Carter, in the matter of Townsville Electronics Service Centre Pty Ltd (In Liquidation) v Sinclair
[2019] FCA 2178
•23 December 2019
FEDERAL COURT OF AUSTRALIA
Carter, in the matter of Townsville Electronics Service Centre Pty Ltd (In Liquidation) v Sinclair [2019] FCA 2178
File number(s): QUD 466 of 2019 Judge(s): GREENWOOD J Date of judgment: 23 December 2019 Catchwords: CORPORATIONS – consideration of an application for orders that judgment be entered in respect of contraventions of the Corporations Act 2001 (Cth) and related orders for recovery of compensation or damages arising out of the particular contraventions Legislation: Corporations Act 2001 (Cth), ss 180, 588FB, 588FE, 588G, 588M, 1317E, 1317H
Federal Court of Australia 1976 (Cth), s 51A
Date of hearing: 19 December 2019 Date of last submissions: 19 December 2019 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 41 Solicitor for the Plaintiffs: A Narayan, Craddock Murray Neumann ORDERS
QUD 466 of 2019 IN THE MATTER OF TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATOIN) (ACN 160 469 036)
BETWEEN: MOIRA KATHLEEN CARTER IN HER CAPACITY AS LIQUIDATOR OF TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATION) (ACN 160 469 036)
First Plaintiff
TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATION) (ACN 160 469 036)
Second Plaintiff
AND: BRADLEY JAMES SINCLAIR
First Defendant
CATRINA LOUISE SINCLAIR
Second Defendant
ROSLYN MAREE SINCLAIR
Third Defendant
GEOFFREY PETER SINCLAIR
Fourth Defendant
JUDGE:
GREENWOOD J
DATE OF ORDER:
23 DECEMBER 2019
THE COURT ORDERS THAT:
1.Judgment be entered in favour of the plaintiffs against the third and fourth defendants for damages to be assessed in respect of the matters described at [20] to [28] of the reasons for judgment published today.
2.The quantum of the damages the subject of Order 1 of these orders is assessed at $190,000.00.
3.Judgment be entered in favour of the plaintiffs against the third and fourth defendants in respect of the matters described at [34] to [38] of the reasons for judgment published today in an amount of $107,793.33.
4.The plaintiffs are directed to provide the Court with a calculation of interest payable on the amount of the judgment against the third and fourth defendants by 31 January 2020.
5.The application in relation to the question of interest contemplated by Order 4 is reserved to be the subject of further orders.
6.The application so far as it relates to the first defendant is adjourned generally for further submissions to be put on both in writing and orally at a date to be fixed.
7.Pursuant to s 23 and s 37P of the Federal Court of Australia Act 1976 (Cth), rule 1.32 and rule 1.36 of the Federal Court Rules 2011, these orders and the reasons for judgment in support of these orders are made and published from Chambers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GREENWOOD J:
These proceedings are concerned with an application by the plaintiffs for orders that judgment be entered against the first defendant in the sum of $169,354.55 plus pre‑judgment interest calculated pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) from 21 July 2019 until the date of judgment and an order that judgment be entered against the third and fourth defendants in the sum of $307,175.04 plus pre‑judgment interest under s 51A from 26 July 2019 until the date of judgment. The plaintiffs seek a further order against the first, third and fourth defendants for costs fixed in an amount of $32,139.50. The quantum of the costs is an amount which represents the discounted quantum of an assessment set out in the affidavit of Ms Suami Campos sworn 6 December 2019.
The relevant background events are these.
The originating application for the principal proceeding was filed on 26 July 2019.
The plaintiff, Ms Moira Kathleen Carter, is the liquidator of the second plaintiff, Townsville Electronics Service Centre Pty Ltd (“Townsville Electronics” or the “company”), having been appointed on 15 September 2017. On 15 August 2017, an application was filed in this Court by the Deputy Commissioner of Taxation seeking an order that the company be wound up in insolvency.
On 15 September 2017, an order was made that the company be wound up in insolvency based upon a failure to comply with a creditor’s statutory demand under the Corporations Act 2001 (Cth) (the “Act”).
The first defendant in the proceeding is Bradley James Sinclair. He was a former director and shareholder of the company having been appointed on 24 September 2012. He ceased acting as a director on 23 February 2016.
