Capocchiano v Young
[2013] NSWSC 879
•02 July 2013
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of David Gregory Young in his capacity as liquidator of Great Wall Resources Pty Ltd (in liquidation) ACN 080 224 808 and the Corporations Act; Capocchiano v Young [2013] NSWSC 879 Hearing dates: 17-19, 21, 26 and 28 June 2013 Decision date: 02 July 2013 Jurisdiction: Equity Division Before: Kunc J Decision: Appeal against rejection of proof of debt dismissed; Liquidator's application for directions concerning any further proofs allowed
Catchwords: COMPANIES – winding up – appeal from rejection of proof of debt – parties unable to establish state of account on balance of probabilities
PRACTICE – abuse of process – injunction to restrain relitigation refusedLegislation Cited: Corporations Act 2001 (Cth) Cases Cited: Optquest Pty Ltd v Marchesi (as trustee of the bankrupt estate of Vasiliou (a former bankrupt)) [2011] VSC 428
Re Galaxy Media Pty Limited (recs and mgrs apptd) (in liq); Walker and Another (in their capacity as recs and mgrs of Galaxy Media Pty Ltd) v Andrew (as liq of Galaxy Media Pty Ltd) and others (2001) 39 ACSR 483; [2001] NSWSC 917;
Re GB Nathan & Co Pty Limited (in liq) (1991) 24 NSWLR 674
Re Kentwood Constructions Ltd [1960] 1 WLR 646;
Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332
Westpac Banking Corporation v Totterdell (1998) 20 WAR 150Category: Principal judgment Parties: Mr F.S. Capocchiano (First Plaintiff)
Mrs I. Capocchiano (Second Plaintiff)
David Gregory Young in his capacity as liquidator of Great Wall Resources Pty Ltd (in liquidation) ACN 080 224 808 (Defendant)Representation: Mr F.S. Capocchiano (In person)
Counsel: Mr S.C. Ipp (of counsel for the defendant)
Solicitors: Kemp Strang (defendant)
File Number(s): 2012/00260733 Publication restriction: No
Judgment
Summary and orders made
The Plaintiffs ("the Capocchianos") are husband and wife. Great Wall Resources Pty Limited ("the Company") was Mr Capocchiano's company. The Defendant ("the liquidator") is liquidator of the Company.
The Capocchianos lodged a proof of debt in the winding up of the Company. They subsequently lodged further claims with the liquidator for different amounts. Ultimately the liquidator rejected their claim.
The Capocchianos appeal against that rejection. Their appeal fails.
The liquidator seeks certain directions and orders. The Court makes a direction as to how the liquidator is entitled to deal with any further proof or claim the Capocchianos may lodge .
At the conclusion of the hearing I made orders disposing of the proceedings. These are the reasons for those orders, which were:
1. The originating process be dismissed.
2. Direct the Defendant that until further order of this Court or until he has called for formal proofs of debt or claims pursuant to s 553D of the Corporations Act 2001 and Regulation 5.6.48 of the Corporations Regulations 2001 that if any proof of debt or claim is submitted to the Defendant by or on behalf of the Plaintiffs on or after 28 June 2013 in the liquidation of Great Wall Resources Pty Limited (in liquidation) ACN 080 224 808 ("the Company") then in relation to any such proof or claim the Defendant is justified in treating the Plaintiffs as neither creditors nor debtors of the Company (other than in respect of any costs ordered to be paid by the Plaintiffs to the Defendant in these proceedings).
3. The Plaintiffs pay the Defendant's costs of and incidental to the originating process.
4. The Plaintiffs pay the Defendant's costs of and incidental to the further amended interlocutory process (which costs, for the avoidance of doubt, do not include costs incurred by the Defendant in relation to the preparation of claims for relief made in earlier versions of the interlocutory process that were ultimately not pressed by the Defendant).
The Capocchianos
It is necessary that I record something about the Capocchianos' circumstances as they relate to the conduct of these proceedings.
Mr Capocchiano is 80 years old. He was born in Stornara, Italy, east of Naples, in 1933. His only education was primary school during the Second World War. He emigrated to Australia and was a tiler by trade.
Mr Capocchiano ultimately operated a business known as Port Kembla Tiles and Ceramics for 20 years. That business was subsequently sold. He established the Company to undertake property development.
In 2006 Mr Capocchiano suffered a serious stroke. He was in hospital for some months and is paralysed down his left side. More recently, Mr Capocchiano was diagnosed with cancer of the larynx. His treatment has involved the insertion of a tracheotomy tube in his throat. The tube has deprived him of speech.
When these proceedings were commenced the Capocchianos were legally represented. However, from September 2012 they represented themselves. Before me Mr Capocchiano acted as the advocate for himself and his wife.
