Supreme Court New South Wales Medium Neutral Citation: Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd (No 2) [2017] NSWSC 707 Hearing dates: 5 June 2017 Decision date: 07 June 2017 Jurisdiction: Equity - Corporations List Before: Gleeson JA Decision: (1) The defendant pay to ACN 166 338 138 Pty Ltd (in liq) the sum of $61,420.89. (2) The defendant pay the plaintiff's costs of the proceeding. Catchwords: PROCEDURE – where liquidator seeking to recover alleged unfair preference from creditor of company in liquidation – whether appropriate to allow liquidator to reopen his case on the issue of insolvency – where at trial counsel for the liquidator had sought to rely on the presumption of insolvency under Corporations Act, s 588E(4) when that presumption was not available because of s 588E(7) – where liquidator's solicitor was not aware that all of the evidence relating to insolvency of company in liquidation was not before the Court at trial – where defendant will suffer no prejudice, having not appeared at any stage of the proceedings. CORPORATIONS – external administration – application to recover alleged unfair preference under Corporations Act, s 588FF – whether company insolvent – whether temporary lack of liquidity or endemic shortage of working capital – where substantial deficiency between debts then payable and payable in the immediate future compared to the company's cash and other liquid resources – where several cheques drawn on company's bank accounts dishonoured – where company's bank accounts were inflated by passing cheques between them – where substantial debts from relevant period remained unpaid at date of liquidation. Legislation Cited: Civil Procedure Act 2005 (NSW), s 56(1) Corporations Act 2001 (Cth), ss 95A, 286(1), 588E(4), 588E(7), 588FF Cases Cited: Australian Securities and Investments Commission v Rich [2006] NSWSC 826 Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300; [1993] HCA 6 Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75 Inspector General in Bankruptcy v Bradshaw [2006] FCA 22 Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd [2017] NSWSC 539 Smith v NSW Bar Association (1992) 176 CLR 256; [1992] HCA 36 Taouk v Louis (No. 1) [2014] NSWSC 656 The Owners – Strata Plan No 74602 v Brookfield Australia Investments Ltd [2015] NSWSC 1682 Urban Transport Authority v Nweiser (1992) 28 NSWLR 471 Category: Principal judgment Parties: James Alexander Shaw as liquidator of ACN 166 338 183 Pty Ltd (in liq) (Plaintiff) KPR Recruitment Aust Pty Ltd (Defendant) Representation: Counsel: Mr D Allen (Plaintiff) Solicitors: Catalyst Legal (Plaintiff) File Number(s): 2015/255116 Judgment 1. GLEESON JA: On 5 May 2017, I delivered reasons for judgment in a claim by the plaintiff, Mr James Shaw, as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) (Projects) against the defendant, KPR Recruitment Aust Pty Ltd (KPR) for an order under s 588FF of the Corporations Act 2001 (Cth) (the Corporations Act) to recover an alleged unfair preference in the amount of $61,420.89: Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd [2017] NSWSC 539. 2. I concluded that the liquidator had established all elements of his claim except proof, on the balance of probabilities, that Projects was insolvent on 28 April 2015, being the date on which Projects paid $61,420.89 to KPR. Subject to one matter, I indicated that I intended to dismiss the plaintiff's interlocutory process filed 20 March 2017 with no order as to costs. The qualification I expressed at [47] of my reasons was as follows: However, I would be prepared to entertain an application by the liquidator to re-open his case if made promptly after delivery of these reasons. That is because it is tolerably clear that the liquidator has approached this proceeding under the mistaken view that the presumption in s 588E(4) would be available to establish the insolvency of Projects. There would seem to be no prejudice to KPR if the liquidator sought to re-open his case to adduce further evidence on the issue of insolvency, since KPR has not appeared in the proceedings. Nonetheless, notice of such an application, if made, should be given to KPR. 1. The reference to the presumption in Corporations Act, s 588E(4) is a reference to the presumption of insolvency which is to be made in proceedings on an application under s 588FF by the company's liquidator, if it is proved that the company breached Corporations Act, s 286(1) by failing to keep adequate accounting records. However, the effect of s 588E(7) is that the presumption of insolvency under s 588E(4) is only available in a recovery proceeding seeking relief under s 588FF, if the creditor who is a party to the unfair preference is a related entity of the company. In the present case, the defendant, KPR, was not a related party to Projects. 