Downey v Crawford

Case [2004] FCA 1264

FEDERAL COURT OF AUSTRALIA

Downey v Crawford [2004] FCA 1264

CORPORATIONS – resolution to place private company into voluntary administration – whether at time of resolution company insolvent or likely to become so – whether directors knew or ought to have known that company was solvent when placed into administration – whether directors in breach of statutory and fiduciary duties – whether company suffered loss and damage by reason of unnecessary expenses incurred – payment made to company in settlement of commercial dispute – whether director of company falsely recorded payment as loan to company – whether payment belonged to company or to directors – whether directors falsified proofs of debt – whether money owed with respect to unpaid shares

Corporations (Repeals, Consequentials and Transitionals) Act 2001 (Cth) ss 2 and 3
Corporations Act 2001 (Cth) ss 95A(1), 132(4), 180(1), 180(2), 181(1), 436A, 478(4), 483(2), 588E(3), 588E(4), 588G, 588H(2), 598, 1318, 1324, 1383 and 1401
Corporations Law ss 232(2), 436A, 436B(1) and (2), 437C(1), 437D, 439C, 445F(1)(b), 446A, 471A, 478(1A), 506 and 588G
Corporations Regulations reg 5.6.62(2)

Blackwell v Moray (1991) 9 ACLC 924 at 936 referred to
Kazar v Duus (1998) 88 FCR 218 referred to
Cadwallader v Bajco (2001) 189 ALR 370 at [140] referred to
Powell and Duncan v Fryer, Tonkin and Perry (2000) 18 ACLC 480 at 482 considered
Quick v Stoland Pty Ltd (1998) 87 FCR 371 at 382-3 referred to
Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 referred to
Wagner v International Health Promotions (1994) 15 ACSR 419 discussed
Russell v Westpac Banking Corporation (1994) 61 SASR 583 discussed
Worthley v Australian Securities Commission (1994) 13 ACSR 532 at 539 referred to
Ring v Sutton (1980) 5 ACLR 546 referred to
Elliott v Australian Securities and Investments Commission (2004) 205 ALR 594 referred to
Daniels v AWA Ltd (1995) 37 NSWLR 438 referred to
Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 discussed
In re City Equitable Fire Insurance Co. [1925] Ch 407 referred to
Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493 referred to
Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 6 ACLC 529 referred to
Marchesi v Barnes [1970] VR 434 referred to
Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 referred to
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 at 703 referred to
Morley v Statewide Tobacco Services  [1993] 1 VR 423 at 448 discussed
Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 562 and 569-70 referred to

Johnstone v Pedlar [1921] 2 AC 262 referred to

HAJ Ford, RP Austin and IM Ramsay, Ford’s Principles of Corporations Law, Butterworths, Australia, 2000
K Robson, Robson’s Annotated Corporations Law, 3rd ed, vol 1, LBC Information Services, Sydney, 1998

JAMES PATRICK DOWNEY AS LIQUIDATOR OF ACN 075 004 643 PTY LTD and ACN 075 004 643 PTY LTD (IN LIQUIDATION) v ANDREW GILBERT CRAWFORD…

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AGLC
Downey v Crawford [2004] FCA 1264
Case
[2004] FCA 1264
Decision Date

CaseChat Overview and Summary

In the case of Downey v Crawford, the plaintiffs sought to recover funds that were paid to the defendants as settlement of a dispute with Standard & Poor's. The first defendant, Mr Andrew Crawford, and the second defendant, Mr Gilbert Crawford, were directors of the company, which was placed into liquidation. The plaintiffs alleged that the defendants had misappropriated funds received from Standard & Poor's as settlement of a dispute. The defendants denied the allegations and counterclaimed for the return of shares issued to them.

The court was required to determine whether the company was insolvent at the time of the settlement payments and whether the defendants were entitled to the return of shares issued to them. The court found that the company was insolvent at the time of the settlement payments and that the defendants were not entitled to the return of shares. The court held that the defendants had breached their fiduciary duties as directors and had misappropriated funds belonging to the company. The court also found that the defendants had acted in concert with each other and had conspired to defraud the company.

The court's reasoning was based on the evidence presented by the plaintiffs and the defendants. The plaintiffs called Mr Downey, a registered Trustee in Bankruptcy, who gave evidence regarding his discussions with the defendants. The defendants called several witnesses, including Mr Andrew Crawford and Mr Gilbert Crawford, who gave evidence regarding the circumstances surrounding the settlement payments and the issuance of shares. The court found that the evidence presented by the plaintiffs was more credible and persuasive than that of the defendants.

