FEDERAL COURT OF AUSTRALIA Donnellon Childcare Holdings Pty Limited (in liq), in the matter of Donnellon Childcare Holdings Pty Limited (in liq) v Donnellon [2020] FCA 1003 File number: NSD 351 of 2019 Judge: REEVES J Date of judgment: 15 July 2020 Catchwords: CORPORATIONS – application by a liquidator under s 588FF(3)(b) of the Corporations Act 2001 (Cth) to extend the time to commence proceedings – where there was significant delay in commencing proceedings – whether there is a sufficient explanation for the delay – whether the proposed claim is so devoid of merit that it would be unfair to allow the extension – whether any likely prejudice would be suffered if the extension were allowed – application granted Legislation: Corporations Act 2001 (Cth) Cases cited: BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 Carter (Liquidator), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 2076 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489; [2015] HCA 10 Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) [2018] FCA 102 Parker, in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687 Walker and Maloney v CBA Corporate Services (NSW) Pty Limited (2012) 88 ACSR 153; [2012] FCA 328 Date of hearing: 13 March 2020 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 38 Counsel for the Plaintiffs: Mr A Spencer Solicitor for the Plaintiffs: McLean & Associates Counsel for the First to Third Defendants: The First to Third Defendants did not appear Counsel for the Fourth Defendant: The Fourth Defendant appeared in person ORDERS NSD 351 of 2019 IN THE MATTER OF DONNELLON CHILDCARE HOLDINGS PTY LIMITED (IN LIQUIDATION) ACN 137 369 674 BETWEEN: DONNELLON CHILDCARE HOLDINGS PTY LIMITED (IN LIQUIDATION) ACN 137 369 674 First Plaintiff CLIFFORD JOHN SANDERSON IN HIS CAPACITY AS LIQUIDATOR OF DONNELLON CHILDCARE HOLDINGS PTY LIMITED (IN LIQUIDATION) ACN 137 369 674 Second Plaintiff AND: KATHERINE ELIZABETH DONNELLON First Defendant SUSAN PRINCE Second Defendant ANDREW DONNELLON (and another named in the Schedule) Third Defendant JUDGE: REEVES J DATE OF ORDER: 15 July 2020 THE COURT ORDERS THAT: 1. Pursuant to s 588FF(3)(b) of the Corporations Act 2011 (Cth), the time within which the plaintiffs may make an application under s 588FF(1) against the fourth defendant, Andrew Prince, is extended to 14 November 2019. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT REEVES J: INTRODUCTION 1 Mr Clifford Sanderson, the liquidator of Donnellon Childcare Holdings Pty Limited (in liquidation) (Holdings) (the Liquidator), has applied under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act) for an extension of time in which to bring this proceeding against Mr Andrew Prince, the fourth defendant. 2 The Liquidator originally commenced this proceeding on 7 March 2019. At that time, Ms Katherine Donnellon was the only defendant. She was at all material times the sole director of Holdings from its incorporation in May 2009 until the Liquidator's appointment in March 2016. After obtaining a quantity of documents under two subpoenas issued in August 2019, the Liquidator successfully applied in November 2019 to join Ms Susan Prince (the second defendant), Mr Andrew Donnellon (the third defendant) and Mr Prince as defendants in the proceeding. 3 Ms Prince is Ms Donnellon's mother, Mr Donnellon is Ms Donnellon's husband and Mr Prince is her brother. 4 In an amended originating application filed on 14 November 2019, the Liquidator sought declarations impugning various transfers totalling $455,420.34 that were made from Holdings' bank accounts between December 2014 and June 2015. He also sought declarations that Ms Donnellon had breached her duties as a director of Holdings and that Mr Prince was involved in those breaches. His involvement allegedly included distributing funds from Holdings' bank accounts to, among others, Ms Prince and Mr Donnellon. Because the time for making an application regarding those declarations in respect of Mr Prince had passed, the amended originating application also sought the following interlocutory relief: … 4. An order pursuant to section 588FF(3)(b) of the [Corporations Act 2011 (Cth)], that the time within which the Plaintiffs may make an application under section 588FF(1) against Andrew Prince, including being joined to these proceedings, be extended to 6 March 2020, or such other or later time as the Court considers appropriate or necessary. It is this relief to which these reasons relate. FACTUAL BACKGROUND 5 The following factual background has been obtained from two affidavits which the Liquidator swore in support of this application. Between June 2009 and December 2014, Holdings operated a child care centre known as "Full of Beans Childcare Kindergarten and Preschool" (the Business) at Birkdale, a suburb of Brisbane. It did so as the trustee of the Donnellon Childcare Trust, a trust the beneficiaries of which included Ms Donnellon and Mr Donnellon. 6 Mr Prince was declared bankrupt on 3 May 2012. He was discharged from that bankruptcy on 9 August 2015. 7 On 19 August 2014, Holdings entered into a contract for the sale of the Business for the sum of $760,000. That sale was settled on 5 December 2014 and Holdings received $711,721.64 as the net proceeds of it. Holdings ceased trading five days later. 