Grant Baines Transport Pty Ltd v John Zappia - [2009] NSWLC 28

No judgment structure available for this case.

Local Court of New South Wales

CITATION: Grant Baines Transport Pty Ltd v John Zappia [2009] NSWLC 28

JURISDICTION: Civil

PARTIES: Plaintiff: Grant Baines Transport Pty Ltd
Defendant: John Zappia

FILE NUMBER: 240 of 2006

PLACE OF HEARING: Newcastle Local Court

DATE OF DECISION: 05/26/2009

MAGISTRATE: Magistrate Truscott

CATCHWORDS: Breach of duty as a Director, Company presumed insolvent or actually insolvent, debts incurred when there were reasonable grounds for suspecting the company was insolvent

LEGISLATION CITED: Corporations Act, 2001 (Cth)

CASES CITED: Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621
Robert Mackay Sutherland & Anor as joint liquidators of Australian Coal Technology & Anor v Hanson Construction Material Pty Ltd &Ors (3 April 2009 NSWSC)

TEXTS CITED:

REPRESENTATION: M Holmes instructed by Perry Legal
T Hall of Hall Partners

ORDERS: Judgment entered for the Plaintiff in the sum of $53,504.58, plus filing costs and interest to be calculated on the usual basis.

Reasons for Decision

2. John Zappia was the director of Zaps at the time the invoices fell due. Transport has brought proceedings pursuant to s558M of the Corporations Act , 2001 (Cth) seeking to recover the outstanding $53,504.58 from the Defendant who at the time was the Director of the company when the invoices fell due and payable (“the relevant period”). It is common ground that the debt was incurred when the service was provided, those dates being 14 days prior to the date each invoice was issued.

- or, a reasonable person in a like position in a company in the company’s circumstances would be so aware (s588G(2)(b))

4. There are statutory defences under s588H(1):

(a) the Defendant had reasonable grounds to expect, and did expect, that at that time the company was solvent or would remain solvent even if it incurred that debt and any other debts that it incurred at that time (588H(2).
(b) The defendant had reasonable grounds to believer, and did believe, that a competent and reliable person was providing adequate information about whether the company was solvent, and on the basis of that information, expected that the company was solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that time that person was fulfilling that responsibility, and keeping the director informed (s588H(3)).

(c)

(d) 5. The Defendant disputes that Zaps was insolvent at any time when the debts were incurred. Alternatively, he raises the defence pursuant to s588H(2) and (3). Additionally, he argues that the debts are not valid debts as Zaps disputes obligation to pay for defective services.

(f) 6. Zaps financial records and books have been subpoenaed from the Liquidator, the Company Accountant and the Company’s bank and the Defendant was subject to a Order of this Court to produce. The Plaintiff says that there is an absence of records that a required to be kept under s286(1): company must keep written financial records that:

(b) would enable true and fair financial statements to be prepared and audited.

Briginshaw

14. The Exhibits

Ex 1 Affidait of Kristen Perry, Solicitor for the Plaintiff, sworn 26 March 2007;

Paragraphs 1-22 with Annexures KP-01 to KP-16. The thrust of this evidence sets out the attempts by the Plaintiff to recover the debts owed by Zaps prior to and subsequent to its entry into administration and subsequent liquidation. There is also evidence that relates to the Plaintiff obtaining the consent of the liquidator such interlocutory issue being dealt with on 2 December 08 and again on 26 February 2009.

Ex 2

Affidavit of Kristen Perry, Solicitor for the Plaintiff sworn 31 May 2007;

Paragraphs 1-2, 4-13,23-77 with Annexures KP1. The bulk of this Affidavit relates to the Plaintiff’s compliance with directions of the Court, proof of Zaps’ lack of financial records, the Defendants non-compliance with directions to file and late service of Affidavits. Paragraph 50 and pages 74 to 89 of Annexure KP- 1 are the Affidavits of John Zappia sworn 23 May 2007, Cheryl Draper and Domenic Zappia.. The Defendant also relies on those Affidavits. Mr Zappia’s Affidavit refers to Annexures A- F. Those documents do not form part of his Affidavit but some of the annexures have been tendered elsewhere. Annexure A includes email correspondence between Zaps and some customers in relation to goods has been tendered as Ex. E. Annexure B – F relate to Zaps financial position as at November 2004 and the Defendant’s procurement of an increased overdraft facility with Bendigo Bank. Those documents are attached to Mr Tolcher’s report with the exception of Annexure F.

Ex 3 Affidavit of Grant Baines sworn 26 March 2007; Paragraphs 1-12, 14-48, 56-57 with Annexures GDB-1to5, GDB7to8.

Ex 4 Affidavit of Grant Baines sworn 13 July 2007., paragraphs 1-27, much of which responds to the contents of John Zappia’s Affidavit.

Ex 5 Report of Raymond Tolcher, Accountant

Ex 6 Documents relating to Quez Removals (formerly Zaps) in the possession of Company Accountant, Roy Spagnolo & Associates produced on subpoena issued by the Plaintiff’s solicitors. Bendigo Bank statements and related documents re overdraft produced on subpoena issued by Plaintiff’s solicitors. and 3 boxes of documents in the possession of Taylor Wooding & Associates, liquidator of Quez removals (formerly Zaps) produced on subpoena issued by the Plaintiff’s solicitors. (The Plaintiff’s solicitor Ms Perry has produced a 7 page aide memoire of these documents). (It is conceded that the Defendant did not produce any documents or respond to any request for particulars)

Ex 7 Transcript of previous proceedings, relevantly the examination of Ms Perry, Mr Baines, Mr Tolcher. The Defendant did not tender his Affidavit or any witness affidavits nor call any witnesses. I note that neither party in their submissions to me referred me to any particular aspect of the evidence on cross- examination. Mr Baines was cross-examined about his work procedures and any problems with goods he delivered for the Defendant. Mr Tolcher was cross- examined about his credentials and expertise, the manner in which he approached the task of assessing Zap’s solvency, his lack of knowledge of s95A and the cash flow test which should be applied as set out in Lewis v Doran, and the reliability of otherwise of his conclusions and reasons for them. Ms Perry was also cross- examined but the main of it the issue of Liquidator’s consent to commence recovery proceedings – that issue was resolved prior to March 09. The other aspect of Ms Perry’s evidence by Affidavit related to the Defendant’s avoidance of Zaps paying the unpaid invoices.

Ex 8 Solicitors’ correspondence re Mr Cook’s Report

Ex A Two file notes dated 20 July and 7 September 2006 prepared by Ms Perry (relevant on interlocutory issue of liquidator’s consent)

Ex B Letter from ASIC 1998 re Mr Tolcher, which sets out that following a complaint and hearing in relation to Mr Tolcher’s conduct as a liquidator, ASIC accepted his undertakings to complete a Professional Development course in insolvency and to accept peer review for the following 10 administrations. (This he readily conceded in cross-examination and gave evidence that he had conducted hundreds of administrations without complaint).

Ex C, C1 C2

Report of Barry Cook and letters from him to the Defendant’s solicitor.

Ex.D

Ex E Annexure A referred to in the Defendant’s Affidavit which includes 2 sets of documents, the first being 11 emails between Zaps employees and customers about delivery problems some of which involved Transport (September – November 2004) and the second set being a list of “Unproduced PODs for deliveries to 62 Companies” in 2005.