In accordance with pre-trial directions the Capocchianos filed what purported to be submissions which, at least, identified the evidence on which they relied. At trial Mr Capocchiano had the assistance of an interpreter. In cross-examination he wrote his answers down in a mixture of Italian and English and his answers were interpreted onto the transcript. His cross-examination of the liquidator was also done by writing down his questions, which were then read out by the interpreter.
Mr Capocchiano's serious physical handicaps made communication (and the proceedings themselves) slow, laborious and frustrating, especially for him. As litigants in person it was apparent that the Capocchianos sometimes found the processes in which they were involved difficult and confusing.
Nevertheless, to my observation Mr Capocchiano demonstrated no lack of mental acuity beyond what might be expected in a man of his age with limited formal education. I am satisfied that Mr Capocchiano grasped the significance of each step of the hearing and understood the questions that were asked of him.
That this is so is due in no small part to the scrupulously fair way in which the case was conducted for the liquidator by his counsel, Mr S.C. Ipp, and those instructing him. Without sacrificing their client's interests it was evident to the Court that every appropriate allowance and courtesy was extended to the Capocchianos by the liquidator's lawyers.
The Court also sought to take into account the difficulties under which the Capocchianos' laboured. Nevertheless, while every procedural allowance was given to the Capocchianos to present their case as best they were able, the final result can only be according to the law by reference to the evidence before the Court.
The evidence
The Capocchianos relied on three affidavits sworn by Mr Capocchiano. The first two had been prepared with legal assistance and exhibited various company records and other documents to support the amount for which the Capocchianos allege they are entitled to prove. The third affidavit was prepared by Mr Capocchiano himself. Their evidence also included several items of correspondence variously addressed to the liquidator and the Court and other documents appended to two sets of what were described as written submissions. All of this evidence was directed to establishing that the Capocchianos were creditors of the Company for $4,303,290.64.
The liquidator's evidence comprised several affidavits sworn by Anthony Wayne Elkerton. Mr Elkerton is a partner of the liquidator and has assisted him with the day to day conduct of the administration. The liquidator's evidence demonstrated his efforts over a considerable period of time to verify the Capocchianos' claims.
The proceedings resembled a taking of accounts between the Company and the Capocchianos. In stark contrast to Mr Capocchiano's firmly held conviction that he and his wife were creditors of the Company for millions of dollars, the liquidator's evidence was that his investigations up to the time of the hearing supported the conclusion that the Capocchianos owed several hundred thousand dollars to the Company.
The utility of the proceedings
It is clear that the Company has insufficient funds to make a dividend payment to its creditors. The liquidator has never formally called for proofs of debt nor advertised for such claims. His evidence was that he had no present intention of formally calling for proofs or advertising for or declaring a dividend. The Capocchianos are the only alleged creditors of the Company to have lodged proofs of debt with the liquidator and required him to adjudicate on the proofs.
The liquidator has sought on several occasions, including after the commencement of these proceedings, to draw the matters set out in the preceding paragraph to the attention of the Capocchianos. On the first day of the hearing (originally fixed for three but which ultimately took six days) I also asked Mr Capocchiano what he and his wife hoped to achieve from the proceedings. I was concerned to ensure that the Capocchianos understood that, on the material presented by the liquidator, a judgment in their favour would not result in a dividend from the administration of anything like the amount they claimed, or at all.
It was apparent from Mr Capocchiano's answers when these matters were raised with him that he did not wish to believe what the liquidator was saying. At the end of the first day I encouraged the parties to engage in further discussions, not least because Mr Capocchiano said he wished to meet the liquidator, something that apparently had not occurred previously.
On the second day of the hearing I was informed that a meeting had taken place between the parties. Further information provided by Mr Capocchiano had resulted in a significant reduction in the amount which the liquidator alleged the Capocchianos owed the Company. However, Mr Capocchiano also made it clear that he and his wife were determined to assert what they considered to be their rights in the matter. The hearing proceeded accordingly.
The facts
The Company was registered on 26 September 1997. From the time of registration Mr Capocchiano has been the Company's sole shareholder and secretary and, since April 2003, its sole director.
The Company carried on the business of property development. In particular, it purchased land at Yallah (near Wollongong) which it subdivided and developed.
In operating the Company Mr Capocchiano saw no difference between himself and the Company. As he said in evidence (T70:2) "I thought I was Great Wall". He regarded himself as being able to, and did in fact, put money into and take money out of the Company whenever he felt like it. As far as he was concerned the Company's money was his money.
The Company's record keeping was, at best, haphazard and incomplete. In 2007 Mr Capocchiano retained an accountant to prepare the Company's financial statements and tax returns for the years 2003 to 2007. In preparing those documents the accountant could only rely on what Mr Capocchiano told her and the documents which he gave to her. Those accounts, signed by Mr Capocchiano, are important to the resolution of these proceedings.
