inconsistent with evidence given in his public examination. During the public examination he admitted that it was Mrs Thomson who sought the advice from the accountants about the company structure while he was working. Mr Thomson could not explain the earlier statement and said he did not recall making it.[43]
- [168]Mrs Thomson’s attempt to minimise her involvement in setting up the Company and the business structure was self-serving and incredible. It was damaging to her credibility as a witness. It reflected a determination to give the evidence which she thought would assist her case.
Mrs Thomson’s role in the Company’s operations
Mrs Willson’s evidence
- [169]Mrs Willson gave direct evidence of Mrs Thomson’s involvement in the waterproofing operations of the Company.
- [170]Mrs Thomson’s involvement in the operations was described in some detail by Mrs Willson. Her evidence has been dealt with in paragraphs [34] to [38] above. For the reasons given there, I accept her evidence. Mrs Thomson admits that she was responsible for tenders. She sought to extract an admission from Mrs Willson that that was all she did. Mrs Willson maintained that Mrs Thomson also dealt with pricing for tenders. Mrs Thomson plainly sought to limit her involvement in the Company’s operations by referring to her role limited to “tenders”. However, the difficulty is that it was never clear why that role, including pricing for tenders, was one which was minor in character.
- [171]The tenor of Mrs Willson’s evidence, which as I have said I accept, is that Mrs Thomson acted in effect as a commercial manager for the Company (which is consistent with her self-identification as General Manager: see below from [200]).
- [172]Further, Mrs Willson’s evidence was that Mrs Thomson managed all the operational issues she identified and Mr Thomson performed the labour for Kadoe. It might be that Mr Thomson’s role went beyond that, to supervision and direction of site works for the Company. However that does not detract from the tenor of Mrs Willson’s evidence: that is that it was Mrs Thomson who was guiding the operational affairs of the Company she describes.
- [173]As I have observed, Mrs Willson’s evidence covers the period February 2010 to January 2011, almost exactly matching the relevant period in this case.
Mrs Jeppesen’s evidence
- [174]There is also evidence that Mrs Thomson managed the internal administration of the Company. The evidence of Mrs Jeppesen is relevant in this respect. I refer to paragraphs [61] to [65] above. Mrs Thomson challenged Mrs Jeppesen’s evidence on the basis of the concessions Mrs Jeppesen is said to have made in cross examination as to the extent of her role in the administration of the Company’s affairs.[44]
- [175]Her evidence under cross examination on these issues, however, did not persuade me that Mrs Jeppesen’s evidence that Mrs Thomson was primarily responsible for the administration of the Company’s affairs and that Mr Thomson was primarily responsible for site labour was unreliable. Indeed most of the cross examination of Mrs Jeppesen tended in my view to confirm two matters:
- (a)That Mrs Jeppesen was an honest witnesses with a reasonably good recollection; and
- (b)That Mrs Thomson was the guiding mind of the administration of the company.
- (a)
- [176]For example, Mrs Thomson made the point in cross examination that Mrs Jeppesen was responsible for entering the wages time sheets in MYOB and issuing the electronic payslips. However, she did not directly challenge Mrs Jeppesen’s evidence that it was Mrs Thomson who was responsible for checking the pays and confirming any points of doubt. There was a suggestion that Mr Thomson might have had some responsibility for this in his evidence. I accept that that might be so, to the extent of providing information about facts on site. However, I accept Mrs Jeppesen’s evidence that Mrs Thomson provided oversight and direction to Mrs Jeppesen on her administration of the pay system.
- [177]Similarly, Mrs Thomson tried to suggest to Mrs Jeppesen that Mrs Jeppesen was responsible for entering data into MYOB. Mrs Jeppesen did not deny it. However, she said that Mrs Thomson taught her how to use MYOB and gave her instructions as to how to deal with any difficulties. This was not effectively challenged.
- [178]Ultimately, the tenor of Mrs Thomson’s challenge to Mrs Jeppesen’s direct evidence of Mrs Thomson’s management of the Company’s administration seemed to have been a combination of two suggestions:
- (a)That Mrs Jeppesen was ultimately responsible for the tasks in which she was involved; and
- (b)That if not, Mr Thomson was.
- (a)
- [179]I reject those suggestions. Not only do I do so because I accept Mrs Jeppesen as a reliable witness, but also because (meaning no disrespect to Mrs Jeppesen) she did not present as a person with either the confidence or training to undertake such responsibilities (a matter which emerged not only from observing her evidence but also from the diffident nature of her resignation letter[45] in circumstances of her complaints about working for Mrs Thomson articulated in that letter and at trial,[46] including that she had not been paid).
The BAS statements and the March 2010 BAS
- [180]Another area which demonstrates Mrs Thomson’s role in managing the affairs of the Company relates to the Company’s BAS. Those statements were lodged through PWA while they were acting for Kadoe.
- [181]When giving evidence about responsibility for instructing PWA as to the figures to be included in the BAS, Mrs Thomson gave the following evidence:
The statutory filing obligations, what about your obligations so far as BAS is concerned? You were responsible for lodging a BAS, weren’t you?‑‑‑No. PWA lodged the BAS.
PWA lodged the BAS?‑‑‑Mmhmm.
But upon your direction; correct?‑‑‑No. The information was provided to me by the bookkeeping and then I would send that information to PWA.
So you directed PWA in relation to the BAS?‑‑‑No. I gave them a copy of what the bookkeeper had given me. I didn’t direct them in regard to the BAS at all. It was up to them ‑ ‑ ‑
Okay?‑‑‑It was up to them in terms of what happened after that.
HIS HONOUR: Who signed the BAS statement?‑‑‑Sometimes I did sign the BAS statement that I sent to them but that – it was lodged electronically online by PWA. It wasn’t actually a form that was actually sent direct ‑ ‑ ‑
Well, who gave the instructions as to what to put in the BAS statement?‑‑‑I took – the bookkeepers gave me that information. It was put into – I put it into the BAS statement, so, that I didn’t have to re-configure what I had been given by the bookkeeper, and then that was then emailed to – of faxed, I think, originally, but emailed, in the end, to PWA.
Did you review that information for accuracy?‑‑‑No.
Did Mr Thomson ever look at it?‑‑‑I don't know.
Did you ever see him look at it?‑‑‑Look, I can’t – I can’t say specifically. I – I don't know. It’s such a long time ago. I don't know.
Well, do you have any recollection of him reviewing BAS statements?‑‑‑Look, he reviewed financials and things like that. As to it specifically, I can’t – I can’t say because I don't know.
Do you remember him ever giving you instructions that the figures to be sent to PWA were to be certain figures?‑‑‑No. That all came from the bookkeeper. There were reports ‑ ‑ ‑
So the bookkeeper, through you as a – in a sense – a post box to PWA ‑ ‑ ‑?‑‑‑Yes.
‑ ‑ ‑ and they put in BAS?‑‑‑Yes. And they checked the BAS statements as well. So PWA would – would reconcile those bank statements. That’s on the invoices that PWA have actually issued.
So are you saying that, as between you, your husband and PWA, they were ultimately responsible for the content of the company’s BAS statements?‑‑‑Sorry, who was?
PWA was?‑‑‑PWA – the information was given to them and then they would reconcile it to make sure the information was correct ‑ ‑ ‑
Yes?‑‑‑ ‑ ‑ ‑ and then they would lodge it.
So who was the mind of the company that gave instructions as to what the BAS should – what the numbers should be in the BAS statements?‑‑‑The bookkeepers produced a report ‑ ‑ ‑
Yeah?‑‑‑ ‑ ‑ ‑ and then that was reviewed.
By?‑‑‑I think – I think it was reviewed by Wayne but I’m not sure – I don't know because I didn’t do it. So ‑ ‑ ‑
Right?‑‑‑ ‑ ‑ ‑ he needs to give evidence in that regard himself.
Okay. All right?‑‑‑Okay. And from there the information was finalised and then given to me.
By whom?‑‑‑The bookkeeper.
Right?‑‑‑And then the bookkeeper gave me the figures to send to PWA.
So you – your evidence is that Mr Thomson was the person who reviewed the accuracy of the BAS figures to go into the company’s BAS statement?‑‑‑He’s going to have to give evidence in his – in that regard himself but my understanding is that if they were reviewed he did it. I’m – a lot of – on some occasions ‑ ‑ ‑
And did ‑ ‑ ‑?‑‑‑‑ ‑ ‑ the bookkeepers would have just given that information to – to – would have – would – printed it out to give me the information to give to PWA.
So it might not have gone through him. It might have just gone to you ‑ ‑ ‑?‑‑‑Yes.
‑ ‑ ‑ and you didn’t apply your mind to the accuracy of the numbers?‑‑‑I believed that the numbers would have been accurate because of the people that were doing the books at the time, and – and it wasn’t my role to do it. I had other things that I had to do. So I physically then – I just took the information from the people that had entered the data into there and there was no reason for me not to because I didn’t – I didn’t get involved in that.
Okay.[47]
- [182]Mr Thomson did not give evidence that he was responsible for instructions as to the figures to be forwarded to PWA. His evidence in cross examination was that Mrs Jeppesen did the MYOB data entry and prepared the BAS for PWA. It was evident to me from his cross examination that he recalled little about that process, either at the time of trial or during his public examination.[48]
- [183]I do not accept the substance of Mrs Thomson’s evidence. While I accept that Mrs Jeppesen would have probably have generated the data from MYOB for the BAS, that is quite different from accepting responsibility for the information to be sent to PWA. Mrs Jeppesen did not have either the confidence or training to undertake that responsibility and I reject the submission that she did. Mrs Thomson accepted that she regularly signed the instructions in relation to the BAS. I find that she was responsible for signing off on the BAS figures. The suggestion that she simply acted on the instructions of the bookkeeper is rejected. That evidence was self-serving and her unreliability on this issue significantly affects her credibility generally.
- [184]This conclusion is reinforced by the evidence about the March 2010 BAS. I refer to paragraphs [43] to [44] above.
- [185]Mrs Thomson’s attempt to characterise her firm instructions on an important commercial matter as something she did because the bookkeeper asked her to is impossible to accept as correct. This is so not only because of the tenor of the email itself and the other evidence as to Mrs Thomson’s broad role in the Company’s affairs, but also because later evidence shows that dealing with the Company’s creditors (Tremco, PWA and the ATO) was part of her role in the Company. As with her evidence about her role in the setting up of the Company, her attempts to explain away the obvious meaning of a document she created and to shift responsibility to an unnamed bookkeeper (Mrs Jeppesen had seemingly not started work at this time) is damaging to her credibility.
Businesswoman of the year
- [186]Mrs Thomson’s involvement in management of the affairs of the Company can also be inferred from the personal awards she received. Two of those awards are particularly relevant: the 2010 Award, the 2011 Award. There was no evidence from the awarding body, direct or indirect, as to the criteria on which each award was given. However, I infer that a significant consideration in granting an award recognising a business woman would be her success in business. Mrs Thomson did not really submit to the contrary and her email to Mrs Willson at paragraph [68] confirms that.
- [187]Further, evidence was given by Mrs Thomson that she did not nominate herself for the awards. (Based on Mr Thomson’s evidence, it might be that the nomination came from the business manager for Tremco though.) Once nominated, however, Mrs Thomson put in a submission as to why she should receive the award. Those submissions were not in evidence.
- [188]However, Mrs Thomson gave evidence of the matters which were taken into account. She conceded that the submissions included reference to work she undertook with the Company.[49] Mrs Thomson, however, gave evidence to the effect that it was not just her work for Kadoe which was relevant. It was also her:
- (a)Involvement over a life time in business; and
- (b)
- (a)
- [189]The proposition that community involvement might be relevant is a credible one, and Mrs Thomson gave evidence of her community involvement.
- [190]The proposition that previous business achievement might be relevant is also credible. However the problem for Mrs Thompson is that she could point to no significant business activities other than Kadoe which would be likely to be relevant. Her evidence showed that her previous involvement in business was limited to her knitwear business which had ended in around 1999, and running a B&B. Given that the awards were given by her local business associations and that the only business she was involved in in that area and at that time was Kadoe, I conclude that the awards reflected, in significant part, her presentation of herself as having an entrepreneurial role in the apparent success of that company. The relationship between these awards and the business of Kadoe is also suggested by the fact that they were specifically referred to in the signing block of the Company used in emails. There are numerous examples in the material. And in virtually every case they are referred in correspondence signed off by Mrs Thomson.
- [191]Mrs Thomson accepted that “[she] worked in sales and … worked with Merle”.[51] The awards tend to support the conclusion that the extent of her involvement and work in the affairs of the company was as extensive as Mrs Willson swore.
- [192]Mr Thomson did not receive any such awards.
Mrs Thomson had control of the Company accounts
- [193]From the start of the Company’s affairs, Mrs Thomson had full authority to transact business in the Company’s bank accounts.[52]
Mrs Thomson’s role in dealing with the Company’s creditors
- [194]I have already described Mrs Thomson’s involvement in the initial failure to pay the March 2010 BAS. Thereafter there was on-going dealings with the ATO in respect of the Company’s debts leading up to August 2012 (when the discovery of the alleged invalidity of the Trust led to the convoluted events described already). The ATO Case Notes[53] demonstrate that the dealings on behalf of Kadoe were conducted by Mrs Thomson from at least December 2010.