15. The claim is for unpaid invoices from 20 December 2004 to 14 March 2005. The Plaintiff transported and delivered goods on a contractual basis for Zaps. Mr Baines the sole Director of the Plaintiff Company has provided evidence about the provision of those services in his Affidavit. His second Affidavit speaks to the Defendant’s claim that the provision of services was flawed. Mr Baines was cross-examined. His evidence is that when an item was delivered, it was accompanied by a “Proof of Delivery” (POD) which the driver would have signed by the recipient and returned to Mr Baines. Mr Baines personally placed the relevant POD with the invoice into an envelope and he or a driver hand delivered it to Zaps. The Plaintiff did not keep a copy of the POD but kept a copy of the invoice. Mr Baines says that he had 2 women who worked in the office 2 days a week inputting data and calculating the weight or size of the delivery and Mr Baines would then price it. He would personally complete the invoice. If there was a non payment of an invoice, 99% of the time it was he personally who would ask the customers about payment, occasionally if he was too busy one of the clerical staff would make the phone calls.

16. Mr Baines said that on average some 2,000 PODs would be issued a month and no one from Zaps ever complained to him about a POD not being produced with an invoice. Ex E contained a list prepared by Zaps of some 62 PODs which the Defendant puts forward as relating to invoices disputed by Zaps on the basis they Zaps was unable to confirm the validity of each invoice by matching it to the relevant POD to approve payment. Mr Baines was cross-examined about the names of the companies on the list – he agreed that most were companies which Transport delivered to.

17. Mr Baines was not cross-examined about any of the invoices he had submitted to establish his claim (they are annexed to his Affidavit Ex 3), nor was he cross-examined about the contents of his Affidavit. His evidence in Ex 4 is that at no time did an employee of Zaps ever raise with him an issue of delivering damaged goods or not providing PODs to Zaps. Mr Baines points out that the 11 emails that form part of Ex E which the Defendant tendered to show Zaps had issues with Transport delivering damaged goods, relate to a “handful of goods” when he was delivering 400-500 items per week. He adds that he saw some damaged goods when he would pick them up from Zaps to transport and deliver them elsewhere. He said that those items were damaged because of the way Zaps employees packed handled or loaded them. Mr Baines said that he understood that any damage caused to goods by the loading procedures at the pick up point was the responsibility of Zaps. He says that that the fact that not one Zaps employee raised the issue either orally or in writing verifies this belief. He also asserts that on occasion when he or his drivers were responsible for damage to goods in transit he would raise this issue with Zaps himself to take responsibility for it.

18. The emails contained in Ex E do not establish that anyone from Zaps ever communicated with Mr Baines about damaged goods. Some of the emails related to “lost” items or items that were not picked up. There are a couple that related to damaged goods, with the cost being credited against the Transport which is consistent with Mr Baine’s that there were a few times when damage was occasioned in transit and he made arrangements for those costs to be credited.

19. The list of “Unreturned PODs” relate to the period of 17 February to 9 March 2005. Mr Baines explains any “lost” PODS is due to Zap’s administrative error and poor record keeping. I note an email (Ex E) dated 9 May 2005 where Jude Finlay of Zaps asks employees of Zaps to provided :”outstanding PODs, list of damaged stock, list of missing stock and ”other”” . The response to that email was that the only thing Zaps had was the list of “Unreturned PODs”. I also note a letter dated 25 September 05 between the Defendant and a John Doyle of “Vision” a debtor customer of Zaps (Ex 6). The issues in relation to PODs and goods being an obvious contention between the writers was, amongst other issues, ventilated – not once did Mr Zappia suggest that there was a problem with any subcontractor damaging goods in transit or not furnishing PODs.

20. I accept Mr Baine’s suggestion that Zaps’ missing PODs was more likely to be the result of Zap’s poor record keeping practices. I performed an exercise where I compared the schedule called “Unreturned PODs” 17/2/05 – 28/2/05 with the invoices submitted by the Plaintiff which evidence his claim. The 18/02/05 manifest for Lear& Smith Cessnock unreturned POD was not invoiced likewise for the 22/2, 25/2, 28/2/05. That suggests that the Plaintiff has not issued the invoice for that delivery which means somebody else delivered the goods for which Zaps could not find its POD. I accept Mr Baines evidence that each invoice he furnished to Zaps was accompanied by the appropriate PODs.

21. The Defendant lists 13 companies who he says complained of non-delivery, loss or damage to goods caused by Transport. He says that as a result of damaged goods in transit, 4 companies which previously placed orders totally about $180,000 per month ceased business with Zaps. He says Abey ceased in February 2005, ADP in June 2005, Vinidex in April 2005 Vision in December 2004. He has provided no evidence to support his claim that the reason these companies did not remain customers was due to Transport. The letter between Mr Zappia and Vision contained in Ex 6 suggests that the issues between Zaps and Vision were very much unrelated to Transport.

22. The Defendant has said that he instructed his solicitors to subpoena Zap’s customers who complaints about Transport’s deliveries. There is no evidence that they were in fact subpoenaed. The Defendant deposed that the companies have a change of management and their relationship deteriorated because of the delivery issues. I am not prepared to accept the Defendants evidence that this is the reason why Zaps lost those contracts. Indeed, I note that Zaps didn’t even have a contract with Vinidex as at November 2004 and wasn’t expecting one to be signed until perhaps February 05 which apparently didn’t eventuate. I further note that the Defendant identifies Jude Finlay as the sales consultant with Zaps who was responsible for the PODs and damaged goods. There is no Affidavit from Mr Findlay to support the Defendant’s claim nor is their adequate evidence from the Defendant why that is so.

23. The emails that form part of Ex E certainly do not establish that there were significant or really any issue with the Plaintiff’s overall service. They are trifling when considered in the scheme of the great number of weekly deliveries Transport was carrying out for Zaps. I note that the Plaintiff ceased providing transport for Zaps in March, yet Vinidex ceased in April. The Defendant says he holds the Plaintiff responsible for the downfall of his company because he provided such poor service that the customers stopped business. I don’t accept this claim at all. There is a plethora of evidence in this case that renders Mr Zappia’s claim in this regard as nonsense. Given the matters contained in the Grant Thornton report which is referred to further later, it is my view, that Zaps was a company in great strife, with poor management and planning, inadequate contracts from current or future customers with apparently very high staff and other overheads costs.

24. I am of the view that the Defendant has sought to create an excuse for the non payment of the Transport invoices as a defence to the suggestion that Zaps was insolvent. That is, he is effectively saying that Zaps chose not pay rather than was unable to pay. I accept Mr Baines evidence that he telephoned Zaps on 2 January 2005 when 2 cheques (927 & 924) sent to Transport were dishonoured by the bank. I accept his evidence that when he contacted Zaps he spoke to an appropriate employee who apologised and advised him that there was a cash flow problem and Zaps was waiting for a payment from a customer and that when that arrived Transport would be paid. Those 2 dishonoured cheques did exceed Zaps Overdraft facility and the money was paid to Transport after Zaps received money from a customer. The sums of $23,392.80 and $15,483.52 were paid by E banking on 6 and 14 January respectively.