On 7 December 2010 the Federal Court ordered the Company to be wound up on the application of the Deputy Commissioner of Taxation.
On 28 January 2011 Mr Capocchiano lodged a formal proof of debt for $1,110,275. The particulars of the debt were "monies advanced by way of loans to company" for the period 2004-2010.
On 21 February 2011 Mr Capocchiano signed the Company's Report as to Affairs. The document records that the instructions for its completion came from Mr Capocchiano. Significantly for present purposes, the Report specifies "nil" in the schedule for "Claims by Employees" and lists Mr Capocchiano (not Mrs Capocchiano) as an unsecured creditor for $1,010,275 (I do not know whether this amount was intentionally or erroneously different to that claimed in the January 2011 proof of debt).
On 10 June 2011 the Capocchianos lodged a joint formal proof of debt claiming $3,132,275. The particulars again included a claim for "moneys paid to company by director as per Report as to Affairs" but now for the period 2002-2010, in the sum of $1,010,275. This proof also included a claim for the same period for "unpaid wages to director and wife $1,350,000 ($150,000 per year for nine years)" ("the June 2011 Proof").
Shortly after receiving the June 2011 Proof the liquidator wrote to the Capocchianos requesting further information. Nearly a year later, on 6 June 2012, Mr Noveski, the solicitor then acting for the Capocchianos, wrote to the liquidator's solicitors to inform them that to substantiate the June 2011 Proof Mr and Mrs Capocchiano relied on affidavits which they had served on the liquidator in two other sets of proceedings then on foot.
On 4 July 2012 the liquidator wrote to Mr Noveski drawing attention to the fact that while the June 2011 Proof claimed $3,132,275, the affidavit material to which the Capocchianos referred claimed $4,303,290.64. The liquidator inquired whether the Capocchianos intended to rely on the June 2011 Proof or whether Mr Capocchiano intended to lodge a new proof for the higher sum.
On 6 July 2012 Mr Noveski wrote to the liquidator enclosing a proof of debt from the Capocchianos of that date ("the July 2012 Proof") confirming that it was the claim which the Capocchianos wanted the liquidator to adjudicate.
The July 2012 Proof stated that the Capocchianos claimed $4,303,290.64 "as per the affidavit of Francesco Saviero Capocchiano dated 17 May 2012". That affidavit had been sworn by Mr Capocchiano in proceedings in this Court which had been brought against him and another one of his companies (Comserv (No 1074) Pty Ltd) by the liquidator. It is the first of the three affidavits relied upon by the Capocchianos in these proceedings.
The Capocchianos set out their claim in a table at the end of that affidavit:
Date
Description
Amount Paid to GWR
Amount Repaid
Balance of Director's Loan
28/03/2002 - 04/04/2003
Purchase of Yallah Rd
$173,494.00
$173,494.00
Purchase of Sussex Inlet
$450,000.00
$623,494.00
Sale of Port Kembla Ceramic Tiles
$501,509.40
$1,125,003.40
Purchase of Greenwell Point
$833,374.56
$291,628.84
2006-2008 Direct Contributions to GWR
$196,500.00
$488,128.84
Purchase of Lees Lane
$270,490.87
$217,637.97
2009-2010 Further direct Contributions to GWR
$150,000.00
$367,637.97
Sale of Shellharbour Rd
$231,848.67
$599,486.64
Claim for wages
$1,500,000.00
$2,099,486.64
Interest on Monies
$2,203,804.00
$4,303,290.64
In addition to their claim for wages and interest, it will be noted from that table that the Capocchianos asserted that they had made various direct contributions to the Company as well as other advances which they allege they made to enable the Company to purchase properties.
On 10 August 2012 the liquidator issued a formal notice of rejection of proof of debt in respect of the July 2012 Proof ("the Rejection"). The liquidator's letter enclosing the Rejection included a sixteen page schedule in which the liquidator tried to reconcile the state of accounts between the Company and the Capocchianos.
The liquidator admitted some parts of the July 2012 Proof and rejected others. In particular, he rejected the claim for wages and interest. Furthermore, by reference to the records then available to him, the liquidator had come to a different view of the state of the notional director's loan account between the Company and the Capocchianos such that the liquidator contended that the Capocchianos owed the Company $297,652.73.
The Capocchianos commenced these proceedings on 21 August 2012.
The second affidavit on which Mr Capocchiano relies in these proceedings was sworn on 4 September 2012 ("the September 2012 affidavit"). This responded to the schedule which was attached to the Rejection. The ultimate point of the September 2012 affidavit was a submission by the Capocchianos that, having taken into account the schedule attached to the Rejection letter and the Capocchianos' response to it, the liquidator should admit the Capocchianos' proof in the sum of $1,113,021.67 (excluding the claim for interest and wages). The September 2012 affidavit also claimed wages for Mr Capocchiano in the sum of $75,000 for each year between 2000 to 2010 being a total of $750,000.
