Cribb v Kingsbury (No 2)

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FEDERAL COURT OF AUSTRALIA

Cribb v Kingsbury (No 2) [2021] FCA 1397    

File number: WAD 87 of 2019
Judgment of: MCKERRACHER J
Date of judgment: 11 November 2021
Catchwords:

CORPORATIONS – recovery proceedings against former director – claims for insolvent trading, breach of directors duties, voidable transactions and debt recovery – where company incorporated as business venture by the two directors who are also the only shareholders – where the first director has day-to-day control of the business and the second director provides financial support to the company – where the first director deliberately concealed the company’s tax and superannuation liabilities from the second director – whether the second director breached his statutory or fiduciary duties by failing to inform himself of the company’s position independently of the first director

CORPORATIONS – insolvent trading – whether company was insolvent at the relevant times – where company received financial support from one of its directors and a related company – whether there was the necessary degree of assuredness that the director would continue to support the company to enable it to pay its debts as and when they fell due

CORPORATIONS – voidable transactions – payments by company to one of its directors and a related company pursuant to a lease agreement and hire agreements – whether the transactions are unreasonable director-related transactions pursuant to s 588FDA of the Corporations Act 2001 (Cth) – whether a reasonable person in the company’s circumstances would not have entered into the transactions
Legislation: Corporations Act 2001 (Cth) ss 9, 79(c), 95A, 180, 180(1), 181, 182, 183, 588FB, 588FDA, 588FDA(1)(a), 588FDA(1)(b), 588FE, 588FF, 588G, 588G(1), 588G(1)(c), 588G(2), 588H(2), 588M, 1317E, 1317H
Cases cited:

ASIC v Flugge & Geary [2016] VSC 779; (2016) 342 ALR 1

Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023

Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 54 ACSR 583

Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052

Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1

Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83

Carna Group Pty Ltd v The Griffin Coal Mining Company (No 6) [2021] FCA 1214

Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28

Hussain v CSR Building Products Ltd [2016] FCA 392; (2016) 246 FCR 62

Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555

Mulherin v Bank of Western Australia Ltd [2006] QCA 175

Playspace Playground Pty Ltd v Osborn [2009] FCA 1486

Scott v Duncan [2007] FCAFC 30

Smith v Boné [2015] FCA 319; (2015) 104 ACSR 528

Super Art Australia Pty Ltd v Foden [2014] FCA 1168; (2014) 9 BFRA 702

Termite Resources NL (in liq) v Meadows (No 2) [2019] FCA 354

VL Finance Pty Ltd v Legudi [2003] VSC 57; (2003) 54 ATR…

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Details
Case
[2021] FCA 1397
Decision Date

CaseChat Overview and Summary

Cribb v Kingsbury (No 2) involved a legal dispute concerning claims related to the operations and financial management of Pilbara Bakeries, a company established as a business venture by the plaintiffs, Mr Cribb and Mr Catlin, and the defendant, Mr Kingsbury. The plaintiffs alleged various breaches of directors' duties, including insolvent trading, voidable transactions, and debt recovery. They sought to recover payments made to Mr Kingsbury and Malaga, as well as to establish breaches of statutory and fiduciary duties by Mr Kingsbury. The case centred on whether Mr Kingsbury, a co-director and shareholder, breached his duties by failing to independently verify the company’s financial position and whether the company was insolvent at relevant times.

The court was required to determine whether Mr Kingsbury breached his statutory or fiduciary duties by not independently verifying the company's financial position. This involved examining whether he should have been aware of the company's insolvency and tax liabilities independently of Mr Catlin. Additionally, the court needed to assess whether the company was insolvent at the relevant times, considering the financial support provided by Mr Kingsbury and Malaga. Another key issue was whether the payments made by Pilbara Bakeries to Mr Kingsbury and Malaga were unreasonable director-related transactions that could be declared void under the Corporations Act.

The court found that Mr Kingsbury did not breach his statutory or fiduciary duties. It held that Mr Kingsbury had no reason to doubt the information provided by Mr Catlin, given the clear commitment and efforts of both directors towards the business. The court further found that Pilbara Bakeries was not insolvent at the relevant times, as there was a sufficient degree of assuredness that Mr Kingsbury would continue to support the company financially. Consequently, the claims for insolvent trading and voidable transactions were dismissed. The court concluded that Mr Kingsbury should not have been required to endure the stress of the litigation, and the amended originating process was dismissed. The plaintiffs were ordered to pay the defendants' costs unless they filed submissions within five days seeking an order to the contrary.

Orders

Orders of the court

1. The amended originating process dated 9 September 2020 be dismissed.

2. Unless within five days the plaintiffs file submissions seeking an order to the contrary, the plaintiffs pay the defendants’ costs, to be taxed or assessed if not agreed.

3. If the plaintiffs file any submissions in accordance with order 2 above, the defendants be permitted a further 5 days to file any submissions in response.

