C Pty Ltd (In Liquidation) & Burt
[2024] FedCFamC1F 428
•26 June 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 1)
C Pty Ltd (In Liquidation) & Burt [2024] FedCFamC1F 428
File number: MLC 13359 of 2022 Judgment of: MCGUIRE J Date of judgment: 26 June 2024 Catchwords: FAMILY LAW – PRACTICE AND PROCEDURE
Application seeking to appeal the Liquidator’s rejection of the Applicant’s Proof of Debt – where applicant here is applicant in ongoing family law proceedings – where respondent to family law proceedings is sole director and shareholder of company now in liquidation and where applicant seeks to prove a debt in the liquidation and where application and proceedings involving liquidation transferred to and vested in this Court from the Supreme Court of Victoria – consideration of principles of proof of debt in liquidation and consideration of the facts – application proceeds as hearing de novo although termed an “appeal” – application/appeal dismissedLegislation: Corporations Act 2001 (Cth) s 90-15 Schedule 2
Family Law Act 1975 (Cth) s 90SN
Cases cited: Bilta (UK) Ltd (in liquidation) and others v Nazir and others (No.2) [2015] UKSC 23
KIS Realty Pty Ltd v Yeo and Rimbaldi [2016] WASC 149
Re Birds Stores Pty Ltd (1931) 37 ALR 94
Re Elina Construction and Developing Group Pty Ltd [2023] VSC 639
Division: Division 1 First Instance Number of paragraphs: 59 Date of hearing: 27 and 28 May 2024 Place: Melbourne Counsel for the Applicant: Mr Schicht Solicitor for the Applicant: Vasilaras & Co Counsel for the Respondents: Mr Serong Solicitors for the Respondents: Serong Legal ORDERS
MLC 13359 of 2022 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 1)
BETWEEN: MR BURT
Applicant
AND: C PTY LTD (IN LIQUIDATION)
First Respondent
MR PQ IN HIS CAPACITY AS LIQUIDATOR OF C PTY LTD (IN LIQUIDATION)
Second Respondent
ORDER MADE BY:
MCGUIRE J
DATE OF ORDER:
26 JUNE 2024
THE COURT ORDERS THAT:
1.The Application/Appeal filed 12 March 2024 be dismissed.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Part XIVB of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish an account of proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under the pseudonym of C Pty Ltd & Burt has been approved pursuant to subsection 114Q(2) of the Family Law Act 1975 (Cth).
REASONS FOR JUDGMENT
McGUIRE J:
APPLICATIONS
This is an appeal by the Applicant against a refusal by the Liquidator of the Respondent Company to accept a proof of debt in the liquidation of that company.
The Applicant and his former de facto partner, Ms Merrill, have been, and remain, embroiled in family law proceedings over many years for property settlement.
On 10 August 2018 Berman J made final orders as to property settlement. The Applicant appealed those orders. That appeal has been stayed. The applicant also made application pursuant to s 90SN of the Family Law Act 1975 (Cth) (“the Act”) seeking those orders be varied or set aside and apparently on a claim of miscarriage of justice by reason of fraud, the suppression of evidence, or the giving of false evidence on the part of Ms Merrill. That application is listed for trial as to the preliminary issue under s 90SN of the Act in a matter of weeks.
A company, C Pty Ltd, holds real property assets relevant to the family law proceedings. Ms Merrill is the sole director and shareholder of that company.
In mid-2019 C Pty Ltd was placed into liquidation. It is commonly understood that the assets of C Pty Ltd at value far outweigh its liabilities.
Ms Merrill was also declared personally bankrupt and, although since discharged, her Trustee in Bankruptcy remains active in the Family Court proceedings where it is claimed Ms Merrill’s creditors remain unsatisfied, but with assets available to satisfy those creditors.
On 26 June 2020 the Applicant served an informal Proof of Debt on the Liquidator of C Pty Ltd.
In early 2021 the Liquidator commenced proceedings in the Supreme Court of Victoria.
In late 2022 Associate Justice Gardiner transferred the Supreme Court proceedings to the Family Court given the ongoing litigation between the Applicant and Ms Merrill and pursuant to cross-vesting provisions.