25. Mr Cook suggests that the 2 cheques could have been “stopped” by the Defendant given what the Defendant had said in his Affidavit about the dissatisfaction with Transport’s services. Mr Cook’s suggestion was fanciful and unfortunately suggests that he was ready and too eager to support his client’s case without applying the essential objectivity required of an expert. Mr Cook did not even look at the bank statement that had the words “dishonoured” nor did he know that the money was paid by e-banking within a fortnight.
26. There is no dispute that Transport obtained default judgment against Zaps on 2 May 2005. A Creditor’s Statutory Demand was served on Zaps by registered post on 10 June 2005. It received no reply. On 14 June 2005 a Garnishee Order was then obtained and served on Zaps bank account at Bendigo Bank which was met with a response that there were no funds in that account. On 13 July Zaps was placed in Administration. By that stage it had changed it’s name to Quez Removals Pty Ltd, that having occurred on 7 July 05, the Defendant resigning as Director on 1 June 2005 and John Vazquez becoming the Director. The Defendant’s dispute of debts lacks merit and I reject it his evidence in relation to it.

27. The Defendant suggests in his Affidavit at paragraph 27 that the Plaintiff obtained the default judgment when Zap’s sales manager Jude Finlay was liaising with a solicitor to file a defence. I take that evidence as the Defendant suggesting the matter was going to be defended but the default judgment was entered before the lawyer had a chance to file a Statement of Defence. The Defendant deposes that after the default judgment was obtained nothing further was done by Zaps on advice of the external Accountants to put the company into Administration. There is no evidence from either Mr Findlay nor the Accountant to support this claim and there is no explanation for that lack of evidence. I note around that time, another company, Integrated Group Pty Ltd obtained a Default Judgment for $13,459.54 against Zaps for unpaid services in excess of $12,000 in January and February 05. There is no mention of this default judgment by the Defendant.

28. In his submissions, Mr Hall refers to a draft defence to an Amended Statement of Claim attached to an Affidavit of Gordon Schurr. That Affidavit is not an exhibit in these proceedings. However, the Defence pleadings to the Amended Statement of Claim are annexed to Mr Tolcher’s Report. Mr Hall’s submissions do not address the Defendant’s claim that the debts invoiced by Transport are not valid debts. I am satisfied that they are valid debts for services that were properly provided.

29. A company must keep written financial records that (a) correctly record and explain its transactions and financial position and performance; and (b) would enable true and fair financial statements to be prepared and audited (286(1)). The breach cannot be minor technical (s588E(5).

30. Pursuant to the s9 of the Act financial records includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements.
31. Mr Holmes submits that the Plaintiff has established that the Company is presumed insolvent because of the “absence” of documents relating to the relevant period. It is conceded by the Defendant that he has not produced any of the Company books and records in answer to an Order to produce (such Order being made by consent on 11 January 2007). Mr Hall submits on behalf of the Defendant that it is of no surprise that the Defendant had nothing to produce because the Company is obliged to hander over all books and records in its possession to the Administrator when it entered administration.

32. Mr Hall said that the Plaintiff can not prove a chain of evidence, that is the Court can not be sure that the same or all of the documents handed to the Administrator by Zaps were given to the Liquidator who in turn produced the same to the Court. The Defendant joined the Plaintiff in tendering Ex 6. There is no evidence from the Plaintiff as to any of the documents missing or explaining their absence. It cannot be that he does not know given his role with Zaps and the appointment of Mr Vasquez as director. I have read the documents in Ex 6 and have read the list of documents prepared by the Administrator setting out what was handed to him by Zaps. There are present and accounted for. I am satisfied that the chain of evidence is good in that all the documents provided to the Administrator/ Liquidator have all been produced to the Court.
33. Mr Hall has also referred in his submissions to pages and annexures of the Thornton Report which refer documents viewed by the authors in November. Those particular annexures are not in evidence, a matter which I pointed out to Mr Hall in March, but he did not respond by tendering the missing pages of annexures of the Thornton Report. I do not think Mr Hall can rely on the Thornton report as establishing that Zaps has kept or retained financial records at the relevant time. The documents viewed by the authors pre date the relevant time and in any event, the Report very clearly articulated concern that many of the figures and projections created by the management and Director were neither validated nor audited, but were deemed by the authors of the Report to be both unreliable and inadequate. There is no evidence or suggestion that either the Defendant or Zaps produced books and records to the Administrator that are not on the list or tendered as part of Ex 6. The Defendant has not attested to anything about the documents sought to be produced by Order of the Court. The Liquidator and Company accountant and Bank have answered the subpoenas to produced and I am satisfied that whatever books and records in each of their respective possession have been properly produced to the Court.. As has been pointed out by Mr Hall, the Company’s accounts were computerised, which means that there should be records for the relevant period.

34. The ASIC document annexed (“U” (and “W” which is the same but not referred to) to Mr Tolcher’s Report lists “some of the basic financial records that accountants might expect a company to keep: Financial Statements Profit and Loss accounts, Balance Sheets, Depreciation Schedules, Taxation Returns, eg: income tax, group tax, superannuation, fringe benefits tax, business activity statements and supporting documents.

35. There are no profit & loss accounts, balance sheets or depreciation schedules for the relevant period but I accept Mr Cook’s opinion that none would be expected since the Company went into Administration and such a document need only be created once per year. However the Company did enter Administration after the commencement of the new financial year, so primary documents from which a P&L account and balance sheet could be prepared should have been kept. There are no depreciation schedules or superannuation documents. There are no income tax, group tax documents but there are Business Activity Statements for the relevant period but only one Income Assessment Statements for one of the 4 months in the relevant period – should have been 4, one for each month.

36. Ex 6 Arch Lever Folder titled “Bas & IAS 2002/2003 & 2003/2004” contain a computer generated bundle of documents for July 04 -31 March 05 of GST collected on sales and GST paid on purchasers. There are Business Activity Statements (BAS) and Income Assessment Statements (IAS) for financial periods years ending 2003 and 2004. There is a copy of completed BAS return for October-December 04 and January-March 05. There is a completed IAS July 04, August 04 and February 05 (only). . There is a corresponding P.A.Y.G Report for February 05. There is a letter from Angela Walters on Zaps letterhead dated 15 April 05 to the ATO, referring to a letter from ATO (not on file). In her letter, Ms Walters advises the ATO that the Instalment Activity Statement for February 05 was sent by mail and that the money was paid by Electronic Funds Transfer 21/3/05. There is no corresponding transfer of funds shown on Zaps’s Bendigo Bank account Statement however, however, there is a Commonwealth Bank of Australia document headed “Bulk Funds Movement” for Isico Pty Ltd payment to Logistic 21/03/05 “ATO EFT DEPOSIT TRUST ACCOUNT” $33,849. There is no evidence about this transaction. There is a PAYG Report for December 04 for the sum of $47,073. There is no corresponding IAS or payment document nor does the sum appear on the Bendigo Bank Statement. There is no evidence about whether a payment for $47,073.82 was ever made. There are no cheque butts for period from 25 October 04 to 28 February 05. General ledger, general journal, asset register, computer back-up discs Cash Records,Cash receipts journal, bank deposit books, cash payments journal, cheque butts, petty cash books.

