Supreme Court New South Wales Medium Neutral Citation: Mitchell Warren Ball (in his capacity as official liquidator of Wealthfarm Group Services) v Nicholas Quinn Sinclair [2015] NSWSC 2103 Hearing dates: 31 August 2015 Date of orders: 31 August 2015 Decision date: 31 August 2015 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Judgment for the plaintiff. Catchwords: CORPORATIONS – insolvent trading – pleading – necessity to plead date of insolvency and date when debt incurred – presumption of insolvency under (CTH) Corporations Act 2001, s 588E(4) – failure to keep financial records under s 286 – bare assertion of liquidator insufficient to found presumption – proof of actual insolvency – whether claims for damages for disclaimed lease constitute "debts" – whether debt to Department of Employment in respect of claims of company's former employees satisfied under FEG Scheme recoverable – whether Department is assignee of employees' claims for purposes of s 588M(1)(b) – assessment of loss or damage suffered by creditor – credit to be given for probable dividend. Legislation Cited: (CTH) Corporations Act 2001, s 286, s 286(1), s 286(2), s 588E(4), s 588G, s 588M, s 588M(1) (NSW) Civil Procedure Act 2005, s 100 Cases Cited: Edenden v Bignell [2007] NSWSC 1122 Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433; 37 ACSR 589 In the matter of Salfa Pty Limited (in liquidation) (ACN 082 308 101) [2014] NSWSC 1493 Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 Texts Cited: ASIC Information Sheet Number 76 Category: Procedural and other rulings Parties: Mitchell Warren Ball (in his capacity as official liquidator of Wealthfarm Group Services Pty Ltd (in liquidation) ACN 144 779 475) (first plaintiff) Wealthfarm Group Services Pty Ltd (in liquidation) ACN 144 779 475 (second plaintiff) Nicholas Quinn Sinclair (defendant) Representation: Counsel: F Salama (plaintiffs) Solicitors: HP Legal Pty Ltd (plaintiffs) File Number(s): 2015/14349 Judgment (ex tempore) 1. HIS HONOUR: The first plaintiff is the liquidator of the second plaintiff company Welfare Group Services Pty Ltd, which was incorporated on 23 June 2010 and went into liquidation pursuant to a creditors' voluntary winding up on 9 August 2013. By statement of claim filed on 14 May 2015, the plaintiffs sue the sole shareholder and director of the company, the defendant Nicholas Quinn Sinclair, for compensation pursuant to (CTH) Corporations Act 2001, s 588M, for contravention of the duty imposed by s 588G to prevent the company from trading while insolvent. The claim is brought in respect of debts due to nine creditors of the company, totalling $1,524,296. 2. On an application under s 588M in respect of a contravention of s 588G, the plaintiff liquidator must establish that the company incurred a debt at the time the defendant was a director; that at the time the debt was incurred, the company was insolvent or became insolvent by reason of incurring the debt; and that at that time, the director was aware that there were grounds to suspect insolvency, or that a reasonable person in a like position would have been so aware. Having established those matters, the liquidator is entitled, pursuant to s 588M, to recover from the director as a debt due to the company an amount equal to the amount of loss or damage suffered by the creditor by reason of the company's insolvency. 3. In such a case, it is necessary to plead when each debt relied on was incurred, and to plead when the company is said to have become insolvent, so that it can be seen that insolvency is established at the date when each relevant debt was incurred. The pleadings in the present case do not clearly do that, but with resort to the evidence, the proofs of debt and the overall circumstances of this company, it is possible to overcome the inadequacies of the pleading. 4. The plaintiff relied on the presumption of insolvency provided for by s 588E(4), which arises where a company which is being wound up has failed to keep financial records in relation to a period as required by s 286(1), or to retain such records for a period of seven years as is required by s 286(2). In order to found that presumption, the plaintiff relies on the liquidator's affidavit of 21 August 2015, in which the liquidator identifies various records that have been provided by the director in response to a request, refers to ASIC Information Sheet Number 76 (which outlines the type of records required to be maintained by private companies), and expresses the bald conclusion that the records provided by the defendant did not comply with Corporations Act, s 286, that they are inadequate in that they do not adequately or properly explain the transactions of the company during a certain period, that they are deficient, and that they do not enable financial statements of the company to be prepared and audited. 5. Against those bald assertions, one is faced with the annual financial statements of the company for each of the financial years ending 30 June 2011, 2012 and 2013, which appear to set out in detail the financial position of the company for each of those years, income and expenditure for each of those years, and bespeaks the keeping of sufficient records to enable an annual financial statement to be prepared. As I said in In the matter of Salfa Pty Limited (in liquidation) (ACN 082 308 101) [2014] NSWSC 1493 (at [17]), the bare assertion of a liquidator to the effect that it has become apparent that the company did not keep adequate books and records is not acceptable evidence of the matters required to found the presumption. In this case, I am unpersuaded on the evidence that the company failed to keep adequate books and records. 