On 27 February 2024 the applicant’s Proof of Debt was rejected by the Liquidator. The Applicant now appeals that rejection.
As a putative creditor, and whose proof of debt has been rejected by the Liquidator, the Applicant has a financial interest in the liquidation and therefore has standing.
THE ASSERTED DEBT
In 1999 the Applicant took out an Income Protection Policy with LM Insurance.
The Applicant deposes that in 2009 he suffered medical episodes that qualified him for payment under the terms of the LM Insurance policy and began receiving payments in late 2009.
The Applicant deposes that, by reason of his poor health, in late 2010 he assigned the policy to his then de facto partner, Ms Merrill, who then received the instalment payments which he says were to be held on trust for him pursuant to a constructive trust.
Ms Merrill signed a document dated “15th day of 2022” (emphasis added) which is not more precisely dated but which states:
I, [Ms Merrill], ACKNOWLEDGE and HEREBY CONFIRM that:
1.[In late] 1999, (the Applicant) entered into by contract the policy of insurance with [LM Insurance], policy number […] (“the Policy”).
2.[In late] 2010, the Policy was transferred to me.
3.At all times I have held the Policy on Trust for, and the benefit of, [the Applicant].
Dated this 15th day of 2022
Signed:… Signed:…
[Ms Merrill] Witness Name:…
Notably:
(i)the document is effectively undated, or, at least, uncertain as to its date of purported execution;
(ii)the purported Declaration of Trust seemingly postdates the liquidation of [C Pty Ltd]; and
(iii)the parties to the purported trust are, [Ms Merrill] and (the Applicant). [C Pty Ltd] is not a party to the trust.
In mid-2019 C Pty Ltd was placed into liquidation. The unchallenged evidence of Mr PQ,[1] the Liquidator, of C Pty Ltd (in liquidation) is that the balance of the only bank account of the Company was on that day $192.23.
[1] Affidavit of Mr PQ affirmed 3 April 2024 at [16].
On or about 26 June 2020 the Applicant lodged with the Liquidator an informal Proof of Debt claiming “$2.4 million plus interest” identifying the consideration for the claim as “constructive trust, marital relationship, care”. The Applicant asserts that any payments under the Policy had been made into the one C Pty Ltd bank account.
On 3 July 2020 the Applicant advised the Liquidator that he elected to have his Proof of Debt treated as a formal Proof of Debt.
On 11 November 2021 the Applicant advised the Liquidator that he was reducing his claim by $900,000 conceding that an amount of the insurance payment had not been paid into the C Pty Ltd account. The claim was therefore reduced to $1.5 million.
On 27 February 2024, and after a deal of correspondence seeking particulars of the claim, the Liquidator advised the Applicant that he was formally rejecting his Proof of Debt advising that the claim was not supported by evidence sufficient to substantiate the claim and specifically rejecting as such evidence a Supreme Court Writ issued (or intended to be issued), by the Applicant as Plaintiff and LM Insurance as Defendant in proceedings.
Notably on 11 November 2021 and in response to a request for substantiating evidence in support of the Proof of Debt, the Applicant had provided a document headed “[Ms Merrill] [LM Insurance] instalment payments from 02/12/09 to 19/03/2014” comprising an asserted list of payments totalling $1,025,519.84.
Further correspondence between the Liquidator, the Applicant, and solicitors acting for the Applicant ensued during 2023 in respect of substantiating the claim of the Proof of Debt.
On 16 November 2023 the above mentioned document purporting to be a Declaration of Trust was provided to the Liquidator under cover of an undated letter.
By letter of 27 February 2024 the Liquidator formally rejected the Applicant’s Proof of Debt in the revised amount of $1,500,000 on the following grounds:
The particulars provided by you, your former solicitors, and your current solicitors in support of your claim do not make out the basis of any legally enforceable claim against the company or its assets and do not provide any sufficient evidence in support of the existence (sic) any claim. In particular the particulars provided do not disclose the basis upon which the alleged claim against the company in the sum of “$2.4 million plus interest” (and reduced by you in the sum of $900,000 to $1,500,000) arose and do not support the existence (sic) any claimed constructive trust or other right legally enforceable against the company or its assets.