2. On 5 May 2017 I make the following orders, directions and notation: (1) Grant liberty to the plaintiff to apply within 14 days of these reasons for leave to re-open the plaintiff's case to adduce further evidence on the issue of insolvency. (2) Direct that notice of any application to re-open the plaintiff's case be served on the defendant. (3) Note that if the plaintiff does not exercise the liberty to apply within the time stated in order 1, the Court will make an order that the plaintiff's interlocutory process filed 20 March 2017 be dismissed with no order as to costs. 1. By interlocutory process filed on 19 May 2017, the liquidator applied for leave to reopen his case and to lead further evidence on the issue of insolvency. Notice of the reopening application has been given to the defendant, KPR, in accordance with directions of the Court given on 16 May 2017. KPR did not appear on the reopening application and has not otherwise participated in the proceeding, let alone entered an appearance. 2. The further material which the liquidator seeks to adduce on the issue of insolvency is contained in Exhibit ASF-3 to the affidavit of the liquidator's solicitor, Mr Anthony Foate. That material includes copies of Projects' bank accounts, a schedule of movements on each account, and an aged creditors' analysis prepared by the liquidator. Issues 1. Two questions arise on the present application. First, whether the Court should allow the reopening application after the Court has delivered its reasons for judgment. Second, if the liquidator is allowed to reopen his case, whether the further evidence adduced by the liquidator establishes that Projects was insolvent on the relevant date, namely, 28 April 2015. 2. The facts and circumstances relating to the liquidator's claim to recover the alleged unfair preference received by KPR are set out in my earlier reasons, which I will not repeat. These reasons should be read together with my earlier reasons. Principles governing grant of leave to reopen 1. The principles governing an application to reopen are well settled. In Smith v NSW Bar Association (1992) 176 CLR 256 at 266 - 267; [1992] HCA 36, the plurality said: If an application is made to re-open on the basis that new or additional evidence is available, it may be relevant, at that stage, to inquire why the evidence was not called at the hearing. If there was a deliberate decision not to call it, ordinarily that will tell decisively against the application. But assuming that that hurdle is passed, different considerations may apply depending on whether the case is simply one in which the hearing is complete, or one in which reasons for judgment have been delivered. It is difficult to see why, in the former situation, the primary consideration should not be that of embarrassment or prejudice to the other side. In the latter situation the appeal rules relating to fresh evidence may provide a useful guide as to the manner in which the discretion to re-open should be exercised. 1. It has also been said that the Court should not provide a back door method by which unsuccessful litigants can seek to re-open their cases by giving an opportunity to reargue them: Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300 at 303; [1993] HCA 6 (Mason CJ). 2. In Urban Transport Authority v Nweiser (1992) 28 NSWLR 471 at 478, Clarke JA (Mahoney and Meagher JJ agreeing) stated the following general principles in relation to the grant of leave to reopen: The principle which should guide the court in determining whether to grant an application for leave to re-open is whether the interests of justice are better served by allowing or rejecting the application as the case may be. No doubt it is relevant to take account of a number of matters such as likely prejudice to the party resisting the application and the reasons why the evidence was not led in the first place. … Where the decision was not made for tactical reasons and is based on a mistaken apprehension of the law or the facts the case is more appropriately to be considered as one in which the application has resulted from an error by counsel. 