37. There are no general ledgers or journals or asset registers no computer back up discs (though one would expect there to be one given Zaps computerised system. There are no cash receipt or payment journals nor petty cash books. There are no cheque butts for 25 October 04 to 28 February 05. There are cheque butts for 28 February to 21 April 05. The butts do not contain information relevant to any particular invoice number or account but they do record the payee. The payments by the Company are accordingly unable to be identify the purpose of the payment eg whether it was paying trade creditors, loans or staff. There are no deposit books for 29 November 04 to 24 February 05, there are deposit book records for 24/2, 28/2 and 1/3 05. There are no bank stamps receipting the deposits. I note that on 1 March 05 a deposit receipt has $42,732.13 on 1/3/05. Looking at the Bank Statement it should be recorded as a “Credit-National Aust Bank” and the corresponding sum on the corresponding date. There are a number of deposits through the NAB facility within before and after 1 March and there are no corresponding deposits. I note that Vinidex has not been listed as a debtor of Zaps when it entered administration so I do not know what happened with that deposit. Bank account statements, bank reconciliation and bank Loan Documents

38. There are the Bendigo bank account statements for the period produced on subpoena by the Bank. Correspondence accompanying the bank statements includes a letter dated 16 July 2004 authorising settlement of funds of $1,150,000. A Solicitors Certificate refers to the up-stamping of existing security documents to secure advances of $9,200,000.00. The schedule to that Certificate indicates the Mortgagor as : JRZ Harley Pty Ltd and Zentrix Pty Ltd, and the Debtor being Zaps. The address of the property are 3 commercial premises in Smithfield.
39. The existing security documents list the Fixed and Floating Charges being from:

JRZ Harley Pty Ltd,

PMP Removals Pty Ltd,
Zerntrix Pty Ltd Isico Pty Ltd
Zaps Transport (Australia ) Pty Ltd
Zaps Logistics Pty Ltd.

40 The Bendigo Bank statement shows Zaps was $1,150,000 Overdraft as at 31/7/04. The balance of the Overdraft as at 30 June 04 was -$1,258,178.98. . The facility reached $1.5 million on 27 August 2004. The first overdrawn account fee was imposed on 30 August 2004. However, there are numerous entries where an increase to the Overdraft facility is approved: eg: 17 Sept 04 $1.65m, 06 October $1.67m, 27 October $1.75m, 2 December $2.2million. The balance as at the last day shown on the statements, 31 May 2005 was $2,223,563.16

41 There are no documents evidencing any loan agreement between Zaps and any other company or the Defendants. There is no ledger in relation to the provision of funds or the repayment of funds to and from Zaps. The second arch lever folder in Ex 6 titled “Bendigo Bank- Zaps Logistics” contains Bendigo e-banking statements from 1 March 04-22 December 2004 but none beyond that period. There is reference in the Defendant’s Affidavit of a Rams Home Loan on his wife’s premises but there are no documents showing this nor are there any documents that show any of this money being inputted to Zaps or being repaid or owing by Zaps. There is also reference to a Commonwealth Bank Account in the evidence but there are no documents in relation to such an accounts (except for the CBA document relating to Isico Pty paying PAYG for February 05).

42 Zaps Transport Pty Ltd is named as a creditor on the RATA schedule provided to the Administrator, how it became so is not documented and if there was a loan arrangement, what it was, is unknown and not supported by documentation. From looking at the Bank statement at least $180,000 was paid by Zaps to Zaps Transport Ltd from 1 July 04 to 15 March 05, of which $90,000 was paid out from 14 December 04 to 15 March 05. There is no ledger no evidence about these transactions. Mr Cook identifies that that third party funding of companies such as Zap is often provided on loan terms where there is no requirement for the company to repay the money unless it is in a position to. These bank records, though not accompanied by a ledger, would suggest that Zaps was not such a company enjoying such a relationship.
43 There are no bank reconciliations and the account was operated by deposits, cheque withdrawals, e-banking transfers and direct credits. The Administrator says in his report to Creditors that he was advised that the Defendant paid the Overdraft facility on 10 June. The only document that relates to this is found in Ex 6 which is a Facsimile letter from the Bendigo Bank to the Defendant dated 9 June 2006 in which it is stated:

“Dear John,

Please find following payout figures for 10 June 2005…

JRZ Harley Pty Ltd

7651383/FO05 $1,721,754.46

765138/CT01 $ 301,505.30

765138/CT 02 $4,521,267.30

765138/CT 03 1,406,153.86 7651383/ FE01 37.97 7651383/ CL01 17,713.00 (Cash will need to be provided for this guarantee)

Zaps Logistics Pty Ltd

13031380/1201 $2,251,627.59

Zaps Transport Pty Ltd

76024/FE01 $4,327.02

PMP Removals & Storage Worldwide Pty Ltd

13033501/1201 $19,827.04

44 I note that on 2 December, the Bendigo Bank Statements show payments from Zaps to the following accounts:

JRZ Harley Pty Ltd $35,332 JRZ Harley Pty Ltd Mortgage Account $85,000 Zaps Transport $18,755

45 Ex. 6 :Arch Lever No 2 contains records of Zaps accounts with fortnightly balances of the Zaps account as well as the balances for the accounts named as follows (I set out the last balances of 22 December 2004) as provided:

Zaps Carriers $10.93-

Zaps Logistics, $2,144,056.23- with available funds of * $49,053.48

ISICO Pty, $269.84 - with available funds of* $19,730.16

PMP Removals & Storage Worldwide $13,815.22- with avail funds $,6184.78*

Applied Training Solutions $89,963.93

Skilled Training Pty Ltd $29.18

Zaps Transport Pty Ltd $1348.55-

JRZ Harley Pty Ltd 7651383FE01 $9445.78

JRZ Harley Pty Ltd Mortgage Loan 7651383/FO05 $1,709,401.92

J&R Zappia. $321,942.08- with avail funds $78,057.92.*

* Denote Overdraft facilities. The records from 22 December 04 onwards are not produced.

44 Ex 6: The third arch lever folder titled “Bendigo Transfers” contains receipts for transfers from Zaps to other accounts which are described as “once off” between 19 March 2004 and 24 August 2004. There are no similar e-banking records of any “once off” payments made after those dates though there are more than a dozen payments amounting to about $90,000 between 14 December 04 to 15 March 05 to Zaps Transport in the same terms and means as the payment of $13,500 paid to Zaps Transport on 24 August 04 – see the Bendigo Bank statements. There is no explanation for the absence of those receipts. There is no evidence as to why these amounts were being transferred to Zaps Transport – there are no invoices from Zaps Transport produced.
45 These documents together with the Overdraft Security documents tend to suggest that there are Intercompany Transactions but what they are I do not know. The Defendant says that he paid the Company’s Overdraft facility which means he personally paid it. I note that the 30 June 04 Summary of Balance Sheet sets out the loans to and from related parties and sets out the names of Companies all of which the Defendant was sole director. $878,635 were loans to some of those companies and $511,511 were other loans.
46 The Defendant says at paragraph 85 of his Affidavit : “Over the period from November 2004 to about July 2005, I placed $2,657,877.57 into Zaps Logistics to assist the Company to pay its debts obtained through the facility at the Bendigo Bank as well as a Loan agreement over my wife’s property ($406,250) The Defendant seems does not refer to any inter related company debts nor was there a company structure that supported Zaps during the relevant period. He identifies not a single business record or financial document to evidence the claim in his Affidavit as set out above and likewise there is not one document in Ex 6 that evidences his claim. The Administrator says that he was advised that the Defendant paid off Zaps Overdraft. I presume he was advised this by the Defendant personally. Compare what is written in the Statement of Defence to the Amended Statement of Claim says:

“The Plaintiff and associated entities were a creditor of the Company in the sum of approximately $2,976,308 ($2,765,920 JRZ Harley and $210,388 Defendant) which represented monies he had loaned to the Company for the purposes of funding ongoing operations”.