Up to and including the hearing before me, the liquidator has continued his investigation into the affairs of the Company, taking into account the matters set out in the September 2012 affidavit and all further information that has been made available to him by the Capocchianos and otherwise. In the course of giving his evidence, Mr Elkerton produced what I accept is the latest reconciliation attempted by the liquidator of the state of accounts between the Capocchianos and the Company ("Exhibit 18D").
Exhibit 18D consists of 32 A3 pages containing a detailed spreadsheet analysis. The end result is that, doing the best he can, the liquidator maintains that the Capocchianos owe the Company $588,054.31. The liquidator's calculations include setting out all additional amounts of which the liquidator is aware that are claimed by the Capocchianos but which he has been unable to verify as properly attributable to the Company. However, even if the currently unverified amounts were all resolved in favour of the Capocchianos' claim, on the liquidator's figures the Capocchianos would still owe $296,668.27 to the Company.
Finally, during the course of the hearing Mr Capocchiano, in answer to a question from me, made it clear that he intended to file another proof of debt if he and his wife failed to satisfy me that the July 2012 Proof had been wrongly rejected by the liquidator.
The legal principles applicable to the Capocchianos' claim
By their originating process the Capocchianos claim:
(1) The decision of the Defendant made on 10 August 2012 to reject the proof of debt of the Plaintiffs made on 6 July 2011 be reversed, and that the proof of debt be admitted in the sum of $4,303,290.64.
(2) In the alternative, the decision of the Defendant made on 10 August 2012 to reject the proof of debt of the Plaintiffs made on 6 July 2011 be modified.
The proceedings are brought under s 1321(1)(d) of the Corporations Act 2011 (Cth) ("the Act") whereby ... "the Court may confirm, reverse or modify the act or decision, or remedy the omission, as the case may be, and make such orders and give such directions as it thinks fit".
The relevant legal principles are not in doubt. An appeal against the rejection of a proof of debt is a hearing de novo. The Court must take into account all relevant evidence, whether or not it was before the liquidator at the time the proof was rejected. The fundamental question is whether the claim sought to be proved is a true liability of the company enforceable against it according to law. Nevertheless, the claimant bears the onus to demonstrate that the liquidator was wrong in rejecting the proof. If that onus is not discharged, the Court will not overturn the liquidator's decision. If the Court is unable to conclude either way whether the proof should be admitted, then the liquidator's decision must stand.
The authorities for the principles summarised in the preceding paragraph are Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 338-341 (per Brennan and Dawson JJ); Re Kentwood Constructions Ltd [1960] 1 WLR 646 at 647-648; Westpac Banking Corporation v Totterdell (1998) 20 WAR 150 at 154 per Ipp J, Pidgeon and White JJ agreeing; Re Galaxy Media Pty Limited (recs and mgrs apptd) (in liq); Walker and Another (in their capacity as recs and mgrs of Galaxy Media Pty Ltd) v Andrew (as liq of Galaxy Media Pty Ltd) and others (2001) 39 ACSR 483; [2001] NSWSC 917 at [23]-[34].
Resolution of the Capocchianos' claims
The Capocchianios have failed to discharge their onus to demonstrate that the liquidator erred in rejecting the July 2012 Proof. He was correct to do so. Furthermore, the Capocchianos have not proven on the balance of probabilities that they are creditors of the Company for any particular amount or at all.
For the purposes of analysis the Capocchianos' claim can be divided into their claim for wages and interest and the claim for what they submit is the balance of their loan account with the Company.
In their final written submissions dated 24 June 2013 the Capocchianos submitted that they claimed "$1,500,000 for wages over a period of 10 years including interest on director's loans over a period of 10 years". Thus, by the end of the hearing the figure of $1,500,000 was apparently intended to comprehend both wages and interest on loans.
The fundamental difficulty with this part of their claim is that the Capocchianos have failed to adduce any evidence of an agreement between them and the Company for employment remunerated by wages or an agreement between either of them and the Company that any advances to the Company should be repayable with interest. This part of their claim is no more than an assertion.
I have carefully reviewed the evidence relied upon by the Capocchianos. There can be no doubt that Mr Capocchiano performed work in his capacity as a director of the Company. The evidence is less clear about what Mrs Capocchiano may have done so as to entitle her to wages from the Company. But in neither case is there any evidence of an agreement that they should be remunerated. Nor is there any evidence of an agreement that monies advanced by either of them to the Company should bear interest.
As the liquidator, correctly, noted in his letter enclosing the Rejection, the contemporaneous evidence (such as it is) does not support this aspect of the Capocchianos' claim. In the Rejection the liquidator dealt with this part of the Capocchianos' claims as follows, and, having regard to the evidence before me, I do not discern any error:
● Rejection of the claim for wages on the basis that the Director signed Financial Accounts acknowledging that no wages were paid or due; and
● Rejection of the claim for interest on the basis that there is no documentary evidence that interest was to be charged on the loan.