The second defendant, Catrina Louise Sinclair, was a former director and shareholder of the company having also been appointed on 24 September 2012. She ceased acting as a director on 23 February 2016.
The third defendant, Roslyn Maree Sinclair, was a director and shareholder of the company having been appointed a director on 23 February 2016.
The fourth defendant, Geoffrey Peter Sinclair, was a director and shareholder of the company having been appointed a director on 23 February 2016. Bradley Sinclair and Catrina Sinclair are the children of Geoffrey Sinclair and Roslyn Sinclair.
On 22 January 2018, Ms Carter prepared a report in relation to the affairs of the company. In that report, Ms Carter observes that the company operated as an electronics service centre providing warranty work for major suppliers of audio‑visual appliances such as Sony, Panasonic and LG products. The company also marketed and supplied services and parts direct to the public. Prior to incorporation, Geoffrey and Roslyn Sinclair operated the business as a partnership. Ms Carter says that she understands that their children, Catrina and Bradley Sinclair, wished to take over the family business with the result that the company was incorporated in 2012 with Catrina and Bradley as its directors. Geoffrey and Roslyn Sinclair remained employees. Mr Geoffrey Sinclair advised Ms Carter that in 2016, Catrina and Bradley Sinclair decided that they did not want to be involved any further so Geoffrey and Roslyn Sinclair replaced them as directors on 23 February 2016.
Pursuant to s 9 and Div 1A of Pt 5.6 of the Act, the relation‑back day is 15 August 2017, the day on which the application for the winding‑up order was filed.
By the originating application, a wide range of relief is sought against each of the directors. Having regard to the basis upon which judgment is now sought against some of the directors, I will simply indicate by reference to the relevant facts the basis upon which judgment is sought against the particular defendants.
As to the procedural matters, these things should be noted. The originating proceedings were duly served against each of the defendants and notices of appearance to act were filed. On 23 September 2019, a notice of ceasing to act was filed by the solicitor, Mr Parsons of Gavin Parsons & Associates who was then acting for Mr Bradley Sinclair, Ms Catrina Sinclair, Ms Roslyn Sinclair and Mr Geoffrey Sinclair.
On 10 October 2019, the Court made orders that the plaintiffs have leave to file and serve points of claim in support of the originating application described by reference to an affidavit of Ms Carter sworn 29 May 2019. Those points of claim were to be served by 15 October 2019. The defendants were ordered to file and serve their defences by 12 November 2019. An order was made that the matter be listed for a case management hearing at 9.30am on 22 November 2019. The plaintiffs were ordered to notify the defendants of the orders of 10 October 2019. The plaintiffs rely upon an affidavit of Ashleigh Estwick‑Jackson sworn 19 November 2019 which deposes to the service on Bradley Sinclair, Geoffrey Sinclair and Roslyn Sinclair of particular material including the orders of the Court made on 10 October 2019 and the points of claim in the principal proceeding.
The matter came before the Court again on 22 November 2019. None of the defendants had filed a defence as required by the order of 20 October 2019. The Court made orders that the plaintiffs file any interlocutory process for default judgment by 29 November 2019 and that the interlocutory process for default judgment be listed for hearing on 9 December 2019.
The matter came before the Court again on 9 December 2019 and it became clear that although the plaintiffs had filed an interlocutory application for default judgment arising out of the failure of the defendants to file a defence, the interlocutory application for default judgment had not been served on the defendants against whom those orders would be sought. The matter was adjourned to 9.45am on Thursday, 19 December 2019 to enable the plaintiffs to effect service of the application and relevant material. That material included an amended interlocutory application filed on 6 December 2019. The matter came before the Court for determination on 19 December 2019. The plaintiffs rely upon an affidavit of Ms Parry affirmed on 16 December 2019 which deposes to service upon Bradley Sinclair, Geoffrey Sinclair and Roslyn Sinclair of the material in support of the application which consists of the amended application of 6 December 2019; the affidavit of Ms Campos sworn 29 November 2019; the further affidavit of Ms Campos sworn 6 December 2019; the affidavit of Ms Chedid sworn 29 November 2019; the affidavit of Ashleigh Estwick‑Jackson sworn 19 November 2019 and the plaintiffs’ outline of submissions.