Compare the list of related creditors (with no mention of JRZ Harley ) provided in the RATA:

Applied Training Solutions Pty Ltd $2,082

Zaps Transport 39,320

John Zappia` 2,500.000 2,541,402

17 Aug 04 5,425.59

02 Sep 5,166.15

06 Oct 25,000

25 Nov 2,085.08

10 Dec 10,000

20 Dec 100,000

20 Dec 772.64

23 Dec 33,117.38

17 Jan 05 1,265.00

17 Feb 488.81

28 Feb 24,514.00

TOTAL: $207,832

What these sums were for and whether they were funds from Applied Training to Zaps I don’t know. Whether Zaps paid funds to Applied Training for it to be left with a balance owing of just $2,082 as set in the Defence to the Amended Statement of Claim I do not know. The absence of ledgers certainly means that one is not able to obtain a true and fair picture of the company’s financial position particularly where Mr Tolcher’s Summary of Balance Sheets (Annex M to Tolcher Report) shows that the loans from related parties decreased from $231,438 at 31 December to $41,402 at 31 March 05.

The fortnightly bank balances for the companies contained in Arch Lever folder 2 of Ex 6 show the last balances for Applied Training and JRZ Harley :

Applied Training balance 29/11 $60,483.04

6/12 $46,357.78

17-20/12 $41,254.25,

22/12 $89, 963.93

JRZ Harley Pty Ltd 29/11 $40,634.95-

6/12 - 16/12 $25,000

17/12 $17998.36

20/12 $9445.7

48 These balance documents have been produced because they relate to Zaps but there is no evidence from the Defendant about them. The list of deposits to Zaps from 17 August to 28 February would raises the question of there being some intercompany structure or loan arrangements to providing funding or liquidity to Zaps but I do not know as there are neither appropriate ledgers nor reconciliations. The Defendant has not suggested that any such funding relationship existed and if it did he would be expected to give that evidence. The Defendant has given no evidence about this other than saying that he paid $2.6 million between November 04 and June 05. There are no documents substantiating either the above stated defence and there no primary documents supporting the Defendants claim that he was owed $2.5million from Zaps. Even if he has off the Overdraft, it was done in circumstances beyond any trading and cannot be said to have been done to support the Company’s business or trade – the Defendant himself says that he settled the account after he decided the Company was insolvent so it’s difficult to see how the Company could be expected to trade out of its troubles to pay the Defendant as an unsecured creditor.

49 In his first Report to Creditors, the Administrator said he had sufficient documents to support the claimed Company’s debtors (there were 4). In relation to Intercompany transactions, he says that he has been advised that John Zappia is owed $2.5million in relation to his loan account. The Administrator said that he had not found any of the related companies as debtors to Quez removals. The Defendant settled Zaps affairs before resigning as director and then Zaps was placed into Administration. The settlement of the Bendigo Bank Accounts prior to the Company being placed into Administration may well mean that at the time the Administrator became involved there was no evidence on the material given to him of related company debtors. There was certainly not trading by the Company. The Defendant’s Affidavit evidence in relation to this aspect is expressed in the briefest of terms and given the lack of appropriate records I am left to wonder what his “tidy up” actually entailed.

Sales/Debtor Records, Work in Progress Records, Job/Customer Files, Stock Listings, Creditors Records, All correspondence, Annual Returns and ASIC forms, Wages Records and Superannuation Records, Registers, Minutes of Meetings of Directors and/or Members, Deeds.

Annual Reports Years Ended 30 June 2004 and 30 June 2003

Company Tax Returns for 2003 and 2004

Company Balance for Supernannuation and Payoll tax 30/07/04-25/03/05 balance

General Ledger Superannuation payments for employees 1/7/03-30/06/04

ATO Overdue Reminder for Income Tax payment of $7415.70 dated 22 September 2004 and payment slip

Letter from Roy Spagnolo to Ms Perry dated 29 January 2006 advising that they are not in possession of any records relative to year ending 30 June 2005.

52 The Bendigo Bank Statements were produced by the bank under subpoena. They cover the period 1/07/-4 – 31/05/05. The last (no 1189) cheque withdrawal is dated 29 April 2005 with a balance of $-2,246,001.96. The remaining withdrawals were by way of direct debit, one of which was honoured on 30 April and ALL remaining 8 were dishonoured:

2 May and 13 May 2005 Valley Financial for the sum of $19,266.10.,

9 May and 13 May Shell $4416.24,

16 May Shell $2149.88,

17 May 05 Toyota Finance $1484.78 (twice),

23 May Toyota Finance $1828.11 and Kel Campbell $559.97,

26 May Citylink $599.11 and Kel Campbell $559.97.

(I note that of those creditors, only Citylink was listed as a creditor in the RATA (for nearly 5 times the amount of the dishonoured cheque) yet there is no evidence of the other creditors having been paid and if so by whom and when.

53 Mr Hall makes the submission that Zaps did keep sufficient financial books and records as evidenced in the Grant Thornton Report . In September 2004, Bendigo Bank requested “Grant Thornton Recovery and Reorganisation” (Thornton) to perform a limited scope review of Zaps. The parameter’s of the review are set in a letter from Thornton dated 13 September to the Defendant:

54 The Report is dated 2 November 2004. It is attached to Mr Tolcher’s (Ex 5 Annex L, paragraph 34 refers to the Thornton Report as Annexure E). The Defendant says that he arranged for the Report for the purposes of “procuring a loan and placing funds into Zaps”. This is not entirely accurate as according to the Thornton Report the bank required the review to be done. There is no evidence that the increase of Overdraft was procured as a result of the contents of the Thornton Report nor is there any evidence of what, if any, funds the Defendant obtained let alone put funds into Zaps from November to July because of the Thornton Report.

55 Mr Hall makes the submission that Thornton was provided with “s286 type records”. The report referred to a Consolidated Profit & Loss to 30 September 2004 as Appendix C. That document is annexure F to Tolcher’s Report. It shows a consolidated loss of $517,000 for the 6 months ended 30 September 2004. The Report sets out the Gross Profit and Net Profit/Loss of the Operations of the Company in the locations where the Company operates but concludes that there is concern about the accuracy of figures and “accordingly, we are unable to provide an accurate analysis in relation to the viability of the operational sites run by the Company”. Likewise, Thornton requested to review the contracts and cost analysis of 9 randomly selected clients, the result was only 2 had contracts which the writers sited, and the Management were unable to provide a detailed cost analysis for each contract requested.

“incorporate the repayment of outstanding creditors for October 2004. The 30 September 2004 aged analysis the credit

balance was $360,000”

“turnover and gross profit with regard to new business cannot be validated and would need to be monitored”.

57 The Report refers to a debtors ledger as at 30 September 2004 and says it included “:inter-company receivables of $115,485 accounting for 10.4% of the total debtor balance” and continues “Following or further discussions with Management, we have some concern as to the viability of certain Companies within the Group and question the recoverability of the opening debtor balance built into the forecast models” .