- [195]There are detailed allegations in paragraphs 12(g), (h) and (i) of the Statement of Claim which articulate the indebtedness of Kadoe to the Commissioner, its payment plans and continual defaults on payment plans from May 2010 to December 2014. These paragraphs are responded to in paragraph 14 of the amended defence, relevantly, on the basis that Mrs Thomson did not know if those facts were true because she had no responsibility in this period, PWA had the responsibility. That denial is untrue, as is demonstrated by the March 2010 BAS evidence. It is also inconsistent with the Case Notes. There is no significant mention of PWA dealing with the ATO after December 2010. All the dealings are with Mrs Thomson.
- [196]I have already mentioned Mrs Thomson’s involvement in dealings with Tremco when the dispute over unpaid debts arose. Mrs Thomson retained the central role in those dealings as is shown by the fact that the appeared for the Company at the adjournment application and trial of the Tremco proceedings.
- [197]It has also been seen that she dealt with the dispute with PWA, though it is to be noted that she was also a defendant in those proceedings. The documentary record shows that she dealt with, and gave instructions to, Thomson’s Lawyers in respect of that dispute. Mr Thomson wrote no part of the voluminous and complex correspondence: it all came under Mrs Thomson’s hand. Indeed, he is almost never mentioned.
- [198]Also, when Thomsons Lawyers ceased to act, she conducted the defence of the proceedings for costs by them, though that was more in her personal interest as the ultimate outcome was their retainer was held to have been with Kadoe, not Mr and Mrs Thomson.
- [199]Further, once Thomsons ceased to act, she took over the PWA litigation.
Mrs Thomson’s self-identification as General Manager
- [200]Apart from the business awards, there are other examples of Mrs Thomson presenting herself as having a significant role in conduct of the Company’s affairs.
- [201]As is recited in paragraph [12] above, Mrs Thomson described herself in an affidavit filed in this Court as having been the General Manager of Kadoe from March 2009 to November 2014. That affidavit was sworn with Mr Thomson’s authority.
- [202]Similarly, In June 2012, Mrs Thomson swore a statutory declaration of the kind required to support a progress claim in which she stated she was General Manager of Kadoe and was “in a position to know the facts contained herein and to bind [Kadoe] by the terms of this declaration and an duly authorised by [Kadoe] to make this declaration…”[54] She then swore that all employees and subcontractors to Kadoe had been paid in full.
- [203]Mrs Thomson’s articulation of her position to others as being the senior manager of the Company has particular weight in this case for two reasons.
- [204]First, it corresponds with the overall impression created by the other more specific evidence addressed above which is that while Mr Thomson was responsible for work on site, Mrs Thomson was primarily responsible for the rest of the Company’s commercial and administrative affairs.
- [205]Second, it might be said that a person can be a General Manager without acting in the role of a director. That would certainly be so for a larger company. It might also be so for a smaller company in which the board decided to put the daily management of the affairs into the hands of an employed manager, working under the board’s direction. However, neither circumstance applied in this case. Mrs Thomson was quite insistent on the fact that she was not and was never and employee of the Company. Whether a person is acting in the role of a director depends on the scale and character of the company under consideration. In this case, where the “General Manager” is not an employee, is the wife of the putative sole director, and presents herself as being charged with general management of the company’s affairs, it is difficult to see that person as other than acting in the role of a director.
Mr Thomson’s evidence
- [206]The effect of Mr Thomson’s evidence in chief given by way of affidavit on this issue seemed to be that:
- (a)Mrs Thomson was merely a conduit between him and the various parties she dealt with;
- (b)That he was responsible for the administrative affairs of the Company with Mrs Thomson just there as a fall back if he was incapacitated;
- (c)That she never made a decision without first speaking with him.
- (a)
- [207]I reject this evidence.
- [208]First, the evidence is of the most general kind and fails to grapple in any detail with the numerous complex issues upon which, on the face of the correspondence, Mrs Thomson has carriage on behalf of the Company. Perhaps more significantly, when given an opportunity to explain the affairs of the Company and Mrs Thomson’s role in it while under cross examination, Mr Thomson’s evidence demonstrated very little understanding of the affairs of the Company. Tremco rightly identified the following examples. Mr Thomson:[55]
- (a)
- (b)Could not recall if he authorised his wife to swear an affidavit on behalf of the Company in relation to Supreme Court of Queensland proceeding 10320/14. Mr Thomson could also not recall what that proceeding was about;[58]
- (c)Could not recall who was responsible for providing to PWA the information in relation to the Company’s statutory filing obligations;[59]
- (d)Could not accurately state who gave the information to PWA so that PWA could prepare the 2009/2010 financial year data, he thought it was probably the bookkeepers;[60]
- (e)
- (f)Could not provide any further details in relation to the business loan from ANZ, other than it was in dispute;[62]
- (g)
- (h)Could not recall if the Company was unable to pay its BAS debts for the first quarter of 2010.[64]
- [209]Second, it is impossible to accept his evidence in the face of the evidence of Mrs Jeppesen, Mrs Willson and (in respect of her role in sales and tenders), Mrs Thomson herself.
- [210]Third, it is impossible to reconcile with the giving of the 2010 and 2011 Award to Mrs Thomson and with Mr Thomson’s frank recognition of Mrs Thomson’s business acumen.
- [211]Fourth, when Mr Thomson did give specific evidence about instructions on a specific matter, that evidence demonstrated that he conferred a broad discretion on Mrs Thomson to handle the matter on behalf of the Company. The evidence related to the negotiation of the payment plans with Tremco and the ATO. His evidence was as follows:
HIS HONOUR: Mr de Waard, I’m minded to – no, that’s all right. I’m minded to ask about instructions given to Mrs Thomson in respect of these payment plans. Do you want to suggest I don’t go there or - - -
MR DE WAARD: No, not at all.
HIS HONOUR: Mr Thomson, what do you remember about what instructions, if any, you gave to Mrs Thomson about payment plans with the ATO?---That to make – make contact with them and they can be very helpful if you explain your situation and – and – and they work with you in times of trouble.
Anything else?---No.
What, if anything, do you recall about instructions you gave to Mrs Thomson in respect of payment plans with Tremco?---Just to – you know, I think she may have spoken to - - -
Well, what instructions do you recall giving her about payment plans with Tremco?---Just make contact and see if we could come to a – a payment arrangement.
- [212]Even if he did make those requests, Mrs Thomson carried them out with the independent authority characteristic in my view of a director: see the discussion in Grimaldi in paragraphs [138] and [139] above.
- [213]Fourth, it is of some relevance that following Mr Thomson’s bankruptcy, Mrs Thomson took over as director of the Inniv8z companies. Mr Thomson accepted that she ran those businesses now, even though he still does the waterproofing work. That makes Mrs Thomson’s evidence that she would not want anything to do with a waterproofing company appear self-serving.
- [214]
- The Defendant was a very accomplished businesswoman. Such was conceded during cross-examination by herself and her husband.
- Out of her and Mr Thomson, with respect to him, she was the one who had the business acumen. Mr Thomson was out on the tools performing the manual labour. This is the same role they have undertaken in the Inniv8 companies now. Using the Defendant’s own words at the public examination, she has described Mr Thomson in the following terms:
“He is a tradesperson. He is a simple man. He is not well-educated, okay.”
- In these circumstances, it seems highly unlikely that Mr Thomson was (or even could) be running the Company.
- [215]I had the opportunity of observing both Mrs Thomson and Mr Thomson while giving evidence and Mrs Thomson while running the trial (which she did with intelligence and no little skill). While Tremco’s submissions might not do justice to Mr Thomson’s ability to supervise and manage subcontract works, I mean no disrespect to Mr Thomson when I say that I generally agree with those submissions.
Use of Mr Thomson’s public examination transcript
- [216]Before I leave Mr Thomson’s evidence it is convenient to deal with an evidentiary objection raised by Mrs Thomson in the course of Mr Thomson’s cross examination. She objected to the use of Mr Thomson’s public examination transcript by Mr de Waard. She relied on s. 597(14) Corporations Act which provides:
597(14) [Admissibility of Record]
Subject to sub-section (12A), any written record of an examination so signed by a person, or any transcript of an examination of a person that is authenticated as provided by the Rules, may be used in evidence in any legal proceedings against the person.
- [217]She submitted that on its proper construction, this provision precluded use of the transcript in any proceedings other than proceedings in which Mr Thomson was a party. Mr de Waard relied on the transcript only to prove, on some limited occasions, that Mr Thomson had made previous inconsistent statements to those given in the witness box at trial. Accordingly, he was not using the transcript to prove any fact, but merely as going to credit. Notwithstanding that limited form of use, it would probably nonetheless fall within the meaning of “used in evidence”. However, the weight of authority is against Mrs Thomson’s submission[66] (which to be fair seems to have been inspired by a query I made of Mr de Waard during the trial). However, even if that objection was upheld, it would not make a material difference to my conclusions in respect of Mr Thomson’s evidence. The inconsistency between his evidence at trial and in the public examination only having to be established by use of the transcript on a few occasions, and those occasions were not particularly material in my forming my views as to his evidence.
Conclusion
- [218]The evidence demonstrates in my view that the business of Kadoe was run by Mr and Mrs Thomson together. Mr Thomson’s role was carrying out of the waterproofing work on site and supervising others doing that work. There was some overlap in ordering goods and perhaps in supervision of payroll. Mrs Thomson was responsible for almost everything else, both operational and administrative. She worked very hard in both areas. She did so without control by Mr Thomson, though she probably discussed issues with him as directors would do.
- [219]While a person carrying out some of Mrs Thomson’s roles might in other circumstances be an employee, Mrs Thomson was careful to deny that she was an employee. In the context of a small family company of this kind, her role is properly characterised as acting in the role of a director. I find that she was a de facto director of Kadoe during the period of March 2010 to January 2011, the relevant period in respect of the Tremco debts. I also find, if it be necessary, that she was acting in the role of a director from March 2009 and continued to do so up until the Company was wound up.
Insolvency
Preliminary observations
- [220]The plaintiff in its submissions at trial, undertook to demonstrate that Kadoe was insolvent from December 2009 until April 2015. Again in my view, it was not necessary for it to undertake such a heavy burden to meet the requirements of s. 588G(1) in respect of the Tremco debts. All that is required by that section is to establish Kadoe was insolvent at the time the Tremco debts were incurred or became insolvent because those debts were incurred or because those debts and others were incurred. The relevant period in that regard is, as I have said, March 2010 to January 2011. However, the continuing insolvency of the Company might be of factual significance to determining whether loss or damage in relation to the debt was suffered because of the insolvency for the purposes of s. 588M(1)(b).
Relevant principles
- [221]Tremco in its opening summarised the general principles in a manner which I accept as providing a correct starting point for analysis of this issue. It stated the principles as follows.
- (a)Ordinarily the burden of proof of showing the insolvency of a company falls upon the liquidator.[67]
- (b)Section 95A(1) of the Act provides that a company is solvent if it is able to pay all of its debts as and when they become due and payable. A company who is not solvent is insolvent.[68]
- (c)The effect of this section was described by Dodds-Streeton J in Crema Pty Ltd v Land Mark Property Development Pty Ltd:
- (a)
Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realizable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.[69]
- (d)Whether a company is insolvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole.[70]
- (e)A state of solvency requires that the cash and other liquid assets of the company be sufficient to cover the debts due and payable and to become due and payable in the immediate future.[71]
- (f)An inquiry into whether insolvency existed at a particular time is generally assisted by investigating the ‘usual indicia of insolvency’ which include:
- (i)continuing losses;
- (ii)liquidity ratios below 1;
- (iii)overdue Commonwealth and State taxes;
- (iv)poor relationship with present Bank, including inability to borrow further funds;
- (v)no access to alternative finance;
- (vi)inability to raise further equity capital;
- (vii)suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply;
- (viii)creditors unpaid outside trading terms;
- (ix)issuing of post-dated cheques;
- (x)dishonoured cheques;
- (xi)special arrangements with selected creditors;
- (xii)solicitors’ letters, summons[es], judgements or warrants issued against the company;
- (xiii)payments to creditors of rounded sums which are not reconcilable to specific invoices; and
- (xiv)inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.[72]
- (i)
- [222]The general principles were also restated recently by Fraser JA[73] in Rexel Electrical Supplies Pty Ltd v Morton [2015] QCA 235. That case involved an application by a liquidator in relation to an insolvent transaction which arose as undue preference. The Liquidator, Mr Morton, succeeded at trial. The main issue on the appeal was whether the debtor company was insolvent at the time it made the payments challenged by the Liquidator.
- [223]In that context, his Honour observed (footnotes omitted):
[8] 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 primary judge cited authority for the proposition that of the two common approaches to the assessment of solvency — a cash flow analysis and a balance sheet review of assets and liabilities — s 95A of the Act adopts the former approach:
Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.