These points were expanded upon in the liquidator's letter to the Capocchianos' then solicitors enclosing the Rejection:
7. I do not accept your client's claim for wages. I advise that Group Tax and Superannuation have not been paid by the Company, which suggests that there were no wage entitlements. Please note it is an obligation under the Superannuation Guarantee Law for employers to pay superannuation for eligible employees.
I am in possession of bound Financial Accounts covering the period 2003-2007 signed by your clients advising that no income was received or due and receivable from the Company. For good order I note that I hold an unsigned bound Financial Accounts for the 2008 year in which the same statement is made.
Furthermore, the Company did not maintain minutes or employment contracts which would evidence the agreement of employment to your clients contrary to what was contained in the Financial Accounts signed by them. I have previously requested employment documents to support your clients' claim including contracts and note that your client has advised he has no further records.
8. Your clients have not provided any evidence that the loan when made was subject to any interest payment. Additionally my reconciliation of your client's loan account indicates that it went into debit on 16 April 2009.
The conclusion I have just expressed is sufficient to dispose of the Capocchianos' proceedings. Insofar as the July 2012 Proof contained the claims for wages and interest, the liquidator was correct to reject it. It is unnecessary for me to refer to the liquidator's detailed submissions as to why he was correct to reject other parts of the July 2012 Proof. The question remains, however, whether the Capocchianos have been able to demonstrate on the balance of probabilities that, once no allowance is made for wages and interest, the Company is indebted to them in a particular amount for which they are entitled to prove.
The most detailed attempt to prove the Capocchianos' claim was through the September 2012 affidavit. Excluding the claim for wages and interest that affidavit contended that the Capocchianos should be admitted to proof for $1,113,021.67.
However, when Mr Capocchiano was cross-examined in relation to that affidavit, it became apparent that the calculations in it were less than reliable for at least two reasons.
First, Mr Capocchiano gave evidence that the first time he saw that affidavit was when it was presented to him to be sworn. Mr Capocchiano fairly resiled from some of the statements in the affidavit on the basis that it had in fact been prepared by his solicitor, who obviously undertook the best reconciliation he could based on the material provided to him by the Capocchianos but had nevertheless made errors. In making this observation I intend no criticism of the solicitor, given that Mr Capocchiano adopted the affidavit by swearing it.
Second, as a consequence of the way in which the affidavit had been prepared, the liquidator was able to demonstrate in cross-examination of Mr Capocchiano that a number of expenses which the September 2012 affidavit identified as company expenses were in fact sums paid or repaid by the Company to the Capocchianos for personal expenses. The inability of the Capocchianos to reconcile and differentiate between the Company's funds (even if advanced by them to the Company) being expended as Company expenses as opposed to their personal expenses met by the Company lies at the heart of their inability to demonstrate the true state of their loan account with the Company.
This difficulty is amply demonstrated by the fact that the amount claimed by the Capocchianos varied between their various proofs of debt and again during the course of the hearing.
For example, Mr Capocchiano tendered a handwritten reconciliation in Italian headed "Fraidei (sic) 14/6/013/" which was subsequently interpreted into English. In that document Mr Capocchiano asserted that his total advances to the Company were $9,916,383.05 (in the final submissions this figure became $8,810,494.90) and that (excluding wages and interest) the sum owing to him by the Company was $1,137,544.34. Earlier calculations of this last figure were $1,110,275 (January 2011) $599,486.64 (the July 2012 Proof), $1,113,021.67 (September 2012 affidavit). In final written submissions this figure became $1,796,699.90.
When cross-examining Mr Elkerton Mr Capocchiano tendered a bundle of bank statements and other documents (which became Exhibit 19P) which Mr Capocchiano asserted demonstrated that his total advances to the Company were $9,916,383.05. However, after Mr Elkerton was given an opportunity to review Exhibit 19P his calculation of the total credits to the Company recorded by those documents was $6,961,676.81. At my request Mr Elkerton and the liquidator's staff further examined the documents in Exhibit 19P to determine whether they assisted the liquidator in refining his reconciliation of the state of accounts between the Capocchianos and the Company. Mr Elkerton subsequently gave evidence that with the exception of three bank statements, all of the documents in Exhibit 19P had already been reviewed by the liquidator and included in his calculations.
While the three additional bank statements disclosed credits of $316,558.99 and debits of $819,705.82, the liquidator had no information from the Capocchianos or elsewhere which enabled him to identify or verify the source of the credits or the recipients of the debits.