58 Mr Cook, in his report, notes that there were sufficient books and records for Zaps to prepare accounts for financial years ending June 2003 and 2004 and interim accounts for 3 and 6 months to 30 September 2004. Whilst that might be correct, such books for the relevant period were not provided to the Administrator and ultimately to this Court which suggests Zaps has not kept them. A Report as to Affairs (RATA) as at 13 July 05 when Zaps went into Administration was prepared. Mr Cook comments that the Administrator did not mention that there was any non compliance with s286 in his Report to creditors dated 29 July 05 nor was there any report to ASIC suggesting any s286 offences. He also notes that the Thornton report was prepared on 31 October 05 which included 2005 projections. Mr Cook says that there was no suggestion in the Thornton Report that there was insufficient information to prepare those projections. Mr Cook does not think that those Reports could be prepared without proper financial records being available.

“It is evident from the forecasts that have been supplied, and based on the delay in their provision, that the Company does not normally forecast the profitability and cash flow of the operations on a regular basis.

The forecasts received appear inaccurate and are certainly not reliable for a business turning over in excess of $11million per annum”.

(pg28)

“The forecasts prepared are inadequate and have not been properly verified, as this is outside the scope of our engagement, to properly predict the on going future of the Company and accurately determine the future funding requirements.

There are limited notes and assumptions to support the forecasts…Based on the information provided we are unable to conclude on the reliability of the break-even position of the Company. The fluctuating 6 months results also do not readily allow for accurate trend analysis.

58 I note that Mr Tolcher’s analysis of the projections assumed sales from November 2004 to end of November 05 would be at an average of $914,040 per month compared with the average monthly sales of $140,481 per month achieved in the year ended 30 June 2004. That is an a huge anticipated increase in sales which were nothing short of being“pie in the sky”.

59 The Administrator was provided with a debtor’s list and a creditors list. The creditors were $3,150,671. This figure includes $2.5million owing to the Defendant and $39,320 to Zaps Transport Pty Ltd of which he is sole director. Elsewhere he notes “It appears the company’s bank account was in overdraft prior to my appointment and extinguished by the director in June 2005. The director has a right of statutory offset for amounts owed to the company as against his loan account balance….The debt owed to the director represents monies paid to the secured creditor and other loans to the company…..“The director believes a reduction in business activity lead to the failure of the company. From my review of the company’s financial statements it appears that the reason for the company’s failure is due to unprofitable trading resulting from high employee expenses”.

60 In relation to the Administrator not reporting any s286 matters, I also note that he did not pursue any insolvency trading matters either though he comments that “it appears that the directors(sic) may have engaged in insolvent trading. The company losses were incurred in the two financial years preceding the appointment. The directors (sic) have taken steps to place the company into administration, after they determined that the company was insolvent, and have not allowed the company to continue trading. They have supported the trading activities of the company as is evidenced by the discharge of the secured debt. I don’t agree with the Administrator’s conclusion that the Director has supported the trading by paying off Zaps debt because when the debt was apparently repaid it was at a time when Zaps had ceased trading, on the Defendant’s evidence, because it was insolvent.

61 Mr Tolcher, in his report, notes that the following information was not available:

financial statements, creditors and debtors ledgers as at the relevant dates

Having viewed the documents I concur with his list of absent documents.

62 Mr Tolcher said “I am unable to accurately establish the trading losses of the Company as at the relevant dates without financial statements as at those dates, or a general ledger as at those dates. For the same reasons he was unable to accurately calculate working capital ratios for the Company at the relevant dates.
63 Mr Cook, suggests that because ASIC has not taken any action pursuant to s286 against the Defendant and because the Liquidator (then Administrator) was able to complete a Report to Creditors something adequate must have been provided. He also suggests that it is not unusual for a small company to not prepare a profit and loss statement until the end of the financial year. That may be the case, but it fails to explain a lack of basic records such as cheque butts, deposit books, and ledgers for the relevant period. Given Zaps computer system and apparent records on that system, there must have been computer discs.

61 Pursuant to s588E(4)(a) I am satisfied that Zaps has breached s286 by failing to keep adequate financial records and it is not is a minor nor technical breach. The failure to keep such records means that the financial position of the Company at the relevant time, cannot be ascertained without what Mr Tolcher has engaged in, namely extrapolation and some well founded assumptions. Accordingly, Zaps is presumed insolvent for the relevant period.

62 If I am wrong about the presumption of insolvency my analysis of the records and evidence that has been provided is such that not only has the Defendant failed to rebut the presumption but there is ample evidence that the Company was actually insolvent at the relevant time.

63 The Defendant has not given evidence in his own case being content to rely on his Affidavit annexed to Ms Perry’s Affidavit and partly annexed to the Tolcher Report tendered in the Plaintiff’s case. The Plaintiff had no ability to cross-examine in those circumstances. On the 12 March, at the close of the day’s submissions Mr Hall made the submission that the Defendant has always been available for cross-examination and was so on this very day at that very moment. That was a provocative and pointless claim to make given the agreement between counsel on how the second hearing was to be conducted and given how the first proceeded. The Defendant has sought from the outset of these proceedings to minimise his evidence and minimise his exposure to scrutiny. He carries an evidentiary burden that he seeks to discharge through the Plaintiff’s case. That is not to say that he cannot rely on evidence that assists him or adversely effects the Plaintiff’s case just because it was tendered in the Plaintiff’s case. He can. Further the Defendant has tendered evidence, such as Mr Cook’s Report (albeit it being an unsigned draft report without the annexures referred to therein being tendered). The documents contained in Ex 6 are documents tendered jointly by the Plaintiff and Defence.

64 The Defendant’s evidence of rebuttal of the presumption really is what he relies on to show that the Company was solvent. This issue therefore needs to be resolved and I do so placing the onus for proof of actual insolvency on the Plaintiff. Accordingly, the fact of presumption of insolvency becomes somewhat incidental in the overall evidence in this case. Mr Hall makes the submission that any lack of s286 documents is not an “accumulative” factor that the Court would take into account in deciding a company’s solvency. I’m not entirely sure what he means by his submission. I don’t take the submission mean that the lack of records is an irrelevant factor. The lack of proper books and records is a matter that I should take into account in relation to actual insolvency in this way: it is one of the indicia of insolvency for the relevant period ACTUAL INSOLVENCY
65 On the question of insolvency, Justice Barrett neatly summarized the law and approach currently relevant in his decision in Robert Mackay Sutherland & Anor as joint liquidators of Australian Coal Technology & Anor v Hanson Construction Material Pty Ltd &Ors (3 April 2009 NSWSC):

I adopt his summary and quote as follows:

“Any examination of the separate question must begin with the provisions of s95A of the Corporations Act:
(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.”

?It has been authoritatively determined that s95A calls attention principally to the cash flow test of insolvency with subsidiary relevance afforded to the balance sheet test. That this is the correct approach was recognised by the Court of Appeal in Keith Smith East West Transport Pty Ltd v Australian Taxation Office [2002] NSWCA 264; (2002) 42 ACSR 501; see also Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711; Lewis (as Liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410; Box Valley Pty Ltd v Kidd [2006] NSWCA 26; (2006) 24 ACLR 471.

Manpac Industries Pty Ltd v Ceccattini

Noxequin Pty Ltd v Deputy Commissioner of Taxation

Bell Group Ltd (in liq) v Westpac Banking Corp (No 9)

Bank of Australasia v Hall

Sandell v Porter

Hymix Concrete Pty Ltd v Garrity

Hall v Poolman

Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation

creditor from relying upon the stipulated time for payment; or

Lewis v Doran

1) a history of dishonoured cheques;

2) suppliers insisting on COD terms;

3) the issue of post-dated or “rounded sum” cheques;

4) special arrangements with creditors;

5) inability to produce timely, audited accounts;

8) receipt of letters of demand, statutory demands and court processes for debt”.