6. Alternatively, the liquidator relies on actual insolvency. In this respect, the annual financial statements provide a useful starting point. The financial statements for the year ended 30 June 2011, which is the first full financial year of the company's existence, show at the end of that year a deficiency of funds of $1,114,771, which equates to its trading loss for its first year. Its total assets of approximately $24,000 were dwarfed by its total liabilities of $1,139,000. Its current assets, also said to be $24,208, were offset by current liabilities of $849,000. In a year in which its expenditure on wages and salaries for employees was $1,576,000, it showed PAYG withholdings payable of $334,000, which suggests that very little of the PAYG attributable in respect of salaries and wages had been remitted. Its superannuation contributions for employees for the year as an expense was shown as $143,000, and superannuation payable as a liability showed as $151,000, suggesting that it was not able to pay any of its superannuation obligations. Trade creditors of $190,000 on their own massively outweighed the total current assets of $24,000. 7. On that evidence, it seems to me that at no time from its incorporation was the company ever solvent. The position did not improve in subsequent years. I am satisfied that the company was insolvent from the date of incorporation and has remained insolvent ever since. 8. In those circumstances, it is unnecessary to identify precisely when each of the debts that existed at the date of liquidation was incurred, as it follows that each was incurred at a time when the company was insolvent. 9. The matters to which I have referred – in particular, the inability to pay statutory debts such as tax and superannuation contributions – must have been known to the sole shareholder and director of the company and, in any event, it would have been manifest to a reasonable person in the circumstances that the company was unable to pay those debts. 10. Some of the debts, however, require some elaboration. 11. The Australian Taxation Office is owed $435,939 on running balance account, and $82,708 in respect of superannuation arrears. The liquidator recovered as a preference some $144,000 from the ATO. That appears to have been reflected in an amended proof of debt later lodged by the ATO, so that the amount claimed in respect of the ATO debt properly reflects a larger amount on account of the recovery of the preference. 12. $93,994 is claimed in respect of a debt due to GO & MJT Nominees Pty Ltd, apparently the lessor of premises to the company. In the GO & MJT Nominees proof of debt, approximately $11,000 is characterised as arrears of rent, and $81,328.17 as "damages" in circumstances where the liquidator disclaimed the lease. Prima facie, being a claim for damages, it is not a "debt" incurred within the meaning of s 588G, and is not recoverable under s 588M. I will deduct that amount from the total claim. 13. $64,441.76 is claimed in respect of a debt due to the Department of Employment, being the amount advanced by that Department under the FEG scheme in respect of claims of former employees of the company. I was somewhat troubled as to whether this could be claimed under s 588M – as the person to whom the debt was incurred, being the relevant employee, could not be said to have suffered any loss or damage because of the company's insolvency, because the employee has been paid out under the FEG scheme. However, as it seems to me, s 588M(1) speaks in sub-paragraph (a) of the incurring of a debt by a company – which, on its face, includes a debt incurred to an employee – and then sub-paragraph (b) speaks of the person to whom the debt "is owed" having suffered loss by reason of the company's insolvency. A person to whom the debt "is owed" may be a person to whom the debt has been assigned after it was first incurred, and thus is not necessarily the same person as the original creditor. The effect of the FEG scheme is that the debts originally due to the employees are assigned to the Department, who thereafter is the person "to whom the debt is owed" under sub-paragraph (b), and it can be said that the Department as such an assignee has suffered loss or damage in relation to the debt because of the insolvency. Accordingly, it seems to me that the amount owing to the Department of Employment can be claimed on that basis. 14. As I also pointed out in Salfa (at [21]-[24]), s 588M makes recoverable the loss or damage suffered by the creditor in relation to the debt because of the insolvency, not the original amount of the debt. Although the amount of the debt will be the starting point, it is not necessarily the amount of the loss. The cases which are sometimes wrongly cited for the proposition that the loss is equivalent to the debt do not in fact say that [see Powell v Fryer [2001] SASC 59; (2001) 159 FLR 433; 37 ACSR 589 at 602-603; Tourprint International Pty Ltd v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 at [79]; Edenden v Bignell [2007] NSWSC 1122]. 15. Assessment of the loss or damage suffered by a creditor by reason of the insolvency must necessarily bring to account any dividend paid or likely to be paid to the creditor. In this case, such evidence as there is indicates that the assets in the liquidation comprise debtors of $4,102, recoveries from the ATO of $144,586; a total of $148,821. The costs of the liquidation, to date and anticipated, amount to some $103,402. The difference, which is the amount that prima facie would be available to fund a dividend for creditors, is $45,419. That sum should be deducted from the total amount of the debts to calculate the amount of the loss or damage suffered by the creditors by reason of the company's insolvency. 16. As it seems to me, therefore, there should be judgment for the plaintiffs for the sum of $1,397,549.15 together with pre-judgment interest under (NSW) Civil Procedure Act 2005, s 100, from the date of the demand of 12 February 2014 to date. That sum is calculated by deducting from the total debts of $1,524,296.32 the amount – which is only damages and not debt – of $81,328.17, and the amount otherwise available to fund a dividend of $45,419. 17. I direct that the plaintiff lodge with my Associate a minute of judgment setting out the proper amount of the judgment together with a schedule showing how the interest component is calculated. The minute of judgment should also provide for an order that the defendant pay the plaintiffs' costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 September 2016