[9] The primary judge acknowledged that the question whether or not a company is insolvent is not merely an arithmetical exercise made with reference to the balance sheet, the profit and loss account, or both; that inquiries might extend to matters such as whether or not the company had access to funds from directors, related companies or others. Inaco accepted that the following observation by the primary judge was correct:
It is a question of fact to be determined by the court as to whether or not a company is insolvent at a particular time. That involves a proper consideration of its financial position based on commercial reality. The concept of commercial reality, was explained by Chesterman J in Emanuel Management Pty Ltd v Fosters’ Brewing Group where his Honour said the determination of the insolvency of a company as a matter of “commercial reality“ was:
… designed to prevent over-hasty adjudications of insolvency in the case of companies suffering a temporary shortage of cash. It was not meant, in my view, to allow companies in a chronic state of illiquidity who evade, by one means or another, determined action by a creditor to wind them up, by that evasion, to be deemed solvent. (citations omitted)
[10] The primary judge’s approach is consistent with that taken by Gleeson J in Smith v Bone:
Under s 95A of the Act, a company is solvent if, and only if, it is able to pay all its debts, as and when they become due and payable. By s 95A(2), a company that is not solvent is insolvent. Section 95A adopts a “cash flow“ test of insolvency which is directed to income sources that are available to the company and expenditure obligations it has to meet, rather than a balance sheet test which focuses on the value of the company’s assets and liabilities reflected in the company’s books, although a balance sheet test can provide context for the application of the cash flow test: Campbell Street Theatre Pty Ltd (recs and mgrs apptd) (in liq) v Commercial Mortgage Trade Pty Ltd [2012] NSWSC 669 at [23], citing Southern Cross Interiors Pty Ltd (in liq) v DCT(2001) 53 NSWLR 213 ; 188 ALR 114 ; 39 ACSR 305 ; [2001] NSWSC 621(Southern Cross ); Plymin (No 1); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)(2008) 39 WAR 1 ; 70 ACSR 1 ; [2008] WASC 239. The focus of the cash flow test of insolvency is the liquidity and viability of the company’s business: Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 ; [2006] VSC 338 at [141].
Whether or not a company is insolvent at a particular point in time is a question of fact to be ascertained from a consideration of the company’s position taken as a whole, including the nature of its assets and business, having regard to “commercial realities“ and common sense: Bluestone Property Services Pty Ltd (in liq) v First Equilibrium Pty Ltd [2013] FCA 876 at [42]; Southern Cross. The court’s task is to decide whether the company is suffering from an “endemic shortage of working capital“: Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321 at 328.
Thus, a temporary lack of liquidity does not constitute insolvency: Sandell v Porter(1966) 115 CLR 666 at 670 ; [1966] HCA 28 per Barwick CJ. “In assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency“: Southern Cross at [54].
In considering a company’s ability to pay debts “as they become due“, it is appropriate to consider the immediate future, precisely how far into the future being a matter that depends on circumstances including the nature of the company’s business and, if known, the future liabilities: Lewis v Doran (2005) 219 ALR 555 ; 54 ACSR 410 ; [2005] NSWCA 243 at [103] (Lewis ) per Giles JA; Melbase v Segenhoe(1995) 17 ACSR 187 at 198. So, for example, “if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month … by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts “as they become due,“ out of his own moneys?“: Bank of Australasia v Hall(1907) 4 CLR 1514 at 1528 ; 14 ALR 51 at 54–5 ; [1907] HCA 78 per Griffith CJ.
…
If the court is satisfied that, as a matter of commercial reality, the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party: Lewis v Doran (2004) 208 ALR 385 ; 50 ACSR 175 ; [2004] NSWSC 608 at [116] (Doran); Lewis at [109] and [110] per Giles JA; Scott v Duncan [2007] FCAFC 30 at [38]. The likelihood that directors will continue to support a company by lending it money is relevant to the assessment of solvency: see Mulherin v Bank of Western Australia Ltd [2006] QCA 175 at [113]–[115]
- [224]Finally, given issues that arise in respect of the payment arrangements with the ATO, I note that where there is a binding arrangement with a creditor, under which the original time for payment is deferred, the debt is not due and payable on the original date. Accordingly the fact that one repays a debt under repayment arrangement is not of itself evidence of insolvency.[74]
- [225]However, that does not automatically mean that a debt subject to a payment arrangement is to be ignored entirely in assessing whether a company is insolvent. All the circumstances must be considered including whether other debts are unpaid, the fact that the company is unable to pay the relevant debt in accordance with its terms and why that is so, whether the repayment plan is realistic and whether it is complied with. Further, a repayment plan merely delays the making of a payment which would otherwise be due. As noted above[75]:
…if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month … by reason of an obligation already existing, and which may before that day exhaust all his available resources, how can it be said that he is able to pay his debts “as they become due,“ out of his own moneys?
Analysis
Kadoe was insolvent from March 2010
- [226]In my view, the evidence supports the conclusion that Kadoe was insolvent from March 2010. The reasons for that are as follows.
- [227]First, in March 2010, the Company had been trading for about 1 year. At that time it was going to be liable in the near future (April 28) to pay its GST liability for the March quarter to the Commissioner. It was not able to do so, as is evident from Mrs Thomson’s email to PWA as set out in paragraph [43] above. Indeed it appeared to have no ability at all to do so, given that the payment plan suggested by Mrs Thomson was small payments of $250 per week. This is an important consideration in assessing the commercial operations of a small trading company like Kadoe. Paying quarterly BAS obligations is an essential part of conducting such a business. The amount can be monitored through the quarter using MYOB. It is not an unexpected liability. The BAS obligation arises as an incident of trading and employing. An inability to meet that payment is an indicator of insolvency. A chronic accumulation of such taxation liabilities is a strong indicator of insolvency.
- [228]I am conscious in this regard, that the adoption of a commercially reliable (if not legally enforceable) arrangement between a creditor and its debtor as to when a debt is to be paid is relevant to whether the whole of the debt is taken to be due. Payment plans with the Commissioner of Taxation is one such arrangement which might be taken into account. There are a number of reasons why this is an inadequate answer to the failure to pay the Company’s tax liabilities as an indicator of insolvency over the period March to 2010 to January 2011 and beyond:
- (a)There is no evidence of any agreement of the Commissioner to a payment arrangement until August 2010. Further, over that period, the Company’s taxation liabilities continued to rise despite the payments being made;
- (b)While there is evidence of a payment arrangement from August 2010, it appears the Company was in default of this plan by November 2011 at the latest, when a further proposal was made and rejected by the ATO. Thereafter the Company continued to be in default of its taxation liabilities and its payment plans. While the existence of a payment plan is relevant to whether the debts rescheduled are due and owing at a particular time, it is necessary to look at the overall position of the Company, the particulars of the payment plan and the Company’s performance under it. Where there are chronic defaults and increasing debts to that creditor (as there was here), with no apparent prospect of meeting the deferred liabilities or further liabilities in the near term, the overall commercial assessment of insolvency might well be strengthened. In my view that is the situation here; and
- (c)This is all the more the case where, over the period from March 2010, Kadoe was also incurring debts that it could not meet with Tremco.
- (a)
- [229]Second, from March 2010 until January 2011, Tremco’s debts were also not paid. Again, the failure to pay Tremco has particular significance in the context of the commercial affairs of Kadoe. Tremco was Kadoe’s main supplier. Its products were essential to Kadoe’s business of carrying out waterproofing work. Indeed Mrs Thomson chose to place all the Company’s business with Tremco and worked hard to build a strong relationship with the Company. Mrs Willson’s evidence shows that she had some success in this regard.
- [230]Not paying BAS payments to the Commissioner is often an indicator of insolvency because a trading enterprise will pay its suppliers first so as to keep business underway. Not paying the Commissioner and a company’s main supplier is a very strong indicator of insolvency.
- [231]Third, these serious problems were not the result of temporary illiquidity:
- (a)The debt to Tremco continued to increase until January 2011 (after which Tremco only supplied COD) and was never repaid; and
- (b)The debt to the Commissioner continued to increase to about $49,000 by the end of January 2011, and to $79,000 by mid-2011 and was never repaid.
- (a)
- [232]Further, Mrs Thomson’s proposals for payment were consistent with the Company not having the funds to pay:
- (a)The payments plans with the ATO were continually breached and renegotiated; and
- (b)The agreement to repay Tremco reached in November 2011 lasted only one payment before default.
- (a)
- [233]Fourth, even if it were thought the effect of the payment deferrals somehow were sufficient to answer the apparent inability of the Company to meet its most fundamental obligations, the Company’s 2010 financial statements demonstrate the problem that Tremco had in terms of available resources ever to meet the liabilities accruing. Tremco took out a $200,000 business loan from ANZ, presumably to fund its operations. However, those funds (or an equivalent amount) were lent to Peradena and were plainly not available to the Company when needed because no repayments of the Peradena debt were made during March to January 2011 or thereafter.
- [234]Mr Hudson determined from his investigations that the Peradena debt was worthless because Peradena did not appear to hold any assets which would permit it to repay the debt. Although that was an inference drawn by Mr Hudson which could have been answered, that inference was never challenged by Mrs Thomson, despite challenging a number of other aspects of Mr Hudson’s report in great detail and despite Mrs Thomson being the sole director of Peradena from about June 2015. The latter consideration meant she was well placed to dispute his conclusion, but she did not. One might infer that the evidence which could be led would not have assisted her case.[76]
- [235]The financial statements also demonstrate that the Company had no material cash on hand at the end of either financial year and, without the Peradena loan as an asset, were hopelessly insolvent on a balance sheet basis. This reinforces the conclusion that the Company’s failure to pay Tremco and the Commissioner reflected that it was insolvent as a matter of commercial reality. Not only was it unable to pay those debts, but it did not have the capital to do so.
- [236]Fifth, Mr Hudson assumed that no further support for the Company was available from formal or informal sources: viz. the Thomsons or Bank finance.
- [237]Mrs Thomson cross examined Mr Hudson in great detail on the overdraft account statements. The purpose of that cross examination was to bring out that ANZ was willing to increase the Overdraft Amount over time from $76,000 to $140,000 (with an increase for one month to $173,000 in June 2012). However, this evidence does not assist in demonstrating that the Company was not insolvent between March 2010 and January 2011 (or indeed thereafter). That is so because:
- (a)No increase was obtained until November 2010. That increase was from $76,000 to $96,000. Despite that increase, Tremco and the ATO were not paid;
- (b)The increases in the overdraft limit seemed to move with the increase in the debt in the overdraft account. It was nearly always fully drawn (or nearly so) at the end of each month. The continual increase in the overdraft limit and the debt in the overdraft account over the years of active trading by the Company are consistent with the Company remaining unable to pay its debts and substituting one debt (the trading debts) with another: the overdraft debt.
- (a)
- [238]Mrs Thomson also suggested that the Company could have obtained further finance from the ANZ or another bank, however, there was simply no evidence of this.
- [239]She relied on the difficulties arising from the allegedly invalid trust as explaining in part why further finance could not be raised. The evidence on this was incomplete. Whatever the effect of the invalid trust issue on the way the Thomsons approached other financiers, there is no evidence that they could have refinanced in any event. In fact, if the true circumstances had been disclosed, it is very difficult to see how Kadoe could have refinanced. By 2013 its financial and commercial position was dire and it had decided to stop trading.
- [240]Sixth, there was no evidence at all that the Thomsons could themselves have lent to the Company, or if they could, that they were willing to do so. That they did not do so speaks to their inability or unwillingness to do so. Mrs Thomson relied on a guarantee given by her of the debts of Kadoe in July 2011. That guarantee was of Kadoe’s debts to the total amount of $353,800. The evidence disclosed that by that time, it had debts to the ANZ on the overdraft account and business loan of at least that sum.[77] As noted in paragraph [98] above, it might be inferred that the Thomsons paid out the ANZ liabilities of Kadoe. However, even allowing for that, the Company remained unable to pay the Tremco and ATO debts.
- [241]In my view, a consideration of the commercial realities of Kadoe’s financial situation establishes that Kadoe was insolvent from March 2010 and became more so as the Tremco debts were incurred without being paid over the period to January 2011. The fact that those debts were never paid until the winding up of the Company is consistent with Kadoe remaining insolvent through that period. The Company was simply unable to pay its major supplier and its primary tax obligations and had no reliable external or internal finance options that permitted it to do so.
- [242]The delay in that reality manifesting itself in a winding up order seems to have been the result of two matters:
- (a)The confusion sown, inter alia, in the ATO by the trust issues and the continual offers to pay outstanding debts (even if that was not done) appears to have delayed the Commissioner taking prompt action to enforce the outstanding tax liabilities. As commented above, the Thomsons appear to have had a role in keeping that question a live issue with the ATO, not least by challenging the 2013 Ruling; and
- (b)Action to enforce the obligation to pay the Tremco debts was delayed by Mrs Thomson procuring Kadoe to dispute the Tremco debts.
- (a)
- [243]I refer with respect to Justice Chesterman’s observations cited by Fraser JA in the quote at paragraph [8] above. The fact that Kadoe survived for so long is not an indicator that it was solvent.
Mr Hudson’s report
- [244]I have reached my own conclusion on the evidence that Kadoe was insolvent from at least March 2010. I will however, deal with Mr Hudson’s evidence.