1. The categories of case in which the Court may grant leave to re-open were summarised by Kenny J in Inspector General in Bankruptcy v Bradshaw [2006] FCA 22 at [24] (Bradshaw) as follows: The authorities indicate that, broadly speaking, there are four recognised classes of case in which a court may grant leave to re-open, although these classes overlap and are not exhaustive. These four classes are (1) fresh evidence (Hughes v Hill [1937] SASR 285 at 287; Smith v New South Wales Bar Association [No 2] (1992) 108 ALR 55 at 61-2); (2) inadvertent error (Brown v Petranker (1991) 22 NSWLR 717 at 728 (application to recall a witness); Murray v Figge (1974) 4 ALR 612 at 614 (application to tender answers to interrogatories); Henning v Lynch [1974] 2 NSWLR 254 at 259 (application to re-open); (3) mistaken apprehension of the facts (Urban Transport Authority of NSW v Nweiser (1992) 28 NSWLR 471 ("UTA") at 478; and (4) mistaken apprehension of the law (UTA at 478). In every case the overriding principle to be applied is whether the interests of justice are better served by allowing or rejecting the application for leave to re-open: see UTA at 478; also The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust v Lenard's Pty Ltd (No 2) [2004] FCA 1310 ("Silver Fox") at [22] and [25]. 1. The summary by Kenny J in Bradshaw has been approved on many occasions, most recently by the Full Court of the Federal Court of Australia (Rares, Murphy and Davies JJ) in Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75 at [169]. 2. In Australian Securities and Investments Commission v Rich [2006] NSWSC 826 at [18], Austin J listed a number of factors potentially relevant to consideration of whether to permit a reopening (in the context of a civil penalty case): (a) the nature of the proceeding; (b) whether the occasion for calling the further evidence ought reasonably to have been foreseen; (c) the consideration of fairness that the defendant is entitled to know all of the evidence he has to meet in taking forensic decisions as to cross-examination and the nature and extent of the evidence he will himself adduce on the matters in question; (d) the extent to which the plaintiff has embarked upon calling evidence on the issue in question in its case in chief; (e) the importance of the issue on which the further evidence is sought to be adduced to the pleaded issues in the case; (f) the degree of relevance and probative value of the further evidence sought to be adduced and its potential to involve an undue waste of time; (g) the prejudice to the defendant in terms of delay in the completion of the proceeding and the consequential costs; (h) the public interest in the timely conclusion of litigation; (i) what explanation is offered by the plaintiff for not having called the evidence in chief. 1. Although these factors provide useful guidance, ultimately the discretion to permit a party to re-open their case must be exercised having regard to all the circumstances of the case: Taouk v Louis (No. 1) [2014] NSWSC 656 at [11] (Darke J); The Owners – Strata Plan No 74602 v Brookfield Australia Investments Ltd [2015] NSWSC 1682 at [43] (Stevenson J). Those circumstances include the public interest in a just, quick and cheap resolution of the real issues in the proceedings and the need for finality of litigation as reflected in the Civil Procedure Act 2005 (NSW), s 56(1). Application of principles to the present case 1. A consideration of the relevant factors referred to in ASIC v Rich leads to the conclusion that the liquidator should be given leave to reopen in the present case, notwithstanding that application is made after the delivery of the reasons for decision. 2. As to the nature of the proceeding, a recovery proceeding under Corporations Act, s 588FF is brought by the liquidator for the benefit of creditors of the company. If leave to re-open is refused, it is the creditors who would suffer from the failure of the liquidator to initially adduce evidence proving insolvency on the date the alleged unfair preference was given to KPR. 3. The explanation for not adducing the further material at the earlier hearing was given in an affidavit by the liquidator's solicitor. Mr Foate deposed that neither the liquidator nor he intended to rely upon any presumption of insolvency, and that this was a mistake made by counsel appearing for the liquidator at the hearing. Mr Foate also deposed that, at the time of the hearing he erroneously thought that the affidavits to be relied upon contained all the material in the liquidator's possession. That was not so and the liquidator now seeks to rely upon the material comprised in exhibit ASF-3 to Mr Foate's affidavit. 4. I accept the explanation given by Mr Foate. In part, there was a misapprehension of law by the liquidator's counsel concerning the presumption in s 588E(4), and, in part, a misapprehension of the facts by Mr Foate concerning the materials available to the liquidator relevant to the proof of insolvency, such as the bank statements of Projects. There is nothing which suggests that the liquidator made a tactical decision to omit to lead such evidence on the issue of insolvency. 