4. Unless otherwise ordered, the question of costs be determined on the papers.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

It is also said that Mr Kingsbury, in breach of his duties, received substantial monetary benefits from Pilbara Bakeries that should be repaid. For reasons that follow, the plaintiffs have not established this case or any part of their case. It should not have been brought. Mr Kingsbury should not have been required to endure the stress of this litigation.BACKGROUND FACTS The plaintiffs rely on five affidavits of Mr Cribb, one affirmed on 8 February 2019, two affirmed on 30 October 2019, one affirmed on 1 July 2020 and a further affidavit affirmed on 16 October 2020. The defendants rely on the expert affidavit of Ms Jennifer Low sworn on 25 March 2020, an affidavit of Mr Kingsbury sworn on 27 March 2020, an affidavit of Mr Catlin sworn on 6 May 2020, an affidavit of Mr Kingsbury sworn on 26 June 2020 and a further affidavit of Mr Kingsbury sworn on 23 March 2021. The evidence, which will be discussed in greater detail below, establishes the following key facts: In early 2010, Malaga developed, and became the owner of, eight strata units on Coolawanyah Road, Karratha. Through a real estate agent engaged by Malaga, Mr Kingsbury was approached by Mr Catlin with a proposal to lease two of the strata units for the purpose of starting the Bakery Business (Premises). Mr Kingsbury initially rejected a number of offers made by Mr Catlin to lease the Premises. The two men then met in late 2010 and discussed various options as to the commercial viability of the venture. Mr Catlin advised Mr Kingsbury that he was an experienced baker and would conduct the Bakery Business with his two sons who had similar experience. He also considered that the Business presented a commercial opportunity because there was at that time no wholesale bakery north of Geraldton, with most bread in the north-west of Western Australia being transported frozen from Perth. After further discussions it was agreed between Mr Catlin and Mr Kingsbury that they would embark upon the wholesale Bakery Business venture in Karratha on a 50/50 basis. Mr Catlin was to operate and manage the bakery on a daily basis, as Mr Kingsbury resided in Perth (about 1527 kilometres apart by road) and Mr Kingsbury would fund the fit-out of the Premises and purchase the necessary equipment to conduct the Bakery. Pilbara Bakeries was incorporated on 8 February 2011 as the entity to run and operate the Bakery. At incorporation, Pilbara Bakeries had two ordinary shares issued, one each to Mr Catlin and Malaga. Both Messrs Catlin and Kingsbury were directors of Pilbara Bakeries from its incorporation. Mr Catlin subsequently, on 10 March 2011, provided Mr Kingsbury with a proposed cash flow budget and ‘master plan’ for the Bakery Business. It forecasted estimated net profits of $470,000 for the year ended 30 June 2012, which was expected to gradually increase to $904,753 by the year ending 30 June 2016. To formalise the arrangements for the Bakery Business, Mr Kingsbury, Mr Catlin, Malaga and Pilbara Bakeries executed a Shareholders Agreement dated 18 March 2011. Clause 2.1 of the Agreement described the company’s purpose as being to conduct the Bakery Business. Clause 6.1 and cl 6.2 provided for the annual adoption of a budget and business plan by the directors. Clause 8.1 then provided as follows:8.1[Mr] Catlin is responsible for all the day to day management and the conduct of the business of the Company. For the purposes of this clause day to day management and the conduct of the business of the Company includes but is not limited to conducting all aspects of the business of the Company which include but are not limited to purchasing products, manufacture of products, managing the baking process, contracting with purchasers of the Products, record keeping, invoicing, account keeping in respect to all expenses purchases and sales of the Products manufactured by the Company .

Evidence

Evidence Before The Court

In light of the conclusions reached on some issues, not all the above questions need to be specifically addressed. Similarly, the defendants no longer rely on any of the limitations arguments which are contemplated by (8) and (11) above.EVIDENCE It is convenient to deal first with the lay evidence and then the expert evidence. As to the expert evidence, Mr Cribb for the plaintiffs and Ms Low for the defendants, gave extensive evidence and were both cross-examined. As foreshadowed above, Ms Low’s evidence is generally preferred. Mr Kingsbury was also cross-examined, however, Mr Catlin was not. There is no reason to doubt either directors’ evidence, which together creates a clear picture of a relationship that was, from its outset, clouded by the dishonesty and deception of Mr Catlin with respect to Pilbara Bakeries’ taxation and superannuation liabilities. That said, both men were clearly committed to the Business and attempted, over a number of years, to establish it as a profitable venture. Mr Kingsbury committed substantial funds to the purchase of assets and the injection of cash into the Business. Ultimately however, that support was given under the false pretence that Mr Catlin had been upholding his side of the bargain by keeping Mr Kingsbury reasonably updated as to the company’s position.Mr Catlin Mr Catlin by his affidavit confirmed the background facts summarised above. He confirmed that he told Mr Kingsbury that he was a baker by profession, but that he did not have the financial resources or ability to purchase the necessary equipment to commence conducting a business. Agreement was reached in the manner summarised above. Mr Catlin engaged all staff necessary to conduct the Business. Other than himself and his two sons, the Business employed overseas backpackers from time to time. Monthly management accounts were provided by Mr Catlin to Mr Kingsbury who would phone Mr Catlin during most weeks to discuss the Business. Mr Kingsbury would enquire of Mr Catlin about how the Business was trading and about the payment of creditors and other financial matters concerning the Business. Mr Catlin engaged an accountant to prepare the annual financial statements for Pilbara Bakeries and provided the accountant with all the information necessary to prepare the annual financial statements. In relation to the company’s debt to the ATO in 2012 which resulted in the garnishee notice, Mr Catlin says that whilst he was aware of the liability, he deliberately did not inform Mr Kingsbury about those arrears as he considered that it was his responsibility to sort out all matters relating to the conduct of the Business, including dealings with the ATO. Mr Catlin confirms that from time to time Mr Kingsbury would ask if Pilbara Bakeries had met its tax obligations, which Mr Catlin would confirm were in order even though he knew the answer to be incorrect. I accept this and all of Mr Catlin’s relevant evidence which was unchallenged, plausible and given against his own interests.