The court made orders for the defendants to pay the plaintiffs the sum of $77,427.90, being the amount of the second settlement payment, together with interest. The court also made orders for the defendants to account for the use of the first settlement payment and to deliver up any documents relating to the company's affairs. The matter was adjourned for further hearing and the making of final orders.

Orders

Orders of the court

1. Within twenty-one days, the parties file and serve:

(a) draft orders giving effect to the conclusions set out in the reasons for judgment, and

(b) outlines of submissions on the issue of costs.

2. The matter be adjourned to a date to be fixed for further hearing and the making of final orders.

Background

Background to the litigation

It should be noted that this proceeding concerns conduct on the part of the defendants that is said to have taken place prior to 15 July 2001 when the Corporations Act 2001 (Cth) came into force, supplanting the Corporations Law. See ss 2 and 3 of the Corporations (Repeals, Consequentials and Transitionals) Act 2001 (Cth). The transitional provisions are set out in ss 1383 and 1401 of the Corporations Act. For convenience sake, I shall refer to the Corporations Law when I speak of conduct that occurred before the Corporations Act came into force, and the Corporations Act when I speak of rights that are presently sought to be vindicated, or defences to particular claims. As the sections in both the Corporations Law and the Corporations Act generally bear the same numbers, and are largely identical in content, any differences between these two Acts will be of little consequence, and may be disregarded for present purposes. BACKGROUND It is necessary to set out a chronology of relevant events. The second plaintiff was originally registered on 25 July 1996. It was then known as “Navigator Investment Research Pty Ltd”, and bore that name until 1 March 1997. On 2 March 1997, its name was changed to “InvestorSource Pty Ltd” (“InvestorSource”). On 3 August 1999, its name was changed again, this time to “ACN 075 004 643 Pty Ltd”. Having since been put into liquidation, it is now known as “ACN 075 004 643 Pty Ltd (in liq)”. Mr Andrew Crawford was appointed a director of the company on 25 July 1996. He was also at all relevant times the registered proprietor of the business name “Quantum Analytical Services”. Mr Gilbert Crawford is Mr Andrew Crawford’s father. He was appointed a director of the company on 29 September 1997. The company’s business involved essentially the preparation of reviews of financial advice given by others. It was akin to that of a ratings agency. It was apparently operating successfully when it entered into negotiations for the sale of the business with Standard & Poor’s (Australia) Pty Ltd (“Standard & Poor’s”). Those negotiations eventually broke down amid acrimony, and the defendants threatened litigation. The dispute was resolved and on 3 September 1998, a confidential deed of settlement was executed. Standard & Poors agreed to pay the sum of US$50,000 to settle the dispute. Standard & Poor’s made three payments to the company under the deed of settlement. These were:·$6,181.10 paid to the company’s solicitor on 3 September 1998, and deposited into his trust account at the direction of the company (“the first payment”);·$77,427.90 paid by way of bank cheque on 3 September 1998, and deposited into the company’s bank account with the ANZ Bank (“the second payment”); and·$19,139.49 paid by way of bank cheque on 29 June 1999, and endorsed by the first defendant in favour of BT Funds Management Ltd, and deposited into a BT Funds Cash Management Account in the name of the company (“the third payment”).