- [245]Tremco relied on a solvency report by Mr Hudson. That report concluded as follows (at pages 15-16):
5 Executive summary
The following is a summary of the opinion I have formed, as detailed in this Report, of the Company’s solvency throughout the relevant period. The summary should not be read or interpreted so as to limit my opinion, but rather only to provide a convenient snapshot of the crucial components of my analysis.
5.1 Attention is drawn to the disclaimers in paragraph 4 of this Report (and in particular paragraph 4 of this Report (and in particular paragraph 4.4 of this Report).
5.2 In my opinion the Company was insolvent at all times from 31 December 2009 and remained insolvent until the winding-up date, within the meaning of s 95A of the Act.
5.3 Between the period 1 July 2013 (the s 286 breach date) and the winding-up date, I am of the opinion that the Company did breach its duties under s 286 of the Act in that, the financial records do not:
5.3.1 adequately record and explain the financial position and performance of the Company; and
5.3.2 enable true and fair financial statements to be prepared and audited.
5.4 Therefore, in respect of paragraph 5.3 of this Report, pursuant to s 588E(4) of the Act, the Company is presumed to be insolvent between the period 1 July 2013 and the winding-up date.
Balance Sheet Test
5.5 From my analysis in paragraphs 6.3 and 6.4, the Company held:
- adjusted net asset deficiencies from 31 December 2009;
- adjusted deficiencies in working capital from 31 December 2009; and
- a liquidity ratio that was, and remained, below 1 from 31 December 2009.
5.6 Therefore, on a Balance Sheet Test basis the Company was insolvent from 31 December 2009 (at the very least) and remained insolvent until the winding-up date.
Cash Flow Test
5.7 Paragraph 6.5 evidences my opinion that the Company had no access to alternative or further funding to meet its deficiency in net assets throughout the relevant period (at the very least) (within the meaning of Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631, Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 and Sandell v Porter [1966] HCA 28.).
5.8 Paragraph 6.6 evidences that the following indicators of insolvency existed (within the meaning of ASIC v Plymin, Elliott & Harrison (2003) VSC 123) between 31 December 2009 (at the very least) and the winding up date:
- the Company’s current and quick ratios were below 1;
- the Company’s Commonwealth and State taxes were overdue;
- the Company was unable to borrow sufficient funds from financiers;
- the Company appeared to not have access to alternative finance;
- it is highly unlikely the Company would be able to successfully raise equity capital; and
- creditors were unpaid outside usual trading terms and made regular demands for payment.
5.9 Therefore, in my opinion, on the Cash Flow Test basis, the Company became insolvent on and from 31 December 2009, and remained as such until the winding-up date.
5.10 Based on this paragraph 5 (inclusive) of this Report, the following table summaries the key events or dates in determining the Company’s insolvency:
Date | Description |
31 December 2009 | Insolvency date on the Balance Sheet Test basis and Cash Flow Test basis |
30 June 2009 – 29 April 2015 | The relevant period |
1 July 2013 | The s 286 breach date |
27 February 2015 | The Tremco debt case was determined in the District Court |
8 April 2015 | (a) Tremco filed a winding-up proceedings for failure to pay the statutory demand (b) The relation-back day |
29 April 2015 | (a) The Liquidators were appointed joint and several Official Liquidators of the Company (b) The winding-up date |
- [246]Further, in respect of the criteria articulated in the Plymin test, he specifically concluded as follows:
6.6.21 In summary, the following indicators of insolvency existed between 31 December 2009 (at the very least) and the winding-up date, the:
- Company incurred recurring net losses;
- Company’s adjusted current ratio was below 1;
- Company’s Commonwealth taxes were overdue;
- Company was unable to borrow sufficient funds from financiers;
- Company appeared to have no access to alternative finance or equity capital;
- Company’s creditors were unpaid outside usual trading terms;
- Company continually incurred dishonour fees; and
- Company received a significant number of formal and informal demands from unpaid creditors.
6.6.22 Therefore, on a Cash Flow Test basis (within the meaning of ASIC v Plymin), the Company was insolvent on and from 31 December 2009, to the date of the Liquidators appointment, being 29 April 2015.
Challenges to Mr Hudson’s report
- [247]Mr Hudson was cross examined extensively by Mrs Thomson. In the course of cross examination, he presented as someone who had undertaken a careful analysis of the evidence before him. He was co-operative under cross examination and not overly defensive of his report. Rather he relied on the reasoning in his report to sustain his conclusions. He generally presented as a credible witness.
- [248]Mrs Thomson challenged his report in a number of respects. In my view, none of those challenges undermined either the ultimate conclusion of Mr Hudson’s report nor, I should add, the reasoning set out in paragraphs [226] to [243] above. I explain as follows.
The MYOB issue
- [249]Mrs Thomson focussed considerable attention in cross examination and in submissions on the question of which MYOB database Mr Hudson had worked from. The point as I ultimately apprehended it was this. Mrs Thomson had obtained third party disclosure from the Liquidators and been provided with two MYOB databases relevant to the Company:
- (a)One which included entries from 1 July 2009 to 11 April 2011 which had been provided to the Liquidators by PWA; and
- (b)One which included entries from 1 July 2011 to 28 January 2014, which had been provided by Mr Thomson’s trustee in bankruptcy, Mr Clout (who it appears obtained it from Mr Thomson).
- (a)
- [250]Mr Hudson gave evidence that the MYOB Database which he used in his report was a version held by SV Partners identified (as best he recalls) as a back-up file. It did not appear from the evidence that the MYOB database was identical to the two MYOB databases disclosed by the Liquidators. He gave evidence that it was contrary to the policy of the Liquidators to vary the MYOB once provided and that in any event MYOB itself usually would not permit this for an insolvency company (presumably because MYOB subscriptions were not kept up to date).
- [251]The evidence about the MYOB database issue was unsatisfactory. I accept that Mr Hudson was provided with a MYOB database of the Company from which he could extract the financial statements he analysed in his report. On the other hand, it was unclear how that database related, if at all, to the ones disclosed by the Liquidators. However, it is to be kept in mind that the Liquidators were not a party to the proceedings. The answer might be as simple as the fact that the disclosure of the MYOB databases was incomplete.
- [252]The real issue is whether this makes any difference to the reliability of Mr Hudson’s conclusions. The main point made by Mrs Thomson in this regard is that the balance sheet Mr Hudson relied upon as at 30 June 2013 was erroneous because it stated the ATO debt as $202,399.99[78], while the RBA exhibited by Mr Rose showed the liability at that time as $64,868.60[79]. Mrs Thomson suggested that the figure in the balance sheet relied upon by Mr Hudson had been adjusted to reflect the ATO’s proof of debt, which was $202,400.64. She therefore suggested that Mr Hudson’s conclusions on the balance sheet position of Kadoe in 2013 were questionable.
- [253]I reject the suggestion that the MYOB balance sheet has been adjusted as Mrs Thomson alleges. While the number is similar, it is not the same. Further, the figure in the balance sheet she challenges is a gross figure, not a net figure. The net debt identified for GST liabilities is $149,502.02. Finally, the GST figures are presented in the same format as for the 2012 balance sheet derived from the MYOB database made available to Mr Hudson, though with different (lesser) figures.
- [254]This discontinuity between the ATO’s RBA figure and the figure for GST in the MYOB databased could be the result of timing issues in respect of liability for GST, or it might be the result of errors in data entry. It is unclear what the true position was.
- [255]The question is whether this assists Mrs Thomson in disputing Mr Hudson’s ultimate conclusions. Perhaps the best that can be said is that it is difficult to be confident of the true balance sheet position of the Company from its MYOB accounts available for the 2013 year and perhaps the 2012 year.
- [256]However, that consideration does not affect Mr Hudson’s conclusions in respect of balance sheet position in the earlier years. Further, there is no suggestion that after 30 June 2013, the Company’s position improved. It ceased trading in mid-2013 and so lost the ability to earn any other income to meet its liabilities. It is difficult to see how ambiguity in the Company’s balance sheet assists Mrs Thomson in rebutting the strong inference of insolvency arising from other evidence set out in his report. She made no persuasive submission that it does.
Value of the counterclaim against PWA
- [257]I will deal with this briefly. Mrs Thomson asked Mr Hudson if he had taken the counter claim against PWA into account in determining Kadoe’s insolvency. He frankly conceded he had not done so. However, I do not think this assists Mrs Thomson.
- [258]She did not plead that the Counterclaim was a matter which answered the allegation of insolvency. Indeed the counterclaim was not mentioned anywhere in her pleadings. If it was to be pursued, in my view it had to be raised on the pleadings. The analysis of the counterclaims in various documents before the Court, particularly the PWA counterclaim, would have given rise to substantial issues to be addressed by Tremco at trial. Fairness required that matter to be pleaded: Rule 149(1)(c) UCPR.
- [259]Further, it did not become an issue at the trial. When the issue of counterclaims going to solvency was directly raised with Mr Hudson, Mr de Waard did object on the basis that the matter was not pleaded, as was Tremco’s right.[80]
- [260]In any event, on the material before the Court, the counterclaim against PWA did not answer the insolvency of the Company evident from the other evidence.
- (a)First, the foundation of the counterclaim was that the Trust was not validly created for taxation purposes. That proposition was never established at the trial and, as I have said, it seems open to doubt.
- (b)Second, the losses claimed in the counterclaim were extravagant to the point of vexatious, bearing in mind that the Company was already insolvent in 2011. The claims for millions in lost opportunity fanciful.
- (c)Third, even if there was some merit in the claims, they had not been pursued to judgment or settlement in the years they had been underway. They were therefore irrelevant from a cash flow perspective. I should observe that similar observations apply to the other counterclaims and retention amounts referred to by Mrs Thomson.
- (a)
Other matters
- [261]Mrs Thomson also challenged Mr Hudson’s report on the basis of the matters in paragraphs [236] to [240] which are addressed above.
Conclusion
- [262]In my view, none of the matters raised by Mrs Thomson are sufficiently material to impugn the basic reasoning or assumptions of Mr Hudson’s report. The best that could be said is that Kadoe’s position might not have been quite as bad as he identified in 2012 and 2013. Mr Hudson’s report provide a further basis to conclude that the Company was insolvent from at least March 2010 until its winding up in April 2015.
Reasonable grounds to suspect insolvency and Mrs Thomson’s position: s. 588G(1)(c) and s. 588G(2)?
Requirements relating to suspicion of insolvency are met
- [263]Section 588G(1)(c) requires Tremco to establish that there was reasonable grounds to suspect that Kadoe was insolvent at the relevant time, which is, as I have said, March 2010 to January 2011 when the Tremco debts were incurred.
- [264]Section 588G(2) provides that Mrs Thomson will have breached that section by failing to prevent Kadoe incurring the Tremco debts if either:
- (a)She was aware that there were reasonable grounds for suspecting the Company was insolvent: s. 588G(2)(a); or
- (b)A reasonable person in like position in a company in similar circumstances to Kadoe would have been so aware: s. 588G(2)(b).
- (a)
- [265]The requirement that there be “reasonable grounds for suspecting” is not a particularly heavy burden for a plaintiff to discharge. In Swan, Black J summarised the approach to that phrase issue in the following terms (in comments focussed specifically on s. 588G(1)(c)):
- In order to establish that Ms Swan and Mr Swan are liable under s 588G of the Corporations Act, the liquidator must establish, first, that there were reasonable grounds for suspecting that Swan Services or the Companies are insolvent, or would become insolvent by incurring the relevant debt or debts: s 588G(1). This requirement adopts a lower threshold of the existence of reasonable grounds for “suspecting” that the company was insolvent or would become insolvent as a result of the transaction, rather than of an expectation that the company was insolvent or would become insolvent as a result of the transaction. The reference to “suspect” denotes "an actual apprehension or fear" that the fact may exist, and not merely reason to question whether it might exist: Queensland Bacon Pty Ltd v Rees [1996] HCA 21; (1966) 115 CLR 266 at 303. In Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [234], Palmer J noted that the standard of “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.”
- The question whether there were reasonable grounds to suspect that Swan Services and the Companies were insolvent during the relevant period, for the purposes of s 588G(1), involves an inquiry into the objectively formed state of mind of a person of ordinary competence. In Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589 at [76]–[77], Olsson J (with whom Duggan and Williams JJ agreed) observed that:
“The test to be applied in relation to s 588G(1)(c) is objective: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 at 702–3. As Duggan J pointed out in Group Four Industries Pty Ltd v Brosnan [1991] SASC 2986; (1991) 56 SASR 234 at 238; [1991] SASC 2986; 5 ACSR 649, 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.”
- The question whether such reasonable grounds to suspect insolvency existed is to be determined by reference to the position of a director of reasonable competence and diligence, who performed his or her duties imposed by law, and reached a reasonably informed opinion as to the financial capacity of Swan Services and each of the Companies: Smith v Bone [2015] FCA 319; (2015) 104 ACSR 528 at [367]. Reasonable grounds for a suspicion of insolvency could be established, for example, where a director of ordinary competence, viewing the whole of a company’s circumstances objectively, would have had no real idea where to find the necessary money to pay debts at the time they were incurred: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 54 ACSR 583 at [251].
- [266]I conclude that the requirements of s. 588G(1)(c) and 588G(2) are made out in respect of both the period March 2010 to January 2011, and (to the extent it is necessary) up to the winding up order in April 2015. I explain as follows.