The Applicant’s appeal was heard by this Court on 27 and 28 May 2024.
Whilst proceeding as a hearing de novo on the claim for Proof of Debt, the Applicant’s asserted claim is now further reduced to a quantum of $265,741 where he claims the payments made by LM Insurance on the policy where such were paid into the one existing C Pty Ltd account between 2/5/11 – 19/3/14. Notably, where the Applicant’s previous claims were in the quantum of “$2.4 million plus interest” and “$1.5 million”, his affidavit of 24 May 2024 at [7] – [8] and read in this application deposes:
[7]Pursuant to the Order made by the Honourable Justice McGuire the Respondent served upon my solicitors a copy of the rental account bank statements for [C Pty Ltd] (In Liq). I have now reviewed those bank statements and say the following sums in black were paid into that bank account in respect of the [LM Insurance] payments, amount to the total sum of $265,741.
Receipt Date Amount 02/08/2011 6,733 02/08/2011 13,464 13/09/2011 20,197 06/10/2011 6,733 06/10/2011 13,464 09/11/2011 6,733 09/11/2021 13,464 15/12/2011 13,466 15/12/2011 26,928 30/01/2012 26,928 30/01/2012 13,466 30/03/2012 26,928 30/03/2012 13,466 18/06/2012 26,928 18/06/2012 13,466 26/07/2012 26,928 26/07/2012 13,466 02/10/2012 13,466 02/10/2012 26,928 06/12/2012 13,466 06/12/2012 26,928 01/02/2013 13,466 01/02/2013 26,928 18/4/2013 13,466 18/04/2013 26,928 13/06/2013 13,466 13/06/2013 26,928 12/08/2013 26,928 12/08/2013 13,466 18/10/2013 26,928 18/10/2013 13,466 07/02/2014 13,466 07/02/2014 26,928 19/03/2014 13,466 19/3/2014 26,928
[8]Annexed hereto and marked with the letters [MB]-8 are true copies of the relevant pages of the bank statements with [LM Insurance] payments received by [C Pty Ltd] in black.
Without explanation or amendment to the amounts listed in [7] of the Applicant’s affidavit, the instalment amounts in fact total $646,304 against the amount of $265,741 asserted in the affidavit and argued as quantum by the Applicant’s counsel at the hearing before me.
The claim of $265,741 is repeated in the Statement of Contentions provided by counsel for the Applicant as an aide memoire supplement to his oral submissions on the appeal. That document also contains a table at [4] of asserted payments made. An addition of those asserted amounts totals $262,561 rather than the $265,741 asserted in the document and in the appeal.
Where the hearing before me proceeded on the papers and oral submissions, the Applicant elected neither to give further evidence nor to adduce any evidence to clarify the above-mentioned discrepancies in his evidence as to the very fundamental issue of the quantum of the claim he asserts to prove as a debt.
THE EVIDENCE
As indicated, no request was made to give or adduce evidence other than the affidavits and no application was made to cross-examine the deponents of the affidavits relied upon by each of the parties.
The Applicant relied on his two affidavits filed 12 March 2024 and 24 May 2024. The Respondent Liquidator relied on his affidavit affirmed 3 April 2024.
Significantly, the Applicant did not provide an affidavit from Ms Merrill and did not seek to bring her to court by subpoena to adduce evidence or, if declared adverse, to cross-examine her. Ms Merrill was present during oral submissions but where she did not either provide an affidavit or make relevant submissions to the Court on the appeal.
THE RELEVANT LAW
The Applicant brings his appeal against the Liquidator’s determination under section 90 – 15 of the Insolvency Practice Schedule in Schedule 2 to the Corporations Act 2001 (Cth).
The legislation provides a 14 day period to bring an appeal after notification of the Liquidators determination. I calculate the appeal has been brought in time and no issue was taken with the appeal being brought by application of 12 March 2024.
The legislation allows the Court to “make such order as it thinks fit (including on the Court’s own initiative) in relation to the external administration of the company”. The section is broad in its scope and contemplates the exercise of judicial discretion and to determine substantive rights of parties and where, as mentioned above, the Applicant prima facie holds such a right vis-à-vis the company in liquidation as a putative creditor whose Proof of Debt has been rejected by the Liquidator and hence has a financial interest.