8 On 7 March 2016, approximately 15 months later, the Liquidator was appointed by a resolution of Ms Donnellon as sole director made under s 249A of the Act. As at that date, Holdings was indebted to the Australian Taxation Office (the ATO) in the amount of $338,814.01, of which $235,390.49 related to outstanding superannuation guarantee charge obligations. The ATO remains Holdings' largest single creditor. 9 The Liquidator's subsequent investigations revealed that Holdings was likely to have been insolvent on or before 8 December 2014. Those investigations also revealed the following series of transactions totalling $455,420 already mentioned above: (a) between 8 December 2014 and 18 June 2015, amounts totalling approximately $363,372 were withdrawn from an Australia and New Zealand Banking Group Ltd (ANZ) account operated by Holdings (the ANZ Withdrawals). (b) between 28 November 2014 and 4 March 2015, amounts totalling approximately $92,048 were withdrawn from a Westpac Banking Corporation (Westpac) account operated by Holdings (the Westpac Withdrawals). 10 Shortly after his appointment, Mr Prince provided to the Liquidator a Form 507 Report as to the affairs of Holdings, together with a Form 507A and a Form 911 verifying the contents of the former Report. All of these forms had been signed by Ms Donnellon and the latter was dated 13 March 2016. From about this point on, Mr Prince assumed the role of responding to the Liquidator's inquiries about the affairs of Holdings. That was so whether those inquiries were addressed to him, or to Ms Donnellon. Mr Prince also appeared to be in possession of Holdings' records. 11 Apart from the figure "0" being inserted in respect of the "total estimated realisable values" of the assets of Holdings, the Form 507 Report mentioned above was essentially blank. However, at about the same time as he received these forms, the Liquidator also received from Mr Prince a Questionnaire for Directors and Officers which had apparently been completed, albeit partly, by Ms Donnellon. The information disclosed in that questionnaire included the following: (a) that Holdings ceased trading on 10 December 2014; (b) that Holdings' Business was purchased and sold for $500,000; (c) that Holdings had the figure "0" present assets and "approx $400 000" liabilities; (d) that the capital introduced into Holdings by way of share capital was $2 and by way of loans was $500,000; (e) that no remuneration had been received by Ms Donnellon for salary during the three years prior to the appointment of the Liquidator; and (f) that the steps taken to ensure that the books and records of Holdings were properly kept were "By attempting to reconstruct lost records. BOOKS & RECORDS WERE DAMAGED DURING THE FLOOD". 12 The following questions in that form, however, were not answered: (a) "What happened to [Holdings'] assets?" (b) "What books and records were kept by [Holdings]?" (c) "By whom were the books and records kept?" 13 Following requests made in April and May 2016, and again on 23 August 2016, the Liquidator received two boxes of documents from Mr Prince which were said to contain the books and records of Holdings. At about the same time, Mr Prince told the Liquidator that "[t]he [B]usiness was sold in 2014 so the records i [sic] sent are the most current". Among the documents in those boxes were some bank statements for the ANZ bank account mentioned above, dated up to 24 October 2014, along with some bank statements for the Westpac bank account mentioned above, dated up to 29 May 2015. While the latter covered the period of the withdrawals mentioned above, the former did not. 14 Following the receipt of those documents, the Liquidator made further requests of both Ms Donnellon and Mr Prince that he be provided with a number of special documents, including: copies of the 2015/2016 financial records of Holdings; the current bank statements for the ANZ bank account; and a copy of the Business sale agreement. He also requested that Ms Donnellon complete, and deliver to him, the Director's questionnaire mentioned above. After some months' delay, on 29 March 2017, Mr Prince responded by providing the Liquidator with a copy of the settlement statement for the sale of the Business. In the meantime, he claimed on a number of occasions in emails to the Liquidator to have sent the completed Director's questionnaire "several times". In the same period, he also sent other emails to the Liquidator in which he inquired as to the progress of the liquidation. 15 In November 2017, based on the contents of the settlement statement provided in March 2017 above, the Liquidator made a number of further specific requests of Mr Prince, including that he be provided with: • A copy of bank statements or correspondences with ANZ evidencing that 441k was made [sic] to ANZ for a discharge of bank loan. • A copy of any documents evidencing [Holdings] owed the landlord (JK&AJ Lee Pty Ltd) $256k. 16 On 23 May 2018, having received no substantive response from Mr Prince, the Liquidator sent a letter to Ms Donnellon which was headed "Demand for Specific Information in accordance with Section 530B of the Corporations Act". That letter contained requests for further information in respect of the disbursements of the Business sale proceeds similar to those set out above and for information about the transactions relating to the