66 Whilst Mr Tolcher’s report did not identify cash flow analysis as the primary test as set out in Lewis v Doran , for which he was rightly criticised in cross-examination and by Mr Cook in his report, it is evident from reading his report that he did not consider the information provided by the Defendant not the review of documents in light of the absent ledgers and balance sheets, was sufficient for him to make a conclusion in relation to cash flow. He did correctly address the issues and indicia of insolvency though he relied on a balance sheet analysis. Given the absence of records, I think his conclusion based on the balance sheet analysis is relevant though the issue of third party support needs to be considered as a primary issue.

67 Mr Cook, says in his report that:

In my opinion that cash flow depended almost entirely on the financial support of the Company by Mr Zappia/and or related parties, and Mr Tolcher’s analysis of its solvency does not adequately consider that financial support”.

I agree with Mr Cook’s comment. I also agree with his appraisal that the $2 company had working capital to 31 December 2003 funded entirely by related parties. The major assets were Loans to Related Parties which were $611,511 at 30 June 2004 with the addition of access to the Overdraft facility secured by related parties which was an asset at that time of $1.2million including Receivables of $954,403. I agree with Mr Cook that Zaps would not have had access to the Over Draft facilities without the support of the related parties.

69 As Mr Cook says, the Company had only since early 2004 commenced to receive direct revenue from the transport business – since its incorporation in July 2002 it had operated as a labour hire business and relied on management fees from an associated company to recoup its costs. The borrowings from the bank rose from $513,931 as at 31 December 2003 to $1,321,061 as at 30 June 2004 and then again to $2.2 million as at 2 December 2004.

70 The Company was trading at a loss of $107K per month up to 30 September 2004. Mr Cook does not dispute that it was likely that Zaps would have continued to trade at a loss. He says that given that the Overdraft was $2.2 million as at end of December 04 and was ultimately paid off in June 2005 indicates that the support provided by the related parties was more than sufficient to fund accumulated losses at the relevant time (when the debts claimed by the Plaintiff were incurred). However, Mr Cook concedes “I am not able to say whether this ‘”excess” of funds provided by related parties/Bendigo Bank was sufficient to enable the Company to continue in business and pay all its debts”. He, unlike Mr Tolcher, did not view any of the primary documents.
71 Lewis v Doran, is authority for the proposition that where a company is paying its debts during a period, though such ability to pay is due to third party support, the company is solvent. Zaps was not paying its debts as they fell due that is the first and a significant difference in Lewis v Doran . The other difference in this case is that in Lewis v Doran the Company Group structure was such as to enable funding of the Company for a period of 3 years where the Company was not only able to but in fact did pay its debts. In this case, the Defendant does not refer to any Inter Related Company structure, though looking at the banking documents which I refer to later, there seems to have been one where Zaps both loaned money to and borrowed money from Companies run by the Defendant. Secondly, the Defendant says that he paid the Overdraft Facility off after he decided that the Company was no longer solvent in about May 2005. He does not mention having paid any other Companies debts or repaid any loans on behalf of Zaps, just that he paid the Overdraft off. He also refers to putting money into Zaps between November 04 and July 05. Apart from the apparent settlement of the Overdraft Facility after Zaps stopped trading, there in no evidence of when this other money was put into Zaps. Finally, the evidence points to that though there was some “third party support” it was not support where the Company was able to and did pay its debts. The question in that circumstance is to look at the commercial reality in relation to those debts.

72 As Justice Palmer said in Lewis v Doran (2004) NSWSC 908 (9 July 2004) at 108-116: “Where the question is retrospective insolvency, the Court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The Court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as a the date of insolvency. By reference to what actually happened, rather that to conflicting expert opinions as to the implications of balance sheets, the Court’s task in assessing insolvency as at the alleged date should not be very difficult…So, where retrospective insolvency is in issue, the Court can take into account that as at and after the alleged date o insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The Court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor’s “own monies. to look at what actually happened avoids the possibility that the Court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as matter of fact, the company clearly did those debts…s95A requires the Court to de decide whether the company is able, as at the alleged date of insolvency, to pay all its debts as they become payable by reference to the commercial realities. If the Court is satisfied that as matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party”.

73 Before any discussion of the “indicia of insolvency”, having reviewed the experts’ reports and documents it is clear to me that the Company was not “able to pay all its debts as they became payable by reference to the commercial realities. The Thornton Report clearly set out that funds far in excess of what were being provided by any third party would need to be available for Zaps to move forward to its break even position. The Overdraft Facility whilst increased to $2.2 million as at 2 December was not increased beyond that point despite Zaps incurring monthly losses of at least $100,000. During the relevant period debts owing to trade creditors amounted to in excess of $150,000. The ATO Superannuation $132,209 ATO $133,359 owing at the time of 13 July must have been significant at the relevant period given that the Company was apparently not running an operation within 6-8 weeks of the last of the Plaintiff’s invoices being due and payable. I note that the projected P&L account ended 30 September 2004 (Annex S Tolcher Report) has the projected Superannuation payments as being less than $16,000 per month. Accordingly, it would appear that Zaps was behind in its Superannuation contributions during the relevant period which would add to the unpaid debts. Mr Cook concedes that Zaps was in arrears with its obligations to ATO (including superannuation) at the relevant dates. He says that that payments of these arrears and depended on third party funding support which had not been withdrawn. My view is that it can’t be withdrawn when in reality it has not been provided – as evidenced by the fact that Zaps was in arrears and was not paying its debts during the relevant period.

74 Whilst Mr Cook agrees with Mr Tolcher that Zaps was in arrears with its obligations to ATO at the relevant dates, it’s position in relation any State taxes owing was not evidenced from the documents (I note that is because no documents have been produced). Mr Cook says that the Company’s ability to make payments was dependant upon the continued financial support of the related parties and that support had not been withdrawn at the relevant dates. He is relying solely on the evidence of the Defendant in this regard and has not analysed any of the primary documents. Given the arrears at the relevant time it is another debt that was not being supported by any third party funding. It is insufficient for the Defendant to say that as a matter of commercial reality he was just waiting to see how Zaps fared before providing sufficient funds for it to pay its debts.

75 Mr Tolcher says that he does not know what the relationship between Zaps and the Bank was. Mr Cook prefers to infer that it was a positive one because the bank did not take any action to recover any monies owing. It didn’t need to, given the security document it had from July 2004 however the $2.2 million overdraft was not extended though Zaps debts accumulated and their losses continued unabated. I doubt that the Thornton Report gave the Bank any confidence in the ability of Zaps to obtain any break even position let alone pay any of the OverDraft back or indeed meet its debts at least through its facility. Zaps relationship with the bank was accordingly, dependant on the third party relationship with the bank and that is a matter that needs to be seen in light of whether debts being incurred were being paid as they fall due.

76 Clearly Zaps would not on its own account be able to raise either debt or equity capital – a position that Mr Cook agrees with. Mr Cook agrees that there were unpaid Trade Creditors of $151,763 over the relevant period (that is 120 days and over from date of Administration). This sum accounts for half of the Trade Creditors. He says he is unable to say why the debts weren’t paid apart from the Defendant’s claim of disputing Transport’s invoices which I have already rejected. He states in his report that two of the largest debts Integrated Group Ltd $13,067 and Patrick Tasmania $30,063 are not shown as any debt other than over 120 days which require further investigation. I’m not sure what he means by that because in the Creditors Listing and by looking at the actual invoices Integrated Group is listed as being owed $14,110 for services January and February 2005 and Patrick Tasmania $1,280 on 20 December 2004 . Mr Cook does not indicate what, if any documents, or information he was given, apart from the Tolcher report.