- [267]I refer to my discussion as to the matters tending to show the insolvency of the Company from March 2010 in paragraphs [226] to [243] above. Those matters demonstrate that there were reasonable grounds to suspect that Kadoe was insolvent from March 2010 to January 2011 and beyond to the winding up date for the purposes of s. 588G(1)(c).
- [268]I have found Mrs Thomson was responsible for, and oversaw, the affairs of the Company other than the carrying out of the on-site work. There is a very strong inference from that matter alone that she was aware of the Company’s financial position from time to time, including debts to be paid and (lack of) cash on hand, and likely to be on hand in the near future, to pay them. On this basis alone, I find that that the requirements of s. 588G(2)(a) were met in respect of her position in the relevant period and further up to the date of winding up.
- [269]But further, as has been seen, Mrs Thomson was personally responsible for dealing with the Company’s unpaid creditors. In particular, Mrs Thomson was responsible for seeking a payment plan from the ATO in March 2010 for the March quarter BAS payment, for managing the on-going liabilities to the ATO and the constant renegotiations of those payment plans after default. She was also responsible for the payment plan offered to Tremco and the failure to meet that payment plan. She was also responsible for direct dealings with Tremco as I have found above.
- [270]It is plain therefore that Mrs Thomson was actually aware of the unpaid Tax Debts from March 2010, the accruing unpaid Tremco debts from that time, and must have been aware that the Company was unable to pay them. It is also plain that Mrs Thomson knew that those debts remained unpaid over the life of the Company after March 2010 and that no funds were or could be raised to meet them, other than the small increases in the ANZ overdraft which were never sufficient to clear the debts. Given that these two creditors were the main operational creditors of the Company, this separately supports the conclusion that Mrs Thomson was aware that there were reasonable grounds to suspect that Kadoe was insolvent from at least March 2010 until January 2011 and further until the winding up of the Company.
- [271]Further, even if Mrs Thomson was not aware of the grounds to suspect insolvency I have identified, a reasonable person in like position (that is guiding the affairs of the Company in way I have found Mrs Thomson did so) could not fail but be so aware.
Mrs Thomson’s responses
- [272]In her written submission at the end of the trial, Mrs Thomson advanced no contentions on this issue. However, there are a number of issues raised in her defence and in the course of the trial which I should deal with.
The 2010 financial statements
- [273]Mrs Thomson sought to answer these issues by relying on the 2010 financial statements which disclosed that the Company had made a taxable profit of some $52,318. There are three difficulties with this submission.
- [274]First, the 2010 financial statements would not have been finalised until after 30 June 2010. An unsigned copy bears the date 18 June 2010 on the accountant’s declaration, though this is not decisive. It seems unlikely that the finalised accounts could have been available to Mrs Thomson until after June 2010. Reliance on those statements therefore cannot avail her before at least July 2010 and possibly much later. It is common for financial statements not to be finalised until well into the next financial year. Further, Mrs Thomson’s evidence about reliance on the 2010 financial statements was vague, as was her evidence about alleged payment of the distribution identified. I am not satisfied that she did in fact rely upon them.
- [275]Second, for the reasons given from paragraph [26] above, the story told by the 2010 financial statements was not necessarily a positive one. About half of the income was the result of adjustments to the accounts for deductions which were not taxable deductions: that is, the cash had been paid away but no deduction was allowable. Further, it was evident from the accounts that there was no cash to pay these distributions as at 30 June 2010. Given the otherwise parlous statement of the Company, I find it impossible to accept that Mrs Thomson could have believed that the modest profit shown meant that there was no reason to suspect the Company was insolvent. I reject her evidence to the contrary as inconsistent with the facts which were known to her at the time.
- [276]Third, even if Mrs Thomson did form the view relying on the accounts that the Company’s position was not as bad as it seemed on an operational basis, she must have had a suspicion about the accuracy of the story of modest success they seemed to tell, given that she had had to negotiate payment plans with the ATO and Tremco and had been unable to pay either of those creditors up to date by the middle of 2011. If she did not have such a suspicion, a reasonable person in her position would have had such a suspicion.
The disputes about the Tremco debts
- [277]The dispute generated as to whether the whole of the Tremco debt was due and owing does not assist Mrs Thomson on the suspicion of insolvency issues in the particular circumstances of this case.
- [278]First, no material dispute was raised by Mrs Thomson at all until about January 2011. Further at that time she did not challenge the whole or event most of the debt asserted by Tremco. There was evidence that at about that time, Mrs Thomson disputed some $30,000 of the $146,000 which was owed (Mrs Willson gave this evidence). However, even assuming that to be correct, some $116,000 unquestionably owed. Those matters therefore provide no rebuttal to the conclusion that there were reasonable grounds to suspect, and that Mrs Thomson had reasonable grounds to suspect, that Tremco was unable to pay the Tremco debts in the period up to January 2011.
- [279]Second, even if Mrs Thomson believed that there might have been a proper basis to challenge the Tremco debts, it is evident from the trial of those proceedings and the correspondence relating to the dispute that she had no positive evidence that the debts were not incurred. Rather she sought to challenge the reliability of the records provided by Tremco proving the debts.
- [280]Mrs Thomson, or at least a reasonable person in her position, would have been aware that that challenge would probably fail, and that if the Tremco debts owed as alleged, the Company would be unable to pay them. Thus the dispute raised by Mrs Thomson, even if it related properly to the whole Tremco debt, does not rebut the conclusion reached above that there was reasonable grounds to suspect insolvency.
- [281]Third, Tremco also submitted that Mrs Thomson never bona fide believed that there was a proper ground to dispute the bulk of the Tremco debts. It is certainly remarkable that a person so closely involved with the operations of the Company, who kept a close eye on Tremco invoices (as Ms Willson said), should have overlooked that the Company had a basis to dispute the whole of the Tremco debts. It is also remarkable that she was unable to articulate what was disputed and what owed. In all the circumstances, I do not accept that Mrs Thomson had any firm grounds to dispute the Tremco debts and disputed them more in hope than expected. In my view, she (or a reasonable person in like position) would have expected that those disputes would ultimately be resolved in Tremco’s favour.
The invalid Trust
- [282]It is necessary to deal with the alleged invalid Trust in this context. Although Mrs Thomson did not rely on this issue as relevant to this element of the plaintiff’s claim, it is raised on the amended defence. Mrs Thomson’s amended defence recites the essential elements of the history of the ATO dealings set out above and then concludes as follows:
26 (r) The determination by the ATO that the defendant’s husband would be treated as a sole trader, led the defendant to believe that the Company either in its own capacity, or that as corporate trustee of the trust was not the responsible business entity and that the responsible business entity was the defendant’s husband as a sole trader. The Company did not trade in its own capacity, and had no further responsibility or liability as corporate trustee once the determinate was made by the ATO that Wayne Thomson was to be treated as a sole trader, so the Company was incapable of being insolvent, it just had no trading income at all.
- [283]This allegation does not justify a conclusion that Mrs Thomson did not reasonably suspect insolvency, or alternatively that a reasonable person in like position would not have had that suspicion.
- [284]First, even accepting the state of mind alleged, there was no suggestion of problems with the Trust until August 2012, well after the relevant time for the purposes of s. 588G. Those problems are therefore irrelevant to whether there were reasonable grounds to suspect insolvency over the key period from March 2010 to January 2011, and irrelevant to the matters raised in 588G(2)(a) and (b) in that regard.
- [285]Second, even accepting the state of mind alleged, it does not avail her in respect of the period from August 2012 either. It is first to be noted that there was no suggestion in the evidence that Mr Thomson would be liable for any additional tax until the period leading up to late 2014, when it seems Mrs Thomson told the ATO (or perhaps was told by an ATO officer) that Mr Thomson would be liable. Further, it is to be noted that at no time in the dealings with the ATO, did the ATO make any statement about the GST and Superannuation liabilities of the Company. The March 2015 Ruling related only to the income previously assessed in Mrs Thomson and Mr Thomson’s hands as beneficiaries. Those liabilities were not the taxation liabilities of the Company which accrued during the period up to insolvency.
- [286]Third, even if it is accepted that Mrs Thomson believed the effect of the 2014 Objection Decisions were that the Company was no longer indebted for debts which it incurred as trustee, I do not consider that a reasonable person in like position would have held the view that there was no grounds to suspect insolvency. The proposition she contends for is both wrong and inherently unlikely and in the absence of considered advice, a person in like position would still have suspected that the Company might be liable for its trading debts and would therefore have had reasonable grounds to suspect the Company was insolvent.
Mrs Thomson has breached s. 588G(2)
- [287]The reference to “failing to prevent the company from incurring the debt” does not create an additional positive obligation on the plaintiff to establish the authority of Mrs Thomson and her role in the Company in relation to the Tremco debts such that she could be shown to have had the ability to prevent the incurring of those debts and failed to do so. That construction of the opening words of s. 588G(2) was rejected in Elliott and Another v Australian Securities and Investments Commission(2004) 185 FLR 245 where the Court found, after an extensive review of authority, that (at [116]):
Having regard to the context, the history and evident legislative purpose of ss 588G and 588H it is in our view clear that the effect of s 588G(2) is that a director contravenes the section “by not preventing” or “by failing to prevent” a company from incurring a debt, and that a director will be taken to have so failed if debts are incurred by a company at a time when there are reasonable grounds for suspecting that the company is insolvent.
- [288]Accordingly, given the above conclusions in respect of s. 588G(2)(a) and (b), Mrs Thomson breached 588G(2) by failing to prevent the Company from incurring the Tremco debts.
Mrs Thomson has no defence
- [289]Again, Mrs Thomson did not address this matter in her trial submissions. However, there was some suggestion that she had a defence under s. 588H because she did not take part in the management of the Company and because she relied on, relevantly, the 2010 Financial Statements. I reject the former proposition for the reasons given for finding Mrs Thomson acted as a de facto director. I reject the latter proposition for the reasons in paragraphs [273] to [276] above.
Loss in relation to the Tremco debts caused by the insolvency
Relevant principles
- [290]Section 588M(1)(b) applies where a creditor has suffered loss or damage in relation to the debt or debts incurred because of the company’s insolvency.
- [291]The effect of this provision was commented on in Edenden v Bignell [2007] NSWSC 1122 at [30] as follows:
[30] This section does not allow recovery of the amount of the creditor’s debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor’s insolvency. In some cases — perhaps most cases — this will be the equivalent of the amount of the debt: see, for example, Powell v Fryer (2001) 37 ACSR 589. In others — for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably — the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt. The separateness of the debt, on the one hand, and the loss and damage, on the other, is emphasised by the statement in s 588M(3) that an amount equal to the loss or damage may be recovered “as a debt due to the creditor.
[emphasis added]
- [292]It is evident from this observation, and indeed from the terms of the section itself, that the compensation which may be ordered under, relevantly, s. 588M(3) is not necessarily limited to the amount of the debt itself. Other authorities, including intermediate appellate authorities, do not lead to a different conclusion. Such authorities as there are tend to look at the subsection as a whole and focus on the extent to which the relevant debt may be recovered.
- [293]In Powell v Fryer,[81] (responding to arguments, inter alia, that the loss must be measured by reference to the profit lost on a particular supply of goods giving rise ot the debt) it was observed:
[87] With all due respect, these arguments, both individually and collectively are both novel and extraordinary. Moreover, they fly in the face of the plain intention of the legislation. All of the provisions to which reference has been made focus on the incurring of further debts when a company is insolvent and the consequential detriment to creditors by virtue of the non payment to them of the amounts of their claims.
[88] I entertain no doubt that, read in context, the loss and damage adverted to is the amount of the unpaid debt due to the creditor in question. This is the view which was obviously taken by Austin J in Tourprint International Pty Ltd (In Liq) v Bott (1999) 32 ACSR 201 at 217 ("Tourprint"), and, in my experience, has always been applied to the practical administration of the statute. Whilst the provisions of the Corporations Law, so applied, may give rise to some practical consequences which could be said to be somewhat arbitrary and possibly inequitable in some respects, the insolvency law has always, as a matter of practicality and commercial expediency, had to adopt certain parameters which are arbitrary. There is nothing particularly novel in the approach here in question. By way of contrast, the adoption of the approach espoused by Mr Randle would render administration in insolvency virtually unworkable. The legislature could not possibly have envisaged creating the inevitable complexity and requirement for detailed examination of collateral issues which Mr Randle propounds.
- [294]
[36] The recovery provisions in Pt 5.7B of the Corporations Act depart from the conventional model of compensation under which a party claims compensation for the loss that it has suffered. Relevantly, under s 588M the liquidator of a company is able to recover a loss that has not been suffered by the company, but rather was suffered by a creditor of the company in relation to a debt owed by the company to the creditor. To the extent that that might be thought to produce a somewhat arbitrary result, it nevertheless reflects the plain intention of the statute and is by no means novel in an insolvency context. The recovery of compensation by a liquidator from a director for breach of s 588G is plainly for the benefit of unsecured creditors. That evidently reflects the view of the Harmer Report,that it is unsecured creditors who normally suffer the greatest loss as a result of a company’s insolvent trading. The legislative scheme is designed to promote equal sharing between creditors of all sums recovered.