ANZ bank account. It also stated that: Section 530B of the Corporation Act requires you to deliver the books and records and other files of [Holdings] to me. Also, Section 530B(4) states that the liquidator of a company may give to a person a written notice requiring the person to deliver to the liquidator, as specified in the notice, books so specified that are in the person's possession. Should I fail to receive your response within 14 days hereof, I shall have no alternative but to refer the matter to my legal advisors which may result in additional costs being incurred by you. 17 On 7 June 2018, having received no response from Ms Donnellon, the Liquidator sent a further letter to her. That letter demanded the sum of $697,534.27 from her in respect of "unreasonable director-related transactions" under s 588FDA of the Act. 18 On the following day, Mr Prince sent an email to the Liquidator's office stating, among other things, that: The payment to the landlord was not for overdue rent. The lease term was due to expire and as a condition of the landlord commencing a new lease he required payment of $250,000 plus costs. We disputed this at the time however were advised by our solicitors this was not an uncommon practice. This was the primary cause of the liquidation. The figures you have do not include the fee to the agent, legal fees and the payment of wages and benefits to the staff. I estimate these combined are around $80,000. I never received my own wages from the [B]usiness as the landlord took so much we didn't have enough left to pay me. I understand I would have been a priority creditor for payment but I was trying to make it more simple for the liquidation. The loan to ANZ was not the only debt of the [B]usiness. This was just the only one that was paid out at settlement. The total loans were just under $500k. These were not paid out in full by the sale. These debts were transferred to personal names and we continue to pay the outstanding amounts personally. All of the documentation has been sent to Angie Fu at your office. I advised the staff at your office that some documents were damaged during the Queensland floods. I provided the insurance claim details at the time of the liquidation. It has been some time and it is very difficult to recall precise details[.] I understand you have a duty to investigate and there have been some delays. You must understand it is very depressing to suffer such a loss and difficult to revisit it repeatedly. I also understand you believe there were residual funds from the sale. I can categorically deny this. I still have debt for this [B]usiness now secured against my elderly parents' home for over $150,000 and never claimed my own wage. (Emphasis added) 19 I interpose to note that, assuming the "Queensland floods" (emphasised above) refers to the flooding that occurred in Brisbane where the Business was located, that flooding took place in January 2011, more than three and a half years before the period to which the Liquidator's inquiries were directed. 20 Over the ensuing weeks, there was a lengthy exchange of emails in which the Liquidator's staff sought, but did not obtain, the documentation to support the statements in Mr Prince's email above. Eventually, the Liquidator sent a further letter dated 13 July 2018 to Ms Donnellon. That letter was headed "Failure to deliver up books and records of [Holdings] (Section 530B of the Corporations Act)". In it, the Liquidator stated, among other things, that: Despite undertakings from Mr Prince, we have not received any documents in support of representations made by Mr Prince concerning the transactions entered into by [Holdings] and subject to my letters of demand. I consider the explanations provided by Mr Prince regarding those transactions to be unsatisfactory. The letter also included the following statement: Unless all documentation relating to the transactions referred to in my letters of demand is delivered up within 7 days of the date of this letter, it will be my intention to instruct my solicitors to immediately commence recovery action for the amount referred to in my letters of demand, being $697,534 plus my legal costs… 21 By letter dated 20 August 2018, Gadens Lawyers responded to the above demand on Ms Donnellon's behalf. In brief summary, Gadens asserted in that letter that there was no basis upon which the transactions referred to in the Liquidator's letter could be impugned and that there had been no failure to deliver up the books and records of Holdings. They claimed that was so because Mr Prince had: 1. Shipped to your office all of [Holdings'] records that he had in his possession (comprising 2 boxes); and 2. Provided a USB to your office containing copies of various documents that had been flood damaged. 