Decision

Reasons for decision

In light of those conclusions, it is unnecessary to consider the claim of set-off raised by the defendants. CONCLUSION The amended originating process will be dismissed. The plaintiffs wished to be heard on costs. There is no apparent reason why costs should not follow the event. Only if the plaintiffs contend otherwise, the parties should each have five days to file submissions not exceeding five pages on costs. Unless the Court otherwise orders, costs will be determined on the papers.

Ratio Decidendi

Legal Principle Established

On this basis, the plaintiffs raise a claim for insolvent trading against the defendants pursuant to s 588G of the Corporations Act 2001 (Cth). The quantum of that claim was the subject of an amendment application on the first day of trial which is addressed below. The plaintiffs also contend, and it is accepted, that during the Relevant Period, Pilbara Bakeries made payments from its bank account to Malaga and Mr Kingsbury totalling $1,072,735.76, as follows:(a)$508,750.00 for Rent Payments, of which:(i)$375,000 was paid to Mr Kingsbury’s bank account;(ii)$133,750 was paid to Malaga’s bank accounts;(b)$94,920.20 for Variable Outgoing Payments, of which:(i)$85,644.98 was paid to Mr Kingsbury’s bank account;(ii)$9,275.22 was paid to Malaga’s bank accounts;(c)$194,849.85 for Fit-Out Payments, of which the full amount was paid to Mr Kingsbury’s bank account;(d)$7,496.15 for Equipment Payments;(e)$200,621.56 for Vehicle Payments; and(f)$66,098.00 for repayment of amounts advanced to the company by Malaga (the Malaga Payments). The plaintiffs seek recovery of each of these amounts as unreasonable director-related transactions that are voidable pursuant to s 588FE and s 588FF of the Corporations Act. Alternatively, the plaintiffs raise a claim in debt for a significant proportion of the above amount on the basis that payments were made by Pilbara Bakeries directly to Mr Kingsbury for amounts that were in fact owing to Malaga. The plaintiffs say this sum of $943,952.90 should be treated as an undocumented loan of funds to Mr Kingsbury that is repayable immediately on demand: VL Finance Pty Ltd v Legudi [2003] VSC 57; (2003) 54 ATR 221. The payments the subject of this claim are referred to as the Kingsbury Loans. Finally, the plaintiffs allege that Mr Kingsbury breached both his statutory and fiduciary duties to Pilbara Bakeries. Accordingly, the plaintiffs seek the following relief:(a)an order that Mr Kingsbury pay Pilbara Bakeries the sum of $943,952.90, being the sum of the Kingsbury Loans;(b)a declaration under s 1317E of the Corporations Act that Mr Kingsbury has contravened ss 180, 181, 182 and 183 of the Corporations Act;(c)a compensation order under s 1317H of the Corporations Act payable by Mr Kingsbury in respect of contraventions of ss 180, 181, 182 and 183 of the Corporations Act;(d)a compensation order under s 1317H of the Corporations Act payable by Malaga in respect of Mr Kingsbury’s contraventions of ss 180, 181, 182 and 183 of the Corporations Act;(e)a declaration that Mr Kingsbury and/or Malaga held the payments received as a result of Mr Kingsbury’s breaches of his fiduciary duties as constructive trustee for Pilbara Bakeries;(f)an order for equitable compensation payable by Mr Kingsbury and/or Malaga as a result of Mr Kingsbury’s breaches of his fiduciary duties;(g)a declaration that Mr Kingsbury has contravened s 588G(2) of the Corporations Act;(h)an order pursuant to s 588M of the Corporations Act that Mr Kingsbury pay to Pilbara Bakeries an amount equal to the loss or damage suffered by Pilbara Bakeries’ creditors because of its insolvency;(i)an order pursuant to s 588FF of the Corporations Act that Malaga pay Pilbara Bakeries an amount equal to the value of the unreasonable director-related payments (as defined in the further amended statement of claim); and(j)in the alternative, an order pursuant to s 588FF of the Corporations Act that Mr Kingsbury pay Pilbara Bakeries an amount equal to the value of the unreasonable director-related payments.