[37] Section 588M(2) permits recovery by a company’s liquidator of the loss or damage suffered because of the company’s insolvency by a creditor in relation to a debt where, in relation to the incurring of that debt, a director contravened s 588G. The liquidator can recover from the director an amount equal to the amount of the loss or damage referred to in s 588M(1). That is the loss or damage suffered by the creditor ‘in relation to the debt because of the company’s insolvency’.
[38] It is clear from this language that there is a distinction between the amount of the debt and the loss or damage suffered by the creditor. It is the loss or damage suffered by the creditor that is recoverable by the liquidator under s 588M(2). That has been recognised in the cases.
- [295]However, none of these cases, nor the cases cited in Perrine at footnote 49[83], deal with, or exclude, the possibility of heads of loss other than the debt or some part of it. Indeed some, like Edenden, appear to contemplate that possibility.
- [296]The section also appears to contemplate that other heads of loss or damage can be recovered so long as the loss or damage has two characteristics:
- (a)It is loss or damage in relation to the debt or debts the subject of the breach by the defendant; and
- (b)It is loss or damage which can properly be characterised as being caused by the insolvency.
- (a)
- [297]The first limb contemplates some form of connection between a loss and the debt which has been the subject of the breach of duty. The second contemplates a causal link between the loss and the insolvency.
- [298]The scope of this provision requires consideration in this case because the plaintiff seeks loss or damage other than the loss of the unpaid amount of the debt. In particular, it seeks to recover interest awarded as part of the judgment for the Tremco debts under s.58 Civil Proceedings Act (CPA) ($44,914.60) as well as the costs of litigating to obtain the Tremco Judgment ($225,605.90). In my view, the former is not recoverable but the latter is for the reasons I now give.
“in relation to”
- [299]“In relation to” is an example of a class of phrases used in statutes identifying a connection between two matters. The approach to construing such a phrase is well known. It is conveniently summarised in Hatfield v Health Insurance Commission (1987) 15 FCR 487 where Davies J observed:
- Expressions such as "relating to", "in relation to", "in connection with" and "in respect of" are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute. As was said by Blackburn, Gallop & Neaves JJ. in Butler v. Johnston & Others [1984] FCA 118; (1984) 55 ALR 265 at 268:-
"It is clear that the words "in respect of" can convey a meaning of wide import, but their exact width will depend upon the context in which they appear. Reference to individual cases on different statutes is of little assistance in determining their particular meaning. The court has to construe the meaning of the words with reference to the purpose or object underlying the legislation in which they appear (s 15AA of the Acts Interpretation Act 1901)."
The terms may have a very wide operation but they do not usually carry the widest possible ambit for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear. In Ausfield Pty. Ltd. v. Leyland Motor Corporation of Australia Ltd. (No 2) (1977) [1977] FCA 6; 14 ALR 457 it was said at p 460 by Bowen C.J., with whom Northrop J. agreed, that the words "in relation to" in s.51(2)(a) of the Trade Practices Act 1974 require a direct relationship and by Deane J. at p462 that the words require a relationship which is direct and immediate. In Perlman v. Perlman [1984] HCA 4; (1984) 51 ALR 317 at p 321 Gibbs C.J. said of the words "in relation to" in the definition of "matrimonial cause" in s.4 of the Family Law Act 1975 (Cth):-
"The words 'in relation to' import the existence of a connection or association between the two proceedings, or, in other words, that the proceedings in question must bear an appropriate relationship to completed proceedings of the requisite kind: See R. v. Ross-Jones; Ex parte Beaumont [1979] HCA 5; (1979) 23 ALR 179 at 183-4; [1979] HCA 5; 141 CLR 504 at 510. An appropriate relationship may exist if the order sought in the proceedings in question is consequential on or incidental to a decree made in the completed proceedings ....".
In Johnson v. Johnson (1952) P 47 at 50-51, Somervell L.J. found helpful the discussion by McFarlane J. in In re Nanaimo Community Hotel Ltd. (1944) 4 DLR 638 of the term "in connexion with" including His Honour's remark that "The phrase 'having to do with' perhaps gives as good a suggestion of the meaning as could be had." It is unnecessary to give further examples.
- [300]No case involving a consideration of the proper construction of the phrase where it appears in s. 588M was put before me and I did not locate any.
“because of the company’s insolvency”
- [301]The law has experience in dealing with the question of causation in many contexts, including the statutory context. There are some general propositions which can be stated.
- [302]First, the resolution of whether X caused Y as a matter of fact must be resolved by applying common sense to the facts of each particular case. The matter is not resolved simply by asking whether “but for” X, Y would not have happened. In March v Stramare (1991) 171 CLR 506 at 515, Mason J (with whom Toohey and Gaudron JJ agreed) said:
The common law tradition is that what was the cause of a particular occurrence is a question of fact which “must be determined by applying common sense to the facts of each particular case”, in the words of Lord Reid: Stapley, at 681. That proposition is supported by a long line of authority in the United Kingdom: Leyland Shipping Co, at 363, 369–70; Admiralty Commissioners v SS Volute [1922] 1 AC 129 at 144; Yorkshire Dale Steamship Co, at 706; Alphacell Ltd v Woodward [1972] AC 824 at 847; McGhee v National Coal Board (WLR at 5, 11; All ER at 1011, 1017). It is supported also by this court's decision in Fitzgerald v Penn (1954) 91 CLR 268.
...
Commentators subdivide the issue of causation in a given case into two questions: the question of causation in fact — to be determined by the application of the “but for” test — and the further question whether a defendant is in law responsible for damage which his or her negligence has played some part in producing: see, for example, Fleming, The Law of Torts, 7th ed (1987), pp 172–3; Hart and Honoré, Causation in the Law, 2nd ed (1985), p 110. It is said that, in determining this second question, considerations of policy have a prominent part to play, as do accepted value judgments: see Fleming, p 173. However, this approach to the issue of causation (a) places rather too much weight on the “but for” test to the exclusion of the “common sense” approach which the common law has always favoured; and (b) implies, or seems to imply, that value judgment has, or should have, no part to play in resolving causation as an issue of fact. As Dixon CJ, Fullagar and Kitto JJ remarked in Fitzgerald v Penn (at 277): “it is all ultimately a matter of common sense” and “in truth the conception in question [ie, causation] is not susceptible of reduction to a satisfactory formula”: at 278.
- [303]Thus while the “but for” test can a useful negative test for causation, it does not define the scope of the causal relationship contemplated in each context.
- [304]Second, as observed in the above passage, the application of the common sense test to a particular factual situation will include the consideration of value judgments and policy considerations. The precise manner in which the consideration of such matters ought to be approached in principle has been the subject of differing views in the High Court. However, in practice, the correct approach appears to be to have regard to the particular framework within which the question of causation falls to be resolved: where the question arises in the context of a statutory scheme one looks to the purpose, nature and effect of that statutory scheme to determine whether Y is “caused” by X for the purposes of the particular statute.
- [305]In that regard, Gleeson CJ observed in Travel Compensation Fund v Tambree (T/As R Tambree and Associates) & Ors (2005) 222 ALR 263 (footnotes omitted):
[28] It is not in doubt that issues of causation commonly involve normative considerations, sometimes referred to by reference to "values" or "policy". However, as Stephen J pointed out in Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad"7, the object is to formulate principles from policy, and to apply those principles to the case in hand. In the context of considering an issue of causation under the Fair Trading Act, the statutory purpose is the primary source of the relevant legal norms. The case did not call for a value judgment about the conduct of Ms Fry. Why her failure to account, after she lost her licence, in respect of moneys paid to her company while it was illegally trading under her licence should be treated differently from her failure to account, after she lost her licence, in respect of moneys paid after she lost her licence but before the authorities took steps to close down her business, is not apparent.
[29] To acknowledge that, in appropriate circumstances, normative considerations have a role to play in judgments about issues of causation is not to invite judges to engage in value judgments at large. The relevant norms must be derived from legal principle. In this case, the primary task of the Court is to apply the legislative norms to be found in the Fair Trading Act, although the outcome is not materially different to applying the common law of negligence.
The statutory context
- [306]The current version of the insolvent trading regime is the present incarnation of a long history of statutory provisions concerned with piercing the corporate veil where directors have permitted a company to trade when the debts incurred were (put generally) unlikely to be paid.[84] The statutory purpose of s. 588M is best approached by looking at the insolvent trading scheme of which it is a part. The purpose of that scheme has been stated as follows by Barrett J[85]:
36 Section 588G and related provisions serve an important social purpose. They are intended to engender in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company’s debt burden. The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability at a time when the prospect of that principle resulting in loss to creditors has become real.
- [307]In my view, s. 588M(1)(b) should be construed having regard to the purpose and concern identified by his Honour.
- [308]Given the apparently novel questions raised in this matter, it is also appropriate to investigate whether guidance to construction may be found from relevant extrinsic material. It is well known that the current form of the insolvent trading provisions was based on the Harmer Report.[86] Further, the current sections were introduced as part of the Corporate Law Reform Bill (1992) which was accompanied by an extensive Explanatory Memorandum. Both have been considered as relevant extrinsic material in construing the insolvent trading provisions.[87]
- [309]The Harmer Report was considering the extant provision (s. 556 Companies Act 1981[88]). That section provided:
566(1) If –
- (a)a company incurs a debt, whether within or outside the Territory;
- (b)immediately before the time when the debt is incurred –
- (i)there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or
- (ii)there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they become due; and
- (i)
- (c)the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applies,
any person who was a director of the company, or took part in the management of the company, at the time when the debt was incurred is guilty of an offence and the company and that person or, if there are 2 or more such persons, those persons are jointly and severally liable for the payment of the debt.
- [310]It can be seen that that section created a direct liability for payment of the relevant debt. The Harmer Report recommended, inter alia, that[89]:
- (a)The legislation should be drafted to impose a duty to prevent insolvent trading on directors;
- (b)Action for breach of duty (to prevent insolvent trading) should be brought by the company through the liquidator or, if the Court grants leave, through a creditor; and
- (c)If a director is found liable, the amount of the liability should be determined by the Court and measured by reference to the loss or damage sustained by the creditors.
- (a)
- [311]The learned authors explained further in respect of the third point under the heading: “Extent of Liability” as follows (footnotes omitted):
- Proposal in DP 32. In DP 32, the Commission proposed that the court have a very broad power to give judgment in favour of the company in such amount as is just having regard to the interests of the creditors. This formulation was to ensure that the damages recovered do not simply reflect some nominal damage to the company. The damage suffered by creditors is the relevant measure. It is not sufficient simply to provide that the measure of damages should be an amount equal to the sum of the unpaid debts which were incurred during the period of insolvent trading. Where debts are incurred, the company usually obtains some benefit. A company may be taken to have engaged in insolvent trading even though none of the debts incurred during the period when circumstances of insolvency existed have been left unpaid. If the court did not have a discretion of the kind proposed in DP 32, the directors could use the assets of the company to pay off the creditors whose debts were incurred during the period of insolvent trading. This would extinguish the cause of action even though the assets available for other creditors would have been reduced if not exhausted. The position of those creditors should be taken into account by the court.
- Quantification of liability. The amount for which a director who is found to have breached the duty should be liable is a matter requiring careful quantification on the facts of each case. A broad discretion to be exercised by the court is appropriate. The need for this is illustrated by the following examples.
- All of the debts may have been incurred while the company was insolvent and the company may have received no benefit from the transactions: in such a case, the directors would be liable for all of the debts.
- Where the company has received a significant benefit by the provision of goods and services, that should be taken into account and the liability of the directors reduced accordingly.
- Where one of more of the creditors whose debts remain unpaid knew the company’s circumstances, yet continued to trade with the company, the amount of the debts to that creditor could be excluded from the calculation of the amount of the liability.
- [312]It is evident from the model bill contained in the report, however, that Parliament ultimately adopted a quite different approach to articulating the extent of the liability imposed from that contemplated in the Harmer Report. The model bill relevantly provided:
Extent of Liability
D9. If, in an action under section D8, the Court is satisfied that a director has committed a breach of duty, the Court may give judgment in favour of the company against the director in such amount as is just, having regard to the interests of the creditors in the extent to which the financial position of the company was prejudicially affected by reason of the breach of duty.
- [313]The differences between this draft provision and s. 588M are so significant as to make it doubtful that the Harmer Report materially assists in interpreting it.
- [314]However, identifying the intention of Parliament as to the scope of loss or damage contemplated by s. 588M(1)(b), is not much assisted by reference to the otherwise comprehensive Explanatory Memorandum to the Corporate Law Reform Bill (1992) either. It relevantly provided:
Proposed section 588M - Recovery of compensation for loss resulting from insolvent trading
1103. Proposed section 588M provides that where a person has contravened proposed section 588G by allowing the company to incur a debt while insolvent, the debt is unsecured, and the person to whom the debt is owed suffers loss or damage as a result, the liquidator of the company may recover from the director as a debt due to the company an amount equal to the amount of loss of damage.
1104. Such an action may be proceeded with irrespective of whether the director has been convicted of an offence in relation to contravention or whether there has been a civil penalty order made against the director for the contravention. Proposed section 588M complements proposed section 5883 [sic], which provides for a company to intervene and seek compensation in proceedings connected with a civil penalty action.