In their final written submissions the Capocchianos no longer appeared to place reliance on the September 2012 affidavit but invited the Court to rely on a set of calculations said to derive from Exhibit 19P. The Capocchianos ultimately submitted that the evidence disclosed total advances by them to the Company of $8,810,494.90 (a different figure again from earlier calculations) and (excluding the claim for wages and interest) a balance in their loan account with the Company in their favour of $1,796,699.90.
Whatever else may be said about the accuracy of the calculations set out in the Capocchianos' final written submissions, it is clear that they make no allowance for monies which they drew from the Company to pay personal expenses. Mr Capocchiano agreed this was the case when I raised the point with him during his closing submissions.
His response, if I understood him correctly, was to submit that any personal expenses which the Company had paid should be set off against the wages he and his wife claimed they were owed.
There is abundant evidence that many personal expenses were paid for by the Company, consistently with Mr Capocchiano's complete self-identification with the Company. The Capocchianos' inability or failure to grapple with this aspect of the correct reconciliation of their claim means that the Court cannot be satisfied, on their evidence, of the true state of the account between them and the Company on the balance of probabilities.
Two other matters fortify me in the conclusion that the Capocchianos have been unable to demonstrate what amount (if any) might be owing to them by the Company.
First, I have taken into account the fact that even over the course of the hearing the amount which the Capocchianos alleged represented their total advances to the Company and the amount ultimately now said to be owing to them changed. Those changes, which I have summarised above, were not sought to be explained in any particular way. They did not inspire confidence in the reliability of the calculations which the Capocchianos were propounding. I am not suggesting that the Capocchianos were in any way attempting to mislead the Court. Rather, it is clear that one of the legacies of the way in which Mr Capocchiano ran the Company is that he did not keep or retain sufficient records to enable a proper reconciliation to be done.
Second, I have taken into account the extensive and detailed attempt at reconciliation undertaken by the liquidator which, on his latest figures, demonstrates that the Capocchianos owe the Company $588,054.31. While that figure is undoubtedly the product of a more rigorous and scientific process than that undertaken by the Capocchianos, it is important to emphasise that I am not able to accept the liquidator's figure as a true statement of the state of accounts between the Capocchianos and the Company. There is no criticism of the liquidator in saying so.
The liquidator's figures have been derived from a process of adjudication, entirely legitimate in the circumstances, where he has brought his own commercial experience to bear in making certain unproven allowances and assumptions both in favour of and against the Capocchianos. For example, these include estimating the proportion of the Capocchianos' personal phone bills which were paid by the Company which might be attributed to company expenses. Similar estimates have been made in relation to motor vehicle usage. Against the Capocchianos the liquidator has included a rental claim for one of the Company's properties which the Capocchianos lived in apparently rent free. I have some doubts about the legitimacy of levying such a claim against the Capocchianos, but it is not necessary for me to decide the point finally and no specific submissions have been addressed to it.
The liquidator's calculations also specify a large number of transactions which he has been unable to verify one way or another. Some of these would enure to the advantage of the Capocchianos and some against their interest on any final accounting. However, even if all presently unverified entries resolved in favour of the Capocchianos then on the liquidator's calculations they would still owe the Company $296,668.27.
The significance of the liquidator's calculations for my decision is that they necessarily cast considerable doubt on any claim advanced by the Capocchianos. Therefore I conclude on the evidence adduced that the Capocchianos are not entitled to prove for wages and interest. The balance of the claim set out in their written submissions of $1,796,699.90 is arrived at by a methodology which is flawed because it relies only on a handful of bank statements and ignores other evidence before the Court (including of significant personal expenses paid for by the Company on behalf of the Capocchianos). That leads me to the conclusion that on the balance of probabilities it is not the correct figure.
That conclusion is supported by the liquidator's calculations which both satisfy me of the unreliability of the figure advanced by the Capocchianos and of the fact that, on the evidence before me, it would be quite impossible for the Court to be satisfied on the balance of probabilities as to what is the true state of the accounts between the Company and the Capocchianos. That uncertainty in and of itself means that the liquidator's decision to reject the July 2012 Proof must be upheld. Furthermore, it also compels the rejection of the Capocchianos' alternative claim that the Court permit them to prove in the winding-up of the Company for some other amount.
No finding that the Capocchianos are indebted to the Company
In his closing written submissions dated 26 June 2013 the liquidator invited the Court to find that the Capocchianos are debtors of the Company in the amount of $588,054.31. I decline to make that finding for two reasons. First, the finding is unnecessary having regard to the issues before me. Those issues are defined by the originating process and the liquidator's further amended interlocutory process.
The relief sought in the originating process (set out in paragraph 44 above) invites either reversal of the Rejection or (as I understand prayer 2 of the originating process) a determination that the Capocchianos should be admitted to proof in some other amount. They have failed to satisfy me that they are entitled to either form of relief. In determining their entitlement to that relief it is unnecessary for me to make a finding that the Capocchianos in fact and law owe the Company money in a specified amount.