The nature of the appeal process was succinctly summarised by Hetyey AsJ in Re Elina Construction and Developing Group Pty Ltd[2] at [44]:
In determining whether a proof of debt should be admitted or rejected, a liquidator acts in a quasi-judicial capacity.[3] The liquidator must satisfy himself or herself there is an adequate basis to conclude the relevant debt exists to ensure the assets of the company are only distributed amongst true creditors of the company, with any surplus paid to contributories.[4] Where a person who claims to be a creditor is dissatisfied with the liquidator’s decision to reject a proof of debt, the ordinary procedure is for the person to apply to the Court to reverse or modify that decision.
[2] [2023] VSC 639.
[3] Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332.
[4] Footnote omitted.
Although referred to as an “appeal”, application such as that now before this Court proceed by way of a hearing de novo where fresh evidence may be given or adduced.[5]
[5] Re Birds Stores Pty Ltd (1931) 37 ALR 94.
In the appeal, however, the Liquidator relinquishes his quasi–judicial role and proceeds to act in an adversarial capacity effectively defending his decision. That is, the issue becomes a contest between the putative creditor and the Liquidator as a party.
As a respondent to the appeal the Liquidator may raise defences available at law which would have been available to the Company had it not entered liquidation and had been sued directly by the creditor.
The Court is to consider the merits of the putative creditor’s claim and make findings and determination on the balance of probabilities as to both the existence of a debt and the quantum of such debt.[6]
[6] KIS Realty Pty Ltd v Yeo and Rimbaldi [2016] WASC 149.
As a hearing de novo, it is proper, if request is made, for cross-examination of the deponents of affidavits to take place and where the onus of establishing error in the Liquidators determination rests with the Applicant on a standard of proof on the balance of probabilities where the fundamental question for consideration is whether the claimed debt was a true liability of the Company as at the date of winding up.
Consistent with the onus of proof, should a court be unable to conclude whether the proof of debt be admitted in the liquidation then the Liquidator’s initial decision will stand.
THE APPLICANT’S CASE
The Applicant argues that Ms Merrill held the LM Insurance policy and its benefits on trust for the Applicant being that a constructive trust is established by the monies being paid to the Applicant into a bank account of the Company where Ms Merrill is the sole director and shareholder of that Company namely C Pty Ltd.
As detailed above, the claim of debt originally set at $2.4 million plus interest and was later amended to $1.5 million. The claim now sits at $265,741 asserting particulars of payment between 2 August 2011 and 19 March 2014.
Where the unchallenged evidence of the Liquidator, Mr PQ, is that the only bank account of C Pty Ltd had a balance of $192.23 as the date of the liquidation then I am understandably urged to infer that the monies deposited into the C Pty Ltd bank account had been removed by its sole director, Ms Merrill.
The Applicant further relies on a document titled “Declaration of Trust” signed by Ms Merrill in 2022 asserting that she held the policy on trust for and the benefits of such policy on trust for the Applicant who argues a constructive trust.
The thrust of the Applicant’s argument is that C Pty Ltd be imputed with the knowledge of its sole director, Ms Merrill, that the funds paid into the C Pty Ltd bank account pursuant to the LM Insurance policy were to be held on trust for the benefit of the Applicant and hence C Pty Ltd is clothed with the same responsibilities as trustee as those assumed by Ms Merrill.
THE RESPONDENT’S CASE
The Respondent Liquidator maintains that there is no evidence of sufficient probity to ground the claim of Proof of Debt by reason of a constructive trust.
CONSIDERATION
There are a number of fundamental problems with the case argued by the Applicant which cause me to find that he has not discharged his onus of proving on the balance of probabilities that the asserted Proof of Debt be admitted and the appeal will consequently be dismissed.