Having regard to the default in filing a defence in the principal proceeding, the plaintiffs seek judgment in the action particularly having regard to facts which have not been put in issue and therefore are to be treated as admitted and having regard to the affidavit material put on by the plaintiffs.
The claims made by the plaintiffs are concerned with a claim which constitutes a claim for liquidated damages and a claim for unliquidated damages.
The background facts relevant to the interlocutory application for judgment are these.
On 23 February 2016, Geoffrey Sinclair and Roslyn Sinclair became directors of the company. On 2 September 2016, the company executed an agreement dated 2 September 2016 for the sale of the business of the company to Geoffrey Sinclair for a purchase price of $5,800.00 recited as consideration for the “Assets and Stock” of the company. That sum was to be paid by bank cheque or direct deposit into the company’s account on the completion date which was to be 31 October 2016. The company entered into that agreement under the signature of its two directors, Geoffrey Sinclair and Roslyn Sinclair. The agreement was signed by the purchaser, Geoffrey Sinclair. In Ms Carter’s report, she says that Geoffrey Sinclair advised her that the finalisation of the sale took two months and was not completed until 31 December 2016. Notwithstanding the terms of the sale agreement, Geoffrey Sinclair failed to pay the consideration of $5,800.00 to the company.
In about January 2017, Geoffrey Sinclair began to operate a business that was, and is, substantially the same business as that operated by the company. The six features of similarity are set out in the points of claim of the plaintiffs. The Townsville business has been traded by Geoffrey Sinclair since January 2017.
As a result of the sale agreement and the transfer of the business of the company to Geoffrey Sinclair (a director of the company), the plant equipment, domain registration, intellectual property, furniture, funds received, stock, employees, warranty servicing contracts and the entire Townsville business of the company has been transferred to Geoffrey Sinclair for the consideration recited in the agreement which, in any event, has not been paid. Geoffrey Sinclair has used all of those things in conducting the trading activity of the business since January 2017.
In about September 2018, Ms Carter arranged for a valuation to be conducted of the business of the company at the date of transfer of the business, assets and stock to Geoffrey Sinclair. The valuation is contained in a document entitled “Expert Report – Business Valuation” dated 26 September 2018. That report was provided by Mr Glenn Parry, a principal of BRI Ferrier and the report is Exhibit “GP‑1” to Mr Parry’s affidavit sworn 29 May 2019. Mr Parry says that he has been engaged to act as an expert and to consider the value of the business undertaking owned by the company at the date of sale to Geoffrey Sinclair. The valuation values the business of the company on or about 31 October 2016. The valuation was determined using a capitalisation of future maintainable earnings methodology. Mr Parry assesses the value of the business transferred to Geoffrey Sinclair (ultimately transferred on 31 December 2016) as $190,000.00.
In the points of claim to which the defendants have not responded, the plaintiffs assert that on 4 June 2018, Geoffrey Sinclair purported to execute an agreement appointing NQ Business Consultants as agent to sell the business he had acquired from the company. In that agreement, which is in writing, the document recites that the value of the business is $195,000.00 plus stock at valuation.
The plaintiffs say that the sale by the company of its business in accordance with the agreement dated 2 September 2016 at the hands of the two directors, Geoffrey Sinclair and Roslyn Sinclair to Geoffrey Sinclair, is a transfer falling within ss 9, 588FB and 588FE of the Act. As to s 588FB, that section provides that a transaction of a company is an uncommercial transaction if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefits (if any) to the company of entering into the transaction; and the detriment to the company of entering into the transaction; and the respective benefits to other parties to the transaction of entering into it; and any other relevant matter. Such a transaction is an “uncommercial transaction”.