Insofar as the further amended interlocutory process is concerned, a finding that the Capocchianos owe the Company a specific amount of money is also not necessary to determine any issue raised by the liquidator. Significantly, in the first iteration of the liquidator's interlocutory process the liquidator did seek judgment against the Capocchianos on behalf of the Company in a specified sum. However, I was subsequently informed that claim was not pressed and it did not appear in the subsequent versions of the interlocutory process. As it finally evolved into the further amended interlocutory process the liquidator's application does not require me to make a finding of indebtedness by the Capocchianos to the Company.
The second reason I decline to do so is that, consistently with my reasons in paragraphs 56 to 74 above, I am not satisfied on the balance of probabilities what the true state of accounts is between the Capocchianos and the Company.
It is one thing for the liquidator to deploy his calculations to demonstrate that the Rejection was correct and to cast doubt on any further calculations of indebtedness submitted by the Capocchianos. As I noted in paragraph 71 above, the liquidator's evidence in this regard is the product of his adjudication, which legitimately includes assumptions and commercial judgments of various kinds.
However, if the liquidator were seeking a positive finding of indebtedness by the Capocchianos to the Company, the same standard as I have applied to the Capocchianos would have to apply to the liquidator, namely that he must satisfy me on the balance of probabilities of the existence of a debt in a specified sum enforceable as a legal obligation by the Company against the Capocchianos. While unproven assumptions and other matters of commercial judgment are appropriate in the process of adjudication of a claim by a liquidator (where he is acting quasi-judicially), that process cannot be the basis for satisfying the Court as to the quantum of a legally enforceable debt owed by the Capocchianos to the Company. I did not understand the liquidator in the course of his submissions to contend that it could be.
The liquidator's further amended interlocutory process
By his further amended interlocutory process the liquidator sought:
2. An order that the Plaintiffs be directed not to commence, or cause any other person to commence, any proceedings in this Court, or any other Court, which seeks to re-litigate any of the issues determined by His Honour Justice Kunc in trial of these proceedings on 17, 18, 19, 21, 26 and 28 June 2013, unless an order of a Judge of this Court is first obtained.
3. Directions pursuant to section 479(3) and section 545(1) of the Corporations Act, the Court's inherent jurisdiction and section 23 of the Supreme Court Act 1970 that the Liquidator of Great Wall Resources Pty Ltd (In Liquidation) ACN 080 224 808 is justified in doing the following things in connection with any proof of debt or claim of, by or on behalf of Frank Capocchiano and Italia Capocchiano ("Claimant Proofs") in the liquidation of Great Wall Resources Pty Ltd (In Liquidation) ACN 080 224 808, namely in treating the Plaintiffs as neither creditors of, nor debtors of, Great Wall Resources Pty Ltd (In Liquidation) ACN 080 224 808 (other than in respect of costs ordered to be paid by the Plaintiffs), in the absence of:
(i) The Liquidator calling for Formal Proofs of Debt or Claims pursuant to section 553D of the Act and regulation 5.6.48; and
(ii) The Liquidator of Great Wall Resources Pty Ltd (In Liquidation) being in possession of sufficient available property to adjudicate upon such Formal Proofs of Debt or Claims; and
(iii) The acceptance by the Liquidator of fresh evidence that is material to the winding up of Great Wall Resources Pty Ltd (In Liquidation); and
(iv) The Plaintiffs first paying any and all moneys owed by them to the Liquidator or Great Wall Resources Pty Ltd (In Liquidation).
The liquidator is not entitled to an order in terms of paragraph 2, but succeeds in his application for a direction to the effect of paragraph 3. In the course of argument the liquidator accepted that it was enough for his purposes if the direction did not continue beyond the reference to calling for formal proofs of debt.
An order against re-litigation is not warranted
The law in relation to an order of the kind sought in paragraph 2 of the liquidator's further amended interlocutory process is, with respect, correctly set out by Justice Vickery in Optquest Pty Ltd v Marchesi (as trustee of the bankrupt estate of Vasiliou (a former bankrupt)) [2011] VSC 428 ("Optquest") (citations omitted):
[33] Quite apart from the Court's power under s 21 of the Supreme Court Act 1986 (VIC) to declare a person to be a vexatious litigant, the Court has a well-recognised inherent jurisdiction to protect itself from abuses of its process. That jurisdiction is reflected in, but not circumscribed by, the Rules of Court.
[34] In England, it has long been accepted that this jurisdiction extends to the making of orders restraining the commencement of proceedings, as well as the institution of applications within a proceeding.
[35] However, Barwick CJ and McTiernan J in Commonwealth Trading Bank of Australia v Inglis, in the context of the lodging of appeals, whilst accepting that there is an inherent power in the Court to control the bringing of applications in the course of an action, identified a fundamental distinction between bringing applications within the proceeding, and instituting a new proceeding.