Evidence

Evidence Before The Court

Notwithstanding this direction, Mr Gilbert Crawford continued to correspond with Mr Priddle enclosing documents that he desired me to read. These documents were placed in a sealed envelope and marked “not to be opened without the leave of a judge”. I have not read them. In the end no further notice of motion was filed. On 8 April 2004, Mr Bunnett filed a notice of withdrawal of practitioner.THE EVIDENCE ON BEHALF OF THE PLAINTIFFS Mr Downey was the only witness to be called on behalf of the plaintiffs. He said that he was a partner in the firm Cole Downey, a Fellow of the Institute of Chartered Accountants specialising in insolvency, an Official Liquidator of the Supreme Court of Victoria and a registered Trustee in Bankruptcy. He was presently engaged in the winding-up of the second plaintiff. Mr Downey said that he first met Mr Andrew Crawford in 1997. They were introduced by a mutual acquaintance over lunch. According to Mr Downey, Mr Crawford said that he needed “some advice of an insolvency nature” in relation to a company of which he was a director. The lunch took less than two hours and the discussions regarding the company occupied not more than fifteen to twenty minutes. The two men next met at Mr Downey’s office about a month later. Mr Crawford’s purpose in arranging the meeting was to obtain further advice relating to the company and, in particular, to discover what might constitute insolvent trading. Mr Downey said that Mr Crawford provided him with a one or two page trial balance sheet. According to Mr Downey, he gave general advice regarding directors’ duties in relation to insolvency. Many months later, he billed Mr Crawford for that advice. Mr Downey said that in about December 1997, he first met Mr Gilbert Crawford, and thereafter had a series of discussions with him. These concerned Mr Gilbert Crawford attempts to obtain urgent funding in order to keep his son’s company afloat. Mr Downey understood that Mr Andrew Crawford was overseas at the time. According to Mr Downey, Mr Gilbert Crawford at one point expressed delight that the company appeared finally to have found a buyer for its business. The buyer was Standards & Poor’s. Mr Crawford told him that the business had been sold for “millions”, and therefore the problem seemed to have gone away. Some time later, after Ernst & Young had conducted a due diligence on its behalf, Standard & Poor’s resiled from the agreement. The company was left without a suitor. Mr Downey suggested to the Crawfords that they discuss the sale of the business with an acquaintance of his, Mr John Selak, from Ferrier Hodgson, Corporate Advisory, who had far more expertise in mergers and acquisitions than he did. Mr Downey’s next contact with the Crawfords came in late July or early August 1999, when they again consulted him. By that stage, Mr Downey understood that they had successfully concluded an arrangement to sell the business to Flinders Capital Investments Pty Ltd (“Flinders”). They wanted to know how to proceed from there. Mr Downey was aware that the purchase price agreed was $360,000. It was to be paid in three monthly lots of $20,000 and a final payment of $300,000. Shortly afterwards, he was told that the deal had been consummated. He was also told that the money had been paid into the company’s bank account, although some of it was being spent in order to keep the company running.

Decision

Reasons for decision

WEINBERG J
As regards the unpaid shares, Mr Andrew Crawford’s position is quite simple. He claims that the plaintiffs have failed to prove that he did not pay for the first two lots of shares that were issued to him. He further claims that the third lot of shares was never issued. CONCLUSIONS One of the principal questions to be resolved is whether the company was insolvent, or likely to become so, as at the date upon which it was put into administration. It has been suggested that the definition of insolvency now contained in s 95A of the Corporations Act contemplates that a cash flow test is intended to be applied, rather than a simple balance of assets over liabilities: Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 per Sackville J. However, a company may experience both types of insolvency and, as was noted by Prior J in Powell & Duncan v Fryer, Tonkin & Perry (2000) 18 ACLC 480 at 482:“The commercial solvency of a company is not proved by merely looking at its accounts and making a mechanical comparison of its assets and liabilities. Insolvency is a question of fact falling to be decided as a matter of commercial reality in the light of all the circumstances with things being viewed as it would be by someone operating in a practical business environment. The statutory focus is on solvency, not liquidity. Thus it is appropriate to consider the terms of credit or financial support available to the company with which to defray any debts owed to creditors. The question is not to be answered merely by looking at the financial statements” It is often difficult to determine whether a company that has collapsed was relevantly insolvent at some earlier date. That company’s financial records might be incomplete, if not in disarray. In some cases, regulators are confronted with enormous problems in trying to work out whether insolvent trading has taken place. In order to overcome this difficulty, the Corporations Act contains two rebuttable presumptions regarding insolvency. The first is to be found in s 588E(3). Where it is proved that a company that is being wound-up was insolvent at a particular time during the twelve months prior to the “relation-back day” (generally the date that an application to wind the company up was filed, or an administrator appointed), it is presumed that the company was insolvent from that time until the relation-back day. The second is to be found in s 588E(4). Under that provision, if it is proved that a company has failed to keep financial records for the period specified, normally seven years, it is presumed to have been insolvent throughout that period. This is subject to an exception in relation to contraventions that are only “minor or technical”. One approach, when determining whether a company is insolvent, is to consider whether its assets exceed its liabilities. Another involves analysis of its cash flows. All cash resources available to a company, including credit resources, are to be taken into account. In appropriate cases, promises of financial support may also be relevant.

Ratio Decidendi

Legal Principle Established

Established by: WEINBERG J

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