At the time of the transaction, Geoffrey Sinclair and Roslyn Sinclair were directors of the company. They caused the company to enter into the transaction. They knew that Geoffrey Sinclair was the buyer at $5,800.00. The transfer was effected in the period between September 2016 and January 2017 during the period of two years ending on the relation‑back day of 15 August 2017. The company derived no benefit and suffered significant detriment by reason of the deprivation of the value of the business for a nominal sum. A reasonable person in the circumstances of the company would not have entered into the transfer as the company received no benefit, suffered a detriment and conferred a benefit on one of the directors. At the time of the transfer, the company was insolvent. The plaintiffs seek an order that Geoffrey Sinclair compensate the company for damage suffered by it by reason of the contravention of s 588FB. The plaintiffs have put on evidence in the form of an expert report which provides an assessment of the general damages suffered by reason of the uncommercial transaction. The quantum of the damages claimed is $190,000.00. That sum would normally be reduced by the value of the benefit obtained by the company of $5,800.00. However, Geoffrey Sinclair did not pay that sum and, accordingly, the company has lost the benefit of the business assets transferred to Geoffrey Sinclair and the value is $190,000.00. Section 1317H of the Act provides that a court may order a person to compensate a corporation for damage suffered if the person has contravened “a corporation/scheme civil penalty provision in relation to the corporation” and the damage claimed resulted from the contravention. A contravention of s 588FB is not a civil penalty provision: ss 9 and 1317E.
The plaintiffs claim that s 180 applies to the conduct of the directors in entering into the uncommercial transaction. Section 180(1) provides that a director or officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director in the corporations circumstances; and, they occupied the office held by, and had the same responsibilities within the corporation as the director or directors. Having regard to the matters earlier mentioned relating to the lack of benefit derived by the company by reason of the transaction, the detriment to the company and the benefit conferred upon one of the directors, Geoffrey Sinclair, and the insolvency of the company, I am satisfied that Geoffrey Sinclair and Roslyn Sinclair contravened s 180(1) by transferring the business to Geoffrey Sinclair at a gross undervalue. Section 180(1) is a civil penalty provision under s 1317E of the Act and thus the plaintiffs are entitled to claim compensation under s 1317H for damage suffered as a result of that contravention. As already indicated, the measure of the damage is $190,000.00. The plaintiffs are entitled to judgment for damages to be assessed in respect of the claim. However, having regard to the evidence put on in support of the assessment and quantum of the loss, the amount of the damage suffered in respect of the claim is $190,000.00.
The transaction is also an unreasonable director‑related transaction for the purposes of s 588FDA(1)(a)(ii) of the Act which conduct also engages contravention of s 180(1) of the Act.
As to the insolvency of the company, the plaintiffs assert that the company was unable to pay its debts as and when they became due and payable as from 23 September 2013 and at all times thereafter. The plaintiffs note aspects of the negative net asset values in the balance sheet of the company for the financial years ending 30 June 2013, 30 June 2014, 30 June 2015, 30 June 2016 as at 31 October 2016 and as at 3 January 2017. They also identify net losses in each of the full financial years and in the periods to 31 October 2016 and 3 January 2017. They plead the liquidity ratio (below 1) from 30 June 2013 for each of those periods. They also plead that the company failed to pay its taxation debts as and when due and, in particular, the debt to the Commissioner of Taxation on the company’s running balance account as at 23 September 2013 and thereafter. They also note that the company had failed to lodge income tax returns for the years ending 30 June 2015, 30 June 2016 and 30 June 2017. They also note that the company failed to maintain its superannuation obligations. The ATO running balance account debt accumulated between 23 September 2013 and 22 February 2016 was $139,490.24. The ATO running balance account debt from 23 February 2016 onwards was $90,554.42. Superannuation liabilities between 23 September 2013 and 23 February 2016 amounted to $29,864.31 and debts owing to the ATO for superannuation liabilities from 24 February 2016 onwards amounted to $17,238.81. An amount for unpaid long service leave was owing to Leslie Cheal in an amount of $8,301.71. These debts total $286,529.59. The plaintiffs plead that when each of these debts were incurred, there were reasonable grounds for suspecting that the company was insolvent.
The plaintiffs assert that Bradley Sinclair and Catrina Sinclair when they were directors of the company, caused the company to incur debts in the period between 23 September 2013 and 22 February 2016 of $139,490.24 in respect of the ATO running balance debt and $29,864.31 in respect of the debt to the ATO for superannuation liabilities constituting debts of $169,354.55.