[36] Nevertheless, in Hunter v Leahy, French J did not regard their Honours' decision in Inglis as operating to confine the inherent jurisdiction of a superior court (or the implied incidental power of the Federal Court) to prevent a court, in the appropriate case, from restraining the institution of proceedings which, in effect, seek to re-litigate the substance of matters determined in earlier proceedings in the same court, noting that: "... the touchstone of the Court's power must be substance rather than form". Nevertheless, if such an order is to be made, as is also clear from the approach of French J in Hunter v Leahy, the order is to be cast no wider than necessary.
The liquidator submitted the Court should infer that there was a real risk that the Capocchianos would commence proceedings seeking to re-litigate the issues in these proceedings by reference to:
(i) the several formal and informal proofs of debt or claims which the Capocchianos had already lodged;
(ii) Mr Capocchiano's stated intention to lodge a further proof of debt if the Capocchianos are unsuccessful in these proceedings;
(iii) Mr Capocchiano's statement during the course of final submissions that he intended to seek to reopen the Federal Court's order for the winding-up of the Company (T213:16-18); and
(iv) Mr Capocchiano's question inferring that he wants some kind of audit of the liquidator's conduct of the administration (T195:9-11, 3536).
Those matters do not support the inference that the Capocchianos may commence proceedings which will seek to re-litigate the issues raised before me. None of the possible steps foreshadowed by Mr Capocchiano during the course of the hearing appears to involve re-litigation of the matters before me. That is a key difference between these proceedings and Optquest. In Optquest the threat of re-litigation had become real because the new proceedings had in fact been commenced and Vickery J made the order. In this case there is insufficient evidence to warrant a finding of a threat to re-litigate that would justify making the order sought by the liquidator.
Furthermore, the Court's power to make such an order is discretionary. In the exercise of that discretion I also decline to make the order sought because it lacks utility. Even if the order is made, if the Capocchianos' commence proceedings the Court will need to determine whether those proceedings in fact involve an attempt to re-litigate the matters dealt with before me. If I do not make the order and the Capocchianos commence proceedings, then the very same question will arise if the liquidator is advised there is a proper basis to contend that those new proceedings involve re-litigation of issues decided in these proceedings. In the circumstances of this case and these parties the Court is not satisfied that the orders sought would have any real utility.
The liquidator is entitled to a direction
The evidence to which I have referred about the Capocchianos' several attempts to lodge proofs of debt and Mr Capocchiano's stated intention to lodge a further proof if he is unsuccessful in these proceedings does, however, warrant a direction to the effect of that sought by the liquidator in prayer 3 of his further amended interlocutory process. The liquidator's application for that direction is undoubtedly properly made under s 479(3) of the Act as going to the manner in which the liquidator should act in carrying out his functions (see Re GB Nathan & Co Pty Limited (in liq) (1991) 24 NSWLR 674).
The conduct of this litigation has undoubtedly further depleted the assets available to the liquidator. It may therefore be the case that, if and when a further proof of debt is lodged by the Capocchianos, the liquidator may be excused from having to adjudicate upon it under s 545(1) of the Act, which provides that "a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property".
However, the evidence before me does not warrant a conclusion that will necessarily be the case. These proceedings have been the most exhaustive attempt in the administration thus far to determine the state of accounts between the Capocchianos and the Company. A direction to the effect that the liquidator is justified in treating the Capocchianos as neither a debtor nor a creditor of the Company (save as to the extent of any costs order I make against the Capocchianos in favour of the Company) is consistent with my conclusion that the Court cannot be satisfied to the requisite standard of a specific amount which one party owes to the other.
The form of the direction which I made has two safeguards for the Capocchianos. First, the direction will not apply if and when the liquidator calls for formal proofs of debt. As a matter of commercial reality he is unlikely to do so unless he has funds available for distribution. But if he does so, the Capocchianos will be entitled to lodge a further proof. Until then the direction is in the interests of the liquidator and the other creditors by having the effect of relieving the liquidator from having to spend time and money adjudicating any further proof of debt or claim the Capocchianos may make.
Second, it will be open to the Capocchianos to approach the Court for an order vacating or varying the direction in relation to any further proof of debt they propose to lodge (assuming formal proofs have not been called for) provided that they can satisfy the Court that there is a proper reason to do so.
Costs
No persuasive reasons have been advanced by the Capocchianos as to why costs should not follow the event in relation to their originating process.
As to the liquidator's further amended interlocutory process, the costs should also follow the event, with one exception. That exception arises from the fact that previous iterations of the liquidator's interlocutory process included claims for relief that were ultimately not pressed. The Capocchianos should not have to pay the liquidator's costs incurred in preparing claims which were ultimately abandoned.
Decision last updated: 02 July 2013
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