- [315]This passage does not deal with the individual creditor claim (though that was included in the 1992 Bill in the form in which it currently exists[90]) nor does it cast any particular light on the intended scope of the key expressions.
- [316]In my view, these passages do not greatly assist in construing s. 588M(1)(b). While the Harmer Report might suggest that the idea of conferring a right to recover “loss or damage” rather than a claim for the debt itself, was intended to cover the situation where another creditor suffered loss in respect of its debt, even though the relevant debt under s. 588G was in fact paid, paragraph 1103 seems to be inconsistent with that inference, referring as it does to the loss suffered by the “person to whom the debt is owed”.
- [317]Unfortunately, I do not find either the Harmer Report nor the Explanatory Memorandum to materially assist in construing the two limbs of s. 588M(1)(b).
- [318]Looking first at the causation test, the expression “because of the insolvency” has some difficulties in construction.
- [319]It seems to me that the cause of the creditor’s loss in a particular case will be the director’s breach of duty comprised in failing to prevent insolvent trading. Focus on the “insolvency” as such seems the wrong point of focus for the causal analysis. Further, “the company’s insolvency” is also somewhat ambiguous. Does it refer to the company’s on-going inability to pay its debts as they fell due, or does it refer to the ultimate winding up of the company? The precise articulation of the causative fact does not matter so much where the focus is on the relevant debt. It becomes more important where the focus is on other heads of loss. In my view, the two approaches are not necessarily inconsistent. Rather, the focus of the provision is on the loss caused by the inability of the company to pay its debts, as ultimately manifested in the winding up of the company on that basis.
- [320]The overall purpose of the provision is to provide compensation to a creditor where a director has caused loss to a creditor by breaching his or her duty to prevent insolvent trading. If that is the purpose, then the civil consequences should properly extend to those losses for which the inability of the company to pay its debts was a material cause. For an individual creditor, that will usually mean at the least, the net loss of value for the relevant the debt (as is recognised by Edenden v Bignell [2007] NSWSC 1122 at [30] cited below).
- [321]The ordinary words of the section, however, also contemplate that other losses for which the inability of the company to pay its debts are a material cause are within the scope of the section. It is difficult to see any good reason to read down those words.
- [322]The connection test also has difficulties. It cannot be said in my view that the section should be read as if it was concerned only with limiting the loss to the unpaid portion of the relevant debt. It would have been easy enough to say so. Rather, the use of the concept of loss or damage communicates to me an intention to create a broader compensatory remedy for all loss which is sufficiently connected to the relevant debt. In my view it is therefore capable of extending to other losses which are “in relation to” the relevant debt.
- [323]The question then is: how is the relevant connection otherwise to be identified? In my view, that question is also answered by considering the purpose of the statutory regime. The purpose is to impose a duty to prevent insolvent trading and to provide compensation for breach of that duty by imposing liability for loss which is defined, inter alia, by reference to debts incurred when, in general terms, they should not have been.
- [324]Accordingly, it is fault associated with incurring and non-payment of the relevant debt which must be the focus of compensation. In my view, therefore, only loss or damage directly related to the incurring and non-payment of that debt are within the scope of the provision. A wider approach to the connection between loss and the relevant debt is apt to result in liability going beyond that contemplated by the statutory scheme.
The Tremco debts
- [325]Based on the above considerations, it might be thought that the loss represented by the non-payment of the Tremco debts is relatively uncontentious. However, the following issues arise.
- [326]It is necessary to demonstrate at trial that the creditor has loss or damage equal to the amount of the debt claimed. As already noted, that is a different from specifying that the plaintiff is allowed to recover the amount of the debt or debts incurred. The issue which frequently arises is whether there are recoveries paid or likely to be paid in the insolvency such that the loss is less than the amount of the debt. It might be argued that that issue is not in dispute given that the amended defence did not directly dispute that the Tremco Judgment (comprised of the Tremco debts plus interest) remained unpaid, nor did it positively alleged that payments had been or might be made in the winding up.[91]
- [327]The fact of the debt remaining outstanding could have been directly dealt with by Mr Millar, but I could not see where that was dealt with in his affidavit. However, the plaintiff’s proof was lodged for the full amount in November 2016 and there is no suggestion of any payment being made since then. I am satisfied the Tremco debts remain outstanding.
- [328]Attention must be turned to the prospect of recoveries. That issue has caused problems in some cases.[92] The principle which I must apply is that stated in Smith v Offermans [2015] QCA 55. That case involved an appeal from a successful summary judgment application for compensation for insolvent trading. Given the complexities of the issues, one would imagine successful summary judgment applications will be rare. One issue which arose was whether the judgment should be set aside in circumstances where there was no evidence as to likely returns in the administration. The Court found that the judgment should be set aside (inter alia) on that basis. The matter was dealt with by Philippides JA, with whom McMurdo P agreed (Morrison JA giving concurring reasons on this issue). Her Honour observed[93]:
[61] A further issue raised by the applicant concerned the absence of proof of the requirement specified in s 588M(1)(b) of the Act that “the person ... to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency”.
[62] In order to recover compensation pursuant to s 588M(2), the respondent was required to show that the DCT had suffered loss or damage because of the Company’s insolvency and establish the quantum of that loss or damage. The allegation in paras 14 and 15 of the statement of claim, that the DCT had suffered loss or damage in the amount claimed, was denied as outlined above.
[63] I note that, while the issue was not raised below, it concerned a matter that required no further evidence to be adduced and raised an important matter of law as to the proof required by s 588M. In those circumstances, I consider that the Court should, in the exercise of its discretion, allow the matter to be raised before this Court.
[64] The applicant placed reliance on Edenden v Bignell [2007] NSWSC 1122 at [30], where Barrett J said:
“This section does not allow recovery of the amount of the creditor’s debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor’s insolvency. In some cases – perhaps most cases - this will be the equivalent of the amount of the debt... In others – for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably – the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt.”
[65] The applicant argued that, the respondent simply failed to depose to the question of whether or not the DCT had actually suffered loss and damage due to the Company’s alleged insolvency, whether in the sum of $138,221 or some other amount. The respondent neither swore to, nor exhibited, any report to creditors disclosing his professional opinion that no alterative avenues for any dividends, bar causes of action against the applicant, existed. It was submitted that such evidence was required, especially given the applicant’s evidence in paras 19(b) and 27 of his affidavit (which was not contested) that, following the Company going into liquidation, the liquidator took possession of an unencumbered asset (a Holden HSV vehicle), able to be realised for the benefit of creditors of the Company and potentially reducing the alleged loss and damage. It was thus contended that without such evidence, a requirement of s 588M of the Act, necessary to sustain a judgment, was not satisfied. The submission is clearly correct. It was essential to establishing the claim for compensation in the sum of $138,221 that the respondent deposed, as at the time of the claim, what the quantum of the loss suffered was. It could not simply be assumed to be the same as the debt owed to the DCT, especially given the evidence that there had been some recovery by the liquidator.
- [329]As I have said, those observations were made in the context of an appeal from a successful application for summary judgment.
- [330]The direct evidence from Mr Rose on this issue is a little unsatisfactory. He swore “At the present time, there are insufficient funds available in the liquidation of Kadoe to pay its unsecured creditors”. He swore that as at February 2017. The trial occurred in May 2018. However, the continued correctness of the proposition was not challenged at trial. Perhaps more importantly, the circumstances of the affairs of Kadoe, its creditors and assets were comprehensively canvassed in the trial. There was no suggestion of any recovery actions or even of grounds to undertake such, beyond the issue of the counterclaim against PWA. That was settled for $20,000 well before Mr Rose swore his affidavit. Further, it is evident from correspondence with the ATO that Mr Rose was intending to bring an end to the administration last year. In all the circumstances, I am willing to infer that there is no prospect of recovery action which would lead to a dividend to unsecured creditors.
- [331]Mrs Thomson contended that the loss of the value of the Tremco debts was not because of the insolvency of Kadoe, but rather because Tremco advanced credit to Kadoe over its $3,000 credit limit. This was not pleaded. In any event, I reject that contention. Tremco made no promise not to extend more credit than the credit limit. Further, even if it had, Kadoe ordered the goods and had an obligation to pay for them. The reason it did not was that it was unable to do so because it was insolvent.
- [332]I therefore conclude that Tremco has suffered loss in relation to the Tremco debts in the amount of those debts: $146,410.20.
Judgment interest on Tremco debts
- [333]Tremco claims judgment interest on the Tremco debt awarded by Andrew DCJ as a relevant loss. There is a close and direct connection between the non-payment of a debt and the interest on the unpaid amount of the debt. I see nothing wrong with the proposition that loss or damage in the form of interest forgone, or alternatively interest paid which would otherwise not have been payable, as loss under the section. The difficulty here is the form in which the interest is claimed. Tremco has not proved interest as a loss to it measured either by overdraft interest paid or interest foregone which could have been earned.[94] Rather, it seeks interest awarded by the Court under s. 58 Civil Proceedings Act as such. These amounts might or might not correlate with the loss to Tremco from non-payment of the relevant debts, however that cannot be assumed. Tremco has not established that the amount of interest claimed represents a loss to it.
- [334]That does not exhaust the potential relevance of the s. 58 CPA interest. It was awarded as part of the Tremco Judgment. Whether it is recoverable as such is a different question.
- [335]The interest awarded by Andrews DCJ comprised part of his Honour’s judgment, which gave rise to a judgment debt. The judgment for interest was made in proceedings brought to establish the debt and that judgment was not paid because the company was insolvent when the judgment was given and subsequently. Looked at as such, it is arguable that it is also a category of loss or damage within the scope of the section. However, on balance, I do not take that view. The judgment for interest does not prove any loss of that sum arising from the incurring and non-payment of the debt. While it is connected with it, I do not think it is loss “in relation to” the debt in the relevant sense.
Costs of the trial
- [336]The costs of trial are the most problematic issue on loss.
- [337]The sum is large in relation to the debt: the actual costs incurred were $225,605.90. Again, the amount itself was not disputed in the Amended Defence. However, the amount was also proved by tax invoices and a trust account statement from the barrister and solicitors involved.[95] These amounts were challenged by Mr Rose during the proof process on the basis that the entitlement to costs under the judgment was to standard costs. However, that is not the issue which arises here. The claim by Tremco is not for the value of the judgment for costs itself, but rather for the litigation costs as a loss in its own right. No particular argument was advanced that the sum was so large as to exclude the conclusion that they were properly described as costs incurred in obtaining judgment. The size of the pleading and the scope of issues raised by Mrs Thomson at the trial tend to rebut such a conclusion. I am satisfied that Tremco has suffered a loss in the form of legal costs paid to pursue Kadoe to judgment on the Tremco debts in the amount claimed. Further, the character of the loss as legal costs does not of itself prevent them being claimed as a loss in these proceedings.
- [338]The difficult question is whether these costs are a loss “in relation to” the Tremco debts and suffered because of the insolvency.
- [339]The costs are in my view a loss in relation to the debts for the purposes of 588M(1)(b). The connection between the incurring of the costs and the wrongful incurring of the Tremco debts is direct. They were incurred to obtain a binding adjudication that Kadoe was liable for the Tremco debts in circumstances where the Company, though Mrs Thomson, was denying that matter.
- [340]That leaves the question of whether the costs were a loss suffered because of the insolvency of Kadoe. There is little doubt that but for the insolvency of Kadoe, the costs would have been paid. The question is whether this is a causative link which should be recognised as falling within the causation test contemplated by the provision in its statutory context.
- [341]In this case I am satisfied that it is:
- (a)The costs were unpaid as a result of the insolvency, in the sense that if the Company had not been insolvent, it would have paid the costs;
- (b)Perhaps more important from a factual perspective, the costs were the direct result of a failed challenge by the Company to impugn the Tremco debts undertaken at a time when the Company on the evidence was plainly insolvent and had been for a considerable period; and
- (c)The basis of the defence did not relate to some distinct consideration which provided a basis to consider that the real cause of the costs being incurred was some unforeseen or unusual matter which could break the chain of causation. The basis of the defence amounted to putting Tremco to proof.
- (a)
- [342]In those specific circumstances, I am satisfied that the loss represented by the costs incurred in obtaining the Tremco Judgment was caused by the insolvency.
Mrs Thomson’s counterfactual contentions
- [343]Mrs Thomson submitted that none of the losses were caused by the insolvency of Kadoe because they were caused by other matters. She relied on two points, (neither of which were pleaded).
- [344]The first point arose out of the problems with the allegedly invalid trust. The proposition as best I could distil it from Mrs Thomson’s submissions[96] seemed to be that Kadoe would not have been in a position to pay its creditors until it succeeded on its counterclaim against PWA and that it was Tremco’s fault that that did not happened because it wound up Kadoe and appointed Liquidators who settled the counterclaim for $20,000. I reject this as a relevant cause of the losses claimed for at least the following reasons:
- (a)It would be contrary to the policy evident in the Act that companies unable to pay their debts should be wound up. Whether the counterclaim had merit or not, it was plainly not an asset that could be turned into cash or realised in any reasonable time frame;
- (b)It would be inconsistent with the scheme of the Act which contemplates that the administration of a winding up is placed in the hands of an independent Liquidator. In that context, it could not properly be said that it was Tremco which caused that loss by appointing the Liquidators; and
- (c)Given the financial state of Kadoe when Mrs Thomson discovered (and chose to agitate) the question of the validity of the Trust, it is impossible to conclude that the extravagant counterclaim against PWA had any significant value.