As to Bradley Sinclair, the plaintiffs seek compensation against him pursuant to s 588M of the Act in respect of a contravention of s 588G of the Act. Section 588G(1) provides that s 588G applies if a person is a director of a company at the time when the company incurs a debt; and the company is insolvent at that time or becomes insolvent by incurring the debt or by incurring at that time debts including the debt; and at that time, there are reasonable grounds for suspecting that the company is insolvent or would so become insolvent as the case may be; and the relevant time is at or after the commencement of the Act. I am not presently satisfied that s 588G is engaged in the circumstances of this case for the entirety of the claim made by the plaintiffs so far as it concerns Bradley Sinclair. Section 588G(2) provides that by failing to prevent the company from incurring the debt, the person (in this case the former director, Bradley Sinclair) contravenes the section if the person is aware at that time that there are grounds for suspecting that the company is insolvent or would so become insolvent; or a reasonable person in a like position in the company in the company’s circumstances would be so aware.
I cannot be satisfied that a reasonable person in a like position in the company to that of Bradley Sinclair, in the company’s circumstances, would have been aware that the company was insolvent at the relevant time so far as the entirety of the claim is made. Plainly, the company was unable to pay its debt to the ATO both in respect of the running balance account debt and in respect of superannuation liabilities. The running balance account debt was accumulating, it seems, for the very reason that the company was unable to pay its debts as and when they fell due and that is said to be from 23 September 2013. Bradley Sinclair was a director from 24 September 2012 to 23 February 2016.
The full amount of the claim against Bradley Sinclair is $169,354.55. I am not presently satisfied about the moment in time when Bradley Sinclair might reasonably be found to have been aware that there were grounds for suspecting that the company was insolvent or would become insolvent. I propose to adjourn that aspect of the matter for further submissions from the plaintiffs which provide the Court with more detail about those matters.
The circumstances in relation to the third and fourth defendants are entirely different.
The third and fourth defendants, Roslyn Sinclair and Geoffrey Sinclair, became directors on 23 February 2016.
In the period from 23 February 2016 onwards to the date of liquidation, the company continued to incur debts. The ATO running balance account debt in this period was $90,554.52 and the debt to the ATO for superannuation liabilities amounted to $17,238.81. During the course of the hearing, some issues were raised with the solicitors for the plaintiffs about an additional income tax liability of $1,080.00 and the obligation owed to Leslie Cheal of $8,301.71. Those amounts were not pressed and thus the total debts incurred by the company during the period that Geoffrey Sinclair and Roslyn Sinclair were directors relevant to this proceeding amounts to $107,793.33. That sum is claimed against both directors on the footing that the business of the company operated under the direct supervision and control of those two directors. They were the guiding mind of the company in the relevant period.
In the relevant period the company operated an electronics service centre and, in doing so, earned income and incurred taxation liabilities to the Commissioner of Taxation. I am satisfied that a reasonable person in the position of those two directors would have been aware when the debts were incurred that there were grounds for suspecting that the company was insolvent or would become insolvent by incurring the respective debts. I am satisfied that the directors have contravened s 588G(2). Section 588M(2) provides that the company’s liquidator may recover from the director as a debt due to the company, an amount equal to the amount of the loss or damage contemplated by s 588M(1). Section 588M(1) applies where (among other things) a person described as a creditor to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency. That amount, in this case, is an amount owed to the creditor in the form of the ATO which is $107,793.33. The company’s liquidator is entitled to recover an amount equal to the amount of that loss from the director.
Accordingly, judgment is to be entered against the third and fourth defendants, Roslyn Sinclair and Geoffrey Sinclair, as a liquidated debt, for the sum of $107,793.33 in respect of the contravention of s 588G(2) having regard to s 588M(1) and s 588M(2) of the Act.
In addition, judgment is to be entered against the third and fourth defendants in the sum of $190,000.00 in respect of the contravention of s 180(1) having regard to the uncommercial transaction described earlier. That judgment is entered under s 1317H of the Act.
The plaintiffs will be entitled to interest on the respective judgment amounts calculated up to the date of judgment.
As to the claims made against Bradley Sinclair, those matters will be adjourned for further submissions addressed to the matters raised by [31] to [33] of these reasons. Arrangements can be made with my Associate to re‑list that matter for further submissions in February 2020. The plaintiffs will be entitled to interest calculated to 23 December 2019 on the amount of the judgment given against Geoffrey Sinclair and Roslyn Sinclair.
I certify that the preceding forty‑one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 23 December 2019
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