Firstly and fundamentally the Applicant has not given or adduced evidence which allows the Court to quantify the asserted debt. Where originally the claimed debt was at “$2.4 million plus interest” and later amended to “$1.5 million”, the affidavit, the Statement of Contentions, and argument by counsel all assert a debt of $265,741. The claimed amounts purport to be supported by “tables” of particularised payments into C Pty Ltd from LM Insurance. Put simply, the particulars asserted do not total the alleged debt of $265,741. The table provided in the Applicant’s affidavit totals $646,304. The table provided as particulars of the claim in the Statement of Contentions totals $262,561. Consequently, and where an onus sits with the Applicant to prove not only the debt but also the quantum of such debt, it is not available to the Court to quantify the asserted debt with any precision where there is no evidence in support of the broad claim of $265,741. As mentioned above, the Applicant was not called to clarify such fundamental discrepancies and no evidence was adduced to give clarification.
Secondly, and also fundamentally, I am unable to find anywhere in the Applicant’s material that he asserts a breach of the constructive trust by Ms Merrill (or the Company). The Applicant provides two affidavits. Neither allege expressly a breach of trust or allow me to infer a breach of trust. Whilst I accept that sums of money may have been deposited the into the C Pty Ltd bank account (but not with any precision as to quantum), I cannot infer on the evidence that the monies were removed by Ms Merrill or any other person or entity in breach of the asserted constructive trust.
I accept the unchallenged evidence of Mr PQ that upon the date of the liquidation the balance of the C Pty Ltd bank account was $192.23. It follows that any withdrawals of whatever amount took place prior to that date. It may be open to me to infer that, as a matter of common sense, Ms Merrill was the only person able to withdraw those monies given that she is the sole director of the Company. Nevertheless, there is no evidence from either the Applicant or from Ms Merrill as to the purpose and object of those withdrawals. Notably, in an annexure to Mr PQ’s affidavit is a document dated 6 December 2021 and authored by the Applicant, addressed to Mr PQ, appears to states inter alia on page 4 “the wife continued to care for [the Applicant]”.
It was available for the Applicant to adduce evidence from Ms Merrill by affidavit or, if adverse, by subpoena. He did not elect to do so.
Put simply, therefore, I can find no assertion in the evidence before me of an actual breach of trust and, in any event, I am unable to find on the balance of probabilities that the monies withdrawn (presumably by Ms Merrill) were used for improper or illegal purposes and constituting a breach of any constructive trust. That is, plausibly those monies withdrawn could have been used for the benefit of the Applicant.
Further, the Applicant brings evidence by way of annexure from a Mr Y as to discussions between he, the Applicant, and Ms Merrill as to the creation of a constructive trust where Mr Y purports to be an experienced professional in such matters. Notably, no affidavit was provided in proper form from Mr Y and he was not to called to give evidence. He does, however, provide a “statement” dated 30 June 2022 but nowhere does such statement allege a breach of trust by Ms Merrill.
Significantly, where the “Declaration of Trust” is arguably defective in form but where I accept a written document is not a necessary condition of a constructive trust, the Applicant did not adduce evidence from Ms Merrill to explain her understanding of her obligations under the trust that she asserts in the document. Notably that document is dated “2022” being some three years after the Company was placed in liquidation and again where the unchallenged evidence is of the Company’s bank account balance being just $192.23 on the date of its liquidation. Prima facie therefore Ms Merrill is confirming in 2022 that she did at all times hold those monies, deposited but withdrawn, prior to the liquidation, on trust for the Applicant. This certainly does not evidence any breach but to the contrary, and if any inference were to be taken, then that interference would irresistibly be as to compliance with the obligations as trustee.
Still further, where monies were obviously withdrawn from the C Pty Ltd account before the liquidation then the Liquidator cannot assist as to whether such funds were utilised for proper or improper purposes. It follows that, in my view, the Company might not be imputed with knowledge of a director’s improper or illegal conduct (if indeed there was any such improper/illegal conduct) and where this Company is clearly solvent and prima facie able to satisfy its creditors. In such circumstances, as a matter of public policy, the Company might not be imputed with such knowledge of its director as might be the case where it is alleged there to be a breach of fiduciary duty by the director and where the Company is otherwise insolvent.[7]
[7] Bilta (UK) Ltd (in liquidation) and others v Nazir and others (No.2) [2015] UKSC 23 per Lord Sumption JSC at [76] to [77].
For all of the above reasons I find that the Applicant has not discharge his onus of proof and the application/appeal is dismissed.
I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McGuire. Associate:
Dated: 26 June 2024
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