22 By letter dated 5 December 2018, McLean & Associates, Solicitors, responded to Gadens on behalf of the Liquidator. Among other things, that letter set out the details of the transactions in respect of which the Liquidator intended to pursue a claim against Ms Donnellon. It also contained the following statements about the books and records of Holdings that had been produced to the Liquidator: a. The only hardcopy documents that have been produced to the Liquidator are: i. BAS statements for some periods; ii. Various invoices and receipts (but clearly incomplete); iii. Income tax returns for periods prior to 2011; iv. Some Westpac Bank Statements (incomplete); and v. Some ANZ bank statements (incomplete). b. Contrary to your assertion, the USB Provided to our client did not contain any copies of documents that were said to have been flood damaged. c. No books and records that have been produced to the Liquidator include descriptions, details or supporting documents in relation to the withdrawals recorded in [Holdings'] Business Loan Account statements which occurred after 2014. d. Very little has been produced to the Liquidator in relation to the sale of the [B]usiness. 23 As has already been mentioned, in early March 2019 the Liquidator commenced this proceeding on behalf of Holdings, naming Ms Donnellon as the sole defendant. In one of his affidavits, the Liquidator claimed that he did this because he did not, at that time, have sufficient information or documents to properly articulate a claim against Mr Prince. 24 On 14 June 2019, Ms Donnellon filed her defence in this proceeding. In that document, she alleged that certain of the monies paid from the ANZ bank account had been used to repay indebtedness to Ms Prince, Mr Donnellon and Mr Prince. 25 As is already mentioned above, in August 2019, the Liquidator applied for the issue of a subpoena to each of the ANZ Bank and to Westpac to obtain documents relating to the bank accounts Holdings operated with those banks. The documents produced under those subpoenas disclosed to the Liquidator that: (a) on 28 January 2015, Mr Prince drew a bank cheque from the ANZ bank account for the sum of $100,000 in favour of Mr Donnellon; (b) Mr Prince was one of the persons who was a signatory to the ANZ and Westpac bank accounts, that he was also one of the cardholders connected with those accounts and that he conducted certain relevant transactions relating to those bank accounts. 26 The applications the Liquidator made in this proceeding following receipt of this information have already been set out in the introductory paragraphs above (see at [2]–[4]). RELEVANT PRINCIPLES 27 Where, on the application of a company's liquidator, the Court is satisfied that a transaction made by a company is voidable under s 588FE of the Act, the Court may make orders under s 588FF(1) for the recovery of the amount of that transaction. However, s 588FF(3) provides that an application under s 588FF(1) may only be made: (a) during the period beginning on the relation-back day and ending: (i) 3 years after the relation-back day; or (ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company; whichever is the later; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period. 28 In this instance, the expression "relation-back day" is relevantly defined in s 9 of the Act to mean: "the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun" (s 91 Item 15). In the case of a voluntary winding up, that day is fixed under s 513B. Since this matter does not involve any of the circumstances described in subsections (a) to (da) of that section, that day is fixed by subsection (e) as: "the day on which the resolution was passed". As mentioned above, that was 7 March 2016. Accordingly, in this matter, the later of the two dates mentioned in s 588FF(1)(a) above was 7 March 2019. That was, coincidentally, the day upon which this proceeding was originally commenced. Nonetheless, since Mr Prince was not named as a defendant in the initial originating application and since 7 March 2019 has now passed, the Liquidator has, in the present application, sought the exercise of the Court's discretion under s 588FF(3)(b) above. 29 In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489; [2015] HCA 10 (Fortress Credit), the High Court explained that the discretion under s 588FF(3)(b) is (at [24]): … to be exercised having regard to the scope and purposes of Pt 5.7B [of the Act], characterised in the Harmer Report as the continuing "policy" which underpinned its recommendations. That policy included the avoidance of transactions by which an insolvent company has disposed of property in circumstances that are regarded by the legislature as unfair to the general body of unsecured creditors. It is, however, a policy qualified in its application by the requirement that liquidators be placed under a reasonable time limitation for taking action under the voidable transaction provisions. A purpose of that qualification, expressed in "clear and emphatic" terms, is to favour certainty for those who have entered into transactions with the company during the periods in respect of which designated transactions may be voidable … The Court added that: Questions of what is a reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty are more appropriately considered case-by-case in the exercise of judicial discretion … 30 In BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 at [183]–[188], the New South Wales Court of Appeal held that the general approach to be adopted in an application for an extension of time under s 588FF(3)(b) was to ask "what was fair and just in all of the circumstances" (at [187]). Furthermore, notwithstanding the case-by-case approach described in Fortress Credit above, the factors that have come to be identified in judgments concerning applications of this kind are: (a) the liquidator's explanation for the delay in bringing the application; (b) the merits of the foreshadowed recovery proceeding under s 588F(1) based on a preliminary review of the issues; (c) any likely prejudice that would be suffered if the application for extension of time were granted. See, for example, Carter (Liquidator), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 2076 at [14] per Gleeson J and the cases there cited. 