5. As to the importance of the further evidence, it may be accepted that the probative value of such material is high. 6. There is no unfair prejudice to the defendant, KPR, who has chosen not to participate in the proceedings. 7. Whilst there is a public interest in the just, quick and cheap resolution of proceedings (s 56 Civil Procedure Act), the short delay and additional court time involved in a further hearing in the present case, do not outweigh the interests of justice, and in particular the interests of the creditors of Projects, in determining the liquidator's claim on the merits. 8. Leave to reopen the liquidator's case will be granted. Has the liquidator established insolvency of Projects on 28 April 2015? 1. The proper approach to the test of insolvency under Corporations Act, s 95A is discussed at [23]-[29] of my earlier reasons. I will not repeat what is set out there. 2. The further material relied upon by the liquidator establishes the following. 3. Projects maintained five bank accounts of which only two were active: one with the Commonwealth Bank of Australia (CBA) and the other with Westpac Banking Corporation (Westpac). 4. The opening and closing balances on the CBA account and the Westpac account for the months March, April, May and June 2015, were summarised by the liquidator as follows: CBA March 2015 April 2015 May 2015 June 2015 Opening balance -14.15 -1,760.70 -62.45 -211.87 Closing balance -1,760.70 -62.45 -211.87 0 Westpac March 2015 April 2015 May 2015 June 2015 Opening balance -97.39 -29,402.36 -166 55,257.85 Closing balance -29,402.36 -166 55,257.85 -2,272.34 1. In June 2015, there were no transactions on the CBA account other than bank fees. 2. Although there is no direct evidence of the requests by Projects for funding under its factoring arrangement with 180 Capital Pty Ltd (180 Capital), the last advance from 180 Capital of $200,000.00 was received by Projects as a credit to the Westpac account on 10 March 2015. 3. It is also apparent that the moneys payable to Projects by Lend Lease Management (Lend Lease) under the company's contract with Lend Lease were deposited into the Westpac account. After April 2015, there were only two further payments from Lend Lease: $11,000 on 15 May 2015 and $310,475.67 on 29 May 2015. Withdrawals from the Westpac account on 29 May 2015 reduced the credit balance to $55,257.85. By 30 June 2015, the Westpac account was in debit of $2,272.34, as indicated above. Cheques dishonoured on CBA account 1. There were a number of reversals and dishonoured cheques on the CBA account for the months of February to May 2015. In February 2015, there were two dishonoured cheques: * 2 February 2015 $37,001.25; * 27 February 2015 $ 5,469.55. 1. In April 2015, there were six dishonoured cheques as follows: * 10 April 2015 $ 32,141.93; * 17 April 2015 $ 35,000.00; * 20 April 2015 $ 43,215.00; * 21 April 2015 $ 107,300.00; * 27 April 2015 $ 145,000.00; * 30 April 2015 $ 2,144.56 (cheque no. 904484). 1. In May 2015, there were two dishonoured cheques as follows: * 11 May 2015 $ 16,837.46; * 18 May 2015 $ 2,144.56 (cheque no. 904484) 1. It may be observed that cheque no. 904484 for $2,144.56 was dishonoured twice, first on 30 April 2015 and again on 18 May 2015. Deposits reversed on Westpac account 1. In April and May 2015, three deposits into the Westpac account were later reversed when the cheques the subject of those deposits (in each case, drawn on the CBA account) were dishonoured by the CBA as follows: * 16 April 2015 $ 35,000.00 (reversed on 17 April 2015); * 21 April 2015 $145,000.00 (reversed on 27 April 2015); * 8 May 2015 $ 16,837.46 (reversed on 11 May 2015). 1. There is no evidence that Projects had an overdraft arrangement on the CBA account. Plainly, CBA did not agree to Projects overdrawing on its cheque account. CBA dishonoured the cheques drawn by Projects when there were insufficient credit funds in the CBA account to meet those cheques. Debts payable by Projects 1. Projects incurred debts totalling $568,799.12 in April 2015 or earlier. Of those debts, $567,332.46 remained unpaid as at 10 December 2015, the date of liquidation. According to the aged creditor analysis prepared by the plaintiff, the only amount repaid between May 2015 and the date of liquidation was an amount of $1,466.66 paid in partial satisfaction of a larger debt owed to Wilson Parking Australia 1992 Pty Ltd. The unpaid debts included the debt of $204,853.00 to Industrial Maintenance and Fabrications Pty Ltd (IMF) incurred on 30 March 2015 and payable on 29 April 2015 and the debt of $16,850.32 to iSoft Group Pty Ltd incurred in April 2015. 2. The debt of $42,285.39 owing by Projects to KPR was incurred in December 2014 and January and February 2015. This debt, plus an amount in respect of legal costs, was only paid by Projects on 28 April 2015 in response to the winding up application filed by KPR on 2 April 2016. 