- (a)
- [345]The second point was also related to the invalid trust issue. Doing the best I can to understand the contention, it seems that Mrs Thomson contends that the Court must find that the Trust was not validly created and that therefore Kadoe never owed any debts and only became insolvent because of the negligence of those who failed properly to create the trust.
- [346]I reject this contention:
- (a)First, as I observed above, I am not satisfied that a trust did not come into existence which would have been regular for taxation purposes. Whether the Trust was invalid as a matter of law was not an issue which was litigated in the trial, nor was evidence led which would have permitted that matter properly to be determined;
- (b)Second, it is trite law that Kadoe was liable for debts it incurred as trustee, whether the trust was properly constituted or not; and
- (c)Third, the solvency of the Company had nothing to do with the invalid trust.
- (a)
Mrs Thomson as a self-represented litigant
- [347]Mrs Thomson showed herself to be a person of determination and intelligence in the manner that she conducted the trial. She was willing to make far reaching forensic judgments in the interests of efficiency in conduct of the trial. She did a reasonable job as advocate and cross-examiner, sometimes conducting effective cross examination. She endeavoured to remain professional and calm and generally did so.
- [348]This is not to disregard the disadvantage which she had arising from her lack of legal training in what was a complex area. However, she was usually able (with some guidance) to identify relevant issues. Mrs Thomson claimed at various times to be caught up by lack of understanding of how the rules of pleading operated. That might have occurred on occasions. However, in my view, indulgence to Mrs Thomson on the pleading issues which arose would have been quite unfair to Tremco, who is after all entitled to the benefit of the rules in the conduct of a complex trial, regardless of whether it has a represented or unrepresented opponent.[97]
Conclusion
- [349]In the circumstances, I find that Tremco has made out its claim to loss or damage in the amount of $372,016.10. Tremco is therefore entitled to recover that amount as a debt due to Tremco under s. 588M(3).
- [350]The plaintiff also seeks interest pursuant to s. 58 CPA on the debt it alleges in these proceedings. That section plainly applies in this case: see ss. 58(1) and (2). Accordingly the Court has a discretion to include in its judgment an amount for interest at the appropriate rate from when the cause of action arose (or at a later date) until judgment.
- [351]The question of when a claim under s. 588M arises was deal with the Full Court of the Supreme Court of South Australia in Powell v Fryer (2001) 37 ACSR 589 where Olsson J (with whom Duggan and Williams JJ agreed) observed[98]:
[114] Finally, there is a need to refer to that aspect of the appeals which joined issue with the inclusion in the judgment of the sum of $62,657.77 for interest. Both notices of appeal sought to place the allowance of interest from the date of liquidation of the Company in issue.
[115] As Professor O'Donovan pointed out, the making of a demand is not a pre-requisite to a cause of action pursuant to s 588M. Further, unlike proceedings related to undue preferences (where the transaction remains valid unless and until it is avoided), s 588M gives rise to liability, as and when each debt is inappropriately incurred and is not satisfied according to its terms. Theoretically, interest ought, as a matter of logic, to be computed as from when each relevant debt fell due and was not met. As a matter of convenience, interest has been allowed to run from the date of appointment of a liquidator. This is consistent with Re Mike Electric (Aust) Pty Ltd (In Liq) (1983) 7 ACLR 600 and a series of authorities stemming from it. These cases all related to preference claims. There is an even greater reason to apply the practice to a claim such as that now before the Court.
- [352]I see no reason not to follow this approach. I therefore award interest on the judgment sum pursuant to s. 58 CPA from the date of the winding up order. The plaintiff sought interest at the relevant default judgment interest rate up to the last day of the trial in the amount of $64,579.20. As I read the submission, this is calculated on the amount of the debt awarded in these reasons: i.e. $372,016.10. However, will hear the parties on the correct calculation of the interest due.
- [353]Finally, it should be noted that these proceedings also include third party proceedings by Mrs Thomson against PWA and Ms Blinco, Ms Bendle and Ms Grenfell. On 6 October 2017 Justice Applegarth directed that the proceedings between Tremco and Mrs Thomson be heard in this Court on the basis of an undertaking from the Third Parties “not to controvert a finding at any trial in the proceedings between” Tremco and Mrs Thomson as to any debt owed by Kadoe to Tremco and the liability Mrs Thomson has for any debt owed by Kadoe to Tremco.
- [354]I will hear the parties as to costs.
Footnotes
[1] Trial Exhibit 5 and 6 respectively.
[2] TS 7-48-49.
[3] Affidavit of Stephen Miller sworn 21 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 24) at Ex No. CMT-9 pages 107-109.
[4] Affidavit of Merle Willson sworn 28 April 2017 (filed 28 April 2017, DC proceeding 3868/17, Court Doc 51) at paras 36-47.
[5] TS 2-116.27-.28.
[6] TS 2-119.25 to TS 2-121.7.
[7] Affidavit of Merle Willson sworn 28 April 2017 (filed 28 April 2017, DC proceeding 3868/17, Court Doc 51) at Ex No. MJW-4 page 18.
[8] Trial Exhibit 12.
[9] Trial Exhibit 19.
[10] TS 6-125.6 to 6-126.14.
[11] Affidavit of Merle Willson sworn 28 April 2017 (filed 28 April 2017, DC proceeding 3868/17, Court Doc 51) at paras 73-85 (excluding para 78).
[12] Trial Exhibit 26.
[13] Trial Exhibit 28.
[14] Trial Exhibit 30.
[15] TS 8-73.35-.36.
[16] Affidavit of Pamela Jeppesen sworn 21 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc No 22) at para 5.
[17] Trial Exhibit 15.
[18] Trial Exhibit 16.
[19] In a statement dated 22 June 2015 prepared in relation to proceedings involving PWA: Trial Ex 18.
[20] See for example, Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Docs 27, 30, 31) at Ex. Nos. TJR-2 to, 7, pages 243 to 320 and Ex. Nos. TJR-27 to 42, pages 1097-1226.
[21] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 29) at Ex. No. TJR-20, page 936.
[22] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 31) at Ex. No. TJR-31, page 1138.
[23] Trial Exhibit 20.
[24] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 27) at Ex. No. TJR-2, pages 276-279.
[25] Affidavit of Wayne Thomson sworn 4 April 2017 (filed 4 April, DC proceeding 3868/17, Court Doc 46) at Ex No. WRT-3, pages 94-95.
[26] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 28) at Ex. No. TJR-17, pages 579-581.
[27] Affidavit of Matthew Hudson sworn 30 August 2017 (filed 30 August 2017, DC proceeding 3868/17, Court Doc 96) at Ex. No. MCW-1, page 556.
[28] Affidavit of Matthew Hudson sworn 30 August 2017 (filed 30 August 2017, DC proceeding 3868/17, Court Doc 96) at Ex. No. MCW-1, pages 558-561.
[29] Trial Exhibit 13.
[30] See Tremco P/L v Kadoe P/L trading as Kadoe Commercial Coatings [2015] QDC 40 at para [1].
[31] See Tremco Pty Ltd v Kadoe Pty Ltd [2015] QDC 24.
[32] See Tremco P/L v Kadoe P/L trading as Kadoe Commercial Coatings [2015] QDC 40.
[33] TS 1-44.10; TS 2-32.5-7; TS 2-33.3; TS 5-95.5; TS 7-39.6-.7.
[34] See the summary of invoice date and due date on the basis of payment being due on 30 days terms as identified in the credit approval.
[35] Jelin Pty Ltd v Johnson (1987) 5 ACLC 463.
[36] At [3].
[37] At 182.10-183.35.
[38] Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565.
[39] This passage was cited with approval by the NSW Court of Appeal in Natcomp Technology Australia Pty Ltd v Graiche [2001] NSWCA 120 at [13].
[40] Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 at 570.10.
[41] See Re Swan Services Pty Ltd (In Liquidation) [2016] NSWSC 1724 at [31].
[42] TS 6-25.27-.28 and TS 6-15.40-.45 and TS 6-16.1-.23.
[43] TS 8-33.16.
[44] Defendant’s closing submissions at paragraphs 85(h) to (j) and (k) to (n).
[45] Trial Exhibit 1.
[46] TS 2-100.19-.20.
[47] TS 6-121 to 6-122.45.
[48] TS 8-42.43 to 8-43.25 and in relation to the March 2010 BAS see TS 8-72.7 to 8-73.7.
[49] TS 6-90.4-.15.
[50] See, e.g. TS 6-89.37-.39, TS 6-92.14-.47, T 6-93, TS 6-94.1-.2.
[51] TS 6-102.37-.38.
[52] Mrs Thomson gave evidence to confirm this at TS 7-74.42-.46, TS 7-75.1-.38.
[53] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 26) at Ex. Nos. TJR-22 at pages 1043 to 1059.
[54] Trial Exhibit 8.
[55] Plaintiff’s closing submissions at paragraph 89.
[56] TS 8-27.5-.14.
[57] TS 8-55.7-.17.
[58] TS 8-28.13-.22.
[59] TS 8-49.40-.43.
[60] TS 8-50.41-.47.
[61] TS 8-65.7-.12.
[62] TS 8-65.21-.23.
[63] TS 8-71.16-.17.
[64] TS 8-72.18-.20.
[65] Plaintiff’s closing submissions at paragraphs 91 to 93.
[66] The Duke Group Limited (in liq) v Arthur Young (Reg) & Anor (1991) 9 ACLC 49 at 55; Wiley v Lo Presti (1997) 16 ACLC 82; Duke Group Ltd (in liq) v Hilmer (1994) 15 ACSR 255 at 279; Re Bufalo Corporation Pty Ltd (2002) 172 FLR 382 at [4] and the cases cited there.
[67] M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australia Ltd (1983) 68 FLR 504.
[68] Section 95A(2) of the Act.
[69] (2006) 58 ACSR 631 at [141].
[70] Powell v Fryer (2001) 37 ACSR 589
[71] Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631 at 652.
[72] ASIC v Plymin [2003] VSC 123 per Mandie J at [386].
[73] With whom Philippides JA and Ann Lyons J agreed.
[74] Smith v Offermans [2015] QCA 55 at [10] and see Re Newark Pty Ltd (in Liq) [1993] 1 Qd R 409 at 414-415.
[75] Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 per Griffith CJ.
[76] Jones v Dunkel (1959) 101 CLR 298.
[77] As at July 2011, the Overdraft Account was $140,661 DR. The Business Loan appeared to remain at around $200,000 DR: see Hudson Report 6.5.4.13.
[78] Affidavit of Matthew Hudson sworn 30 August 2017 (filed 30 August 2017, DC proceeding 3868/17, Court Doc 94) at Ex No. MCW-1 at page 208.
[79] Affidavit of Terrence Rose sworn on 23 February 2017 (filed 24 February 2017, DC proceeding 3868/17, Court Doc 29) at Ex. No. 22 at page 953.
[80] TS 5-43.11-.19.
[81] Powell v Fryer (2001) 37 ACSR 589 per Olsson J (with whom Duggan and Williams JJ agreed).
[82] Perrine v Carrello [2017] WASCA 151.
[83] Powel v Fryer (2001) 159 FLR 433 [88]–[89]; Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124 [535]; Edenden v Bignell [2007] NSWSC 1122 [30]; Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 [22], [24]; Smith v Boné (2015) 104 ACSR 528 [410].
[84] Starting with s. 275 Companies Act 1929 (UK), first adopted by Queensland in 1931, which imposed personal liability on directors for fraudulent trading.
[85] Woodgate v Davis (2002) 42 ACSR 286 at [36].
[86] Australia Law Reform Commission Reports, Annual Reports, General Insolvency Inquiry, Report No 45 (1988).
[87] See for example Elliott and Another v Australian Securities and Investments Commission(2004) 185 FLR 245 at [107] – [110].
[88] Corporations Law Section 592 (the immediate predecessor of the current statutory scheme) was in materially the similar term as s. 556.
[89] At [283].
[90] See p.148 of the Bill.
[91] See Statement of Claim paragraph 20 and Amended Defence paragraphs 30 and 31. The question of the judgment debt (which includes the Tremco debts) remaining outstanding and the question of recoveries in the administration are not raised elsewhere in the pleading.
[92] See the cases reviewed in Swan at [208] to [216].
[93] Compare apparently different the conclusion of the Full Court of the Supreme Court of South Australia in Powell v Fryer (2001) 37 ACSR 589 at [88].
[94] Hungerfords v Walker (1989) 171 CLR 125.
[95] Affidavit of Terrance Rose sworn 21 March 2018 (filed 23 March 2018, DC proceeding 3868/17, Court Doc No 148) at Ex. No. TJR-4 at pages 66 to 83.
[96] Defendant’s closing submissions at [47] to [56].
[97] Ross v Hallam [2011] QCA 92; Robertson v Hollings [2009] QCA 303.
[98] See also Smith v Bone [2015] FCA 389 at [17].