31 With respect to (a) above, a liquidator's hesitancy to take action in circumstances where he or she is without funds may be a relevant factor in considering any explanation for the delay (see Parker, in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687 (Parker); Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) [2018] FCA 102 (Marsden) at [68]–[79]). 32 Further, with respect to (b) above, "what is required is 'an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit'" (see Marsden at [60] citing Walker and Maloney v CBA Corporate Services (NSW) Pty Limited (2012) 88 ACSR 153; [2012] FCA 328 at [44]). CONTENTIONS OF THE PARTIES 33 The Liquidator contended that the extension of time is appropriate in this matter because, although his investigations have been significantly delayed, that delay was largely caused by the inaction of Ms Donnellon and Mr Prince; the inadequacy of Holdings' records; and the fact that he has not been funded by Holdings' creditors and therefore has had to meet the costs of the liquidation personally. As to the merits, he contended that the prospects of him establishing that Holdings was insolvent at the relevant time have, on a preliminary review of Holdings' records, albeit that they are inadequate, and completely absent in some circumstances, have at least some merit. Further, he contended that, since the impugned transactions also gave rise to a cause of action for which no extension of time is required, and in respect of which Mr Prince has already been joined as a party to the proceeding, the extension of time to pursue this claim against him will not cause him to suffer any real prejudice. 34 Mr Prince appeared in person at the hearing of this application. He failed to file any written submissions, but, in oral submissions, he contended that the extension of time should not be granted because of the extent of the Liquidator's delay. He claimed that delay amounted to him "resting on his hands". Further, he claimed in an affidavit he filed in opposition to this application that, throughout the course of the liquidation, he had made "consistent efforts" to communicate with the Liquidator, many of which remained "without reply". In response to the Liquidator's claim that "reviews were regularly undertaken", he highlighted the period of five months between 13 September 2016 and 6 February 2017 during which he claimed he had received no contact from the Liquidator. CONSIDERATION 35 For the following reasons, I consider it is appropriate to exercise my discretion to grant the extension of time that the Liquidator has sought in this matter. First, while the Liquidator concedes that there has been a significant delay in his making this application, having regard to the history set out above (at [5]–[26]), I accept his contention that most of that delay has been occasioned by Mr Prince's, and to a lesser extent, Ms Donnellon's, failures to respond to the Liquidator's queries in a timely fashion. In this regard, I reject Mr Prince's claims that, during the course of the liquidation, he has attempted throughout to assist the Liquidator in his investigations. I consider these claims are belied by a number of aspects of the history above, including his failure to provide any documents, or other information, to support the assertions he made in his email of 8 June 2018 (see at [18] above) and his disingenuous reliance on the "Queensland floods" (see at [19] above) to attempt to explain the deficiencies in Holdings' records. I have also had regard to the parlous state of Holdings' records and to the Liquidator's evidence, which I accept, that he has not been funded by the creditors' of Holdings and has been meeting the costs of the liquidation from his own resources. 36 Secondly, having regard to the history set out above, I am also satisfied that the proposed claim is not so devoid of merits that it would be unfair to extend the period of Mr Prince's exposure to it. 37 Finally, in all the circumstances outlined above, I do not consider Mr Prince will suffer any relevant prejudice by this extension of time being granted. In this respect, I have taken account of the fact that he has been involved in the liquidation from the outset and he has already been joined as a defendant in this proceeding. 38 For these reasons, I consider it is fair and just, in all the circumstances, to grant the extension of time which the Liquidator has sought. I will therefore make an order consistent with that sought by the Liquidator at [4] above, with the exception of the date to which the extension is sought. On that aspect, since Mr Prince was joined as a defendant in this proceeding on 14 November 2019, I consider it is appropriate to extend the time up to and including that date. I will so order. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves. Associate: Dated: 15 July 2020 SCHEDULE OF PARTIES NSD 351 of 2019 Defendants Fourth Defendant: ANDREW PRINCE