3. Significant debts were also incurred by Projects in May 2015, which remained unpaid as at the date of liquidation, including a further debt to IMF of $203,253.60. 4. The originating process to wind up Projects was filed by IMF on 31 August 2015. Cash and other liquid assets 1. The extent of cash and other liquid assets available to Projects as at the end of April 2015 is reflected in the bank statements for the CBA account and the Westpac account. As mentioned, the funding from 180 Capital under the factoring arrangement and progress payments by Lend Lease under its subcontract with Projects were deposited into the Westpac account. 2. After April 2015, there were no deposits of any significance made to the CBA account, and only three significant deposits made to the Westpac account, one on 11 May 2015 of $18,386.84 and two from Lend Lease, the first on 15 May 2015 of $11,000 and the other on 29 May 2015 of $310,475.67. As indicated, the deposits into the Westpac account swelled the credit balance of that account only for a very short period of time. By the end of May 2015, the credit balance of the Westpac account had been reduced to $55,257.85. By the end of June 2015 that credit balance had been exhausted. Further and importantly, there were no significant deposits made to the Westpac account in June 2015. Conclusion on insolvency 1. The question raised by the cashflow test of insolvency under Corporations Act, s 95A, is whether Projects was suffering from a temporary lack of liquidity or an endemic shortage of working capital in April 2015, in particular on 28 April 2015. 2. The financial picture of Projects as at the end of April 2015 is one where the debts due and payable and to become due and payable in the immediate future far exceeded the extent of cash and other liquid assets available to Projects. As at 28 April 2015, there was a debit balance of $37.65 on the CBA account and a small credit balance of $1,058.85 on the Westpac account. The debts incurred in April and March 2015 and earlier, which remained unpaid (at the end of April 2015) totalled $586,799.10. 3. Whilst the dishonoured cheques on the CBA account are an indicator of insolvency, they have an additional significance in the present case. First, three of the dishonoured cheques (two in April 2015 for $35,000 and $145,000, and one in May 2015 for $16,837.46) were deposited into the Westpac account when there were insufficient funds in the CBA account to pay those cheques on presentation. The passing of cheques between Projects' bank accounts in those circumstances is further indicator of insolvency. 4. Second, the multiple dishonours of cheque no. 904484 for $2,144.56 within a short period of time in late April and mid-May 2015 takes on added significance as an indicator of insolvency, in view of the relatively small amount of that cheque. 5. Plainly, Projects was unable to pay all of its debts which were then due and payable as at 28 April 2015 and those which became due and payable in the immediate future. That inability to pay was not purely temporary. The activity on the CBA account and the Westpac account in April, May and June 2015 establishes that the cash and other liquid assets of Projects in the form of funding from 180 Capital and progress payments from Lend Lease (and from one other client), were insufficient by a margin of well over $500,000 to meet all of Projects' debts which were then due and payable and those which became due and payable in the immediate future. 6. There is nothing which suggests that Projects had resources other than cash which were readily realisable by sale or borrowing upon security to meet its debts as and when they fell due as at the end of April 2015. 7. Viewed objectively, and taking into account the immediate future, I am satisfied that Projects was insolvent on 28 April 2015. It is not necessary to express any view as to whether Projects was insolvent on any earlier date. 8. Having regard to the above conclusion and the findings in my earlier reasons, the liquidator has made out his claim for relief under Corporations Act, s 588FF. Although the company is not a party to the proceedings, the appropriate form of order is that KPR pay the amount of the unfair preference of $61,420.89 to the company: Corporations Act, s 588FF(1). Orders 1. Accordingly, I make the following orders: 1. The defendant pay to ACN 166 338 138 Pty Ltd (in liq) the sum of $61,420.89. 2. The defendant pay the plaintiff's costs of the proceeding. ********** Amendments 14 June 2017 - CaseLaw technical error - amendment to jurisdiction 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: 14 June 2017