77 Mr Cook notes that the aged analysis of debts did not include the ATO and says “this requires further investigation”. There is no evidence from the Defendant in light of this comment. I have only found one document that assists this investigation, that is that on 23 march Zaps paid $1937 to the ATO for money due the quarter ending June 2004, so it is likely that a very significant portion of the $133,359 debt was in existence at the relevant time. I also note that despite the letter from Ms Walters on 14 April 05 suggests that the sum of over $33,000 was paid for PAYG ending February 05, yet there was only the CBA document in relation to this and there was no evidence that the December PAYG in excess of $40,000 was paid.
78 Mr Cook suggests that the non –payment of debts is due to a decision not to pay as opposed to an inability to pay given the apparent continued support of the related party and the Over Draft being mostly in limits during the relevant period. He refers to two cheques in favour of the Plaintiff which were dishonoured in January 05. He says they could well have been cheques that the Defendant stopped because the Defendant said in his Affidavit he disputed the claim made by the Plaintiff. Mr Cook has too readily sought to assist the Defendant in this regard and it effects the weight I place on his opinion generally. The cheques as set out in the Bank Statement were clearly dishonoured as there were insufficient funds to keep Zaps within the $2.2 million overdraft. They were paid within 14 days later by E banking when funds were available. Mr Hall, in his submissions, says that Mr Cook’s evidence supports the contention that Zaps was having supply and delivery issues with the Plaintiff. He says “Where Mr Cook as an expert was never cross-examined on these matters, then the only contention now must be that his evidence on this point can not be the subject of challenge”. Firstly, Mr Cook has never ever been available for cross-examination and his unsigned draft report was tendered over Mr Holmes objection at the first hearing and it was again relied on by agreement in the second proceedings in a hope to save the parties costs. It is disgraceful for Mr Hall then to seek advantage on the basis that Mr Cook was not cross-examined. It is also evident that Mr Hall has not appraised himself of the evidence in relation to the payment of those invoices which is contrary to his client’s contention that the invoices were not paid because they were subject to dispute about delivery problems –clearly not the case at all.

79 Mr Tolcher has attempted to construct or extrapolate a Net Assets Debt Ratio based on net asset positions as at 30 September 04 and 13 July 05. Mr Cook says a “full analysis of the book values of assets and liabilities as at the date of the RATA” would be required before any reliable estimate of trading losses to that date could be made. I agree with that position, but Mr Cook has in his report, earlier accepted likely trading losses of $100,00 per month. Further, there is evidence that Zap’s trading performance dramatically diminished over the relevant period. Finally, there are insufficient books for that full analysis to be conducted because Zaps has failed to keep those books.

80 I note Mr Cook also says “losses were being incurred but the funding provided by, or with the support of related parties exceeded the accumulated losses ”. Firstly, paying off an Overdraft, after a company has apparently ceased trading is not a fair description of a third party providing support that exceeded the accumulated loss. Indeed, Mr cook said he was not able to comment whether the support was sufficient to pay all Zap’s debts(p28). At page 16 he notes that as at 30 September 04 the accumulated debt was $983,000 and would have been around $1.4-1.6 at the relevant time. The Overdraft at the relevant time was $2.2million, it having been $1.6 million at the end of September. Accordingly, over a 3 month period – October, November, December the increase in the facility was $600,00 and there it remained with a further unpaid $650,000 being accumulated over the next 4-6 months of 2005.

81 Mr Cook says the third party support is often marked with loans to a Company where those loans are not required to be repaid or are not called upon unless the Company is in a position to pay them. If there were loans during the relevant period I do not think that Mr Cook can fairly say that Zaps was not being called upon to pay them if he has not looked at the bank statements and there is an absence of books. He is assuming that related company debts were not being called upon because Zaps did not have adequate cash flow to pay them. From my appraisal of the bank statements it seems that, contrary to Mr Cook’s apparent assumption, a considerable amount of money was leaving Zaps accounts for other Companies of which the Defendant was sole director and these are Companies that the Defendant has not nominated as being involved in intercompany support or having provided any support to Zaps over the relevant period. Further, the Summary of balance Sheets as seen in Annexure M of Mr Tolcher’s report is useful in that it shows that as at 30 June 2004 the loans to related parties was $878,635, decreasing to $658,976 at 30 September, $439,318 at 31 December $219,659 at 31 March 05 and zero at the time of the RATA.

82 Compare the Loans from related parties (not including the Overdraft facility) $611,511 as at 30 June 04, $421,475 at 30 September, $231,438 at 31 December 04, $41,402 at 31 March 05. The Defendant then claims to be owed $2.5 million having paid the Overdraft of $2,251,627.59. I don’t know where the $248,370 being the difference comes from because he hasn’t provided any evidence in relation to that.

83 I note that the related companies that owed Zaps money were different to the companies to whom Zaps was owing money, but each of the companies were solely directed by the Defendant. There is no evidence from him how the Loans owing to Zaps were diminished nor is there any evidence how the debts owing by Zaps were diminished.

84 Apart from the Defendant’s bald and general statement in his evidence there is no evidence of third party support which did not rely on loans being repaid unless Zaps was in a position to do so. The Defendant’s Affidavit was particularly “loose” about when he provided the funding to support the company. I note that the payment of the overdraft was apparently just prior to the Defendant’s resignation as director. That payment was not in support of the Company continuing at all.

85 It is one thing for the Defendant to claim a preparedness to fund in the sense of paying of its overdraft compared to fund the Company so that it pays its debts when they are due and that it incurs debts in those circumstances. I do not think that Lewis v Doran creates a precedent for Directors to simply assert a claim of related or third party access to funding without an identification of what that funding was and when it was provided rather than a loose and overly broad claim as that made by the Defendant. Particularly, in circumstances of this case where there is simply a laguna of financial records of the kind that Zaps or its Director would be expected to keep and provide upon Statutory request, Subpoena or Court Order.

86 Zaps was not paying its debts as they fell due because they did not have the funding to do so over the relevant period. The lack of cash flow was not temporary, the Company had always relied on related party funding particularly evident between June and December 04. It‘s dependence upon the related party funding and its accrual of monthly losses continued as it had been and would continue to be was endemic as evidenced by the analysis of Zap’s history and what limited financial records there are. The Thornton Report shows that the Zaps was in dire trouble with unreliable unrealistic and unattainable projections.

87 In terms of Indicia of Insolvency, aside from the “inability to produce timely, audited accounts ” (because of a failure to keep the appropriate s286 documents ), there is evidence of overdue superannuation contributions and group tax, there were court process for unpaid debts arising from January and February 05 (Integrated Group obtained a default judgment), there were 2 dishonoured cheques (2 January) of which Mr Baines gave evidence that a Zaps employee explained was due to a difficulty with cash flow which is consistent with the Overdraft at that time. Mr cook does not dispute Zaps was incurring continuing trade losses of at least $107,000 per month. There is no evidence of post dated cheques but I note that the relevant period cheque butts weren’t provided and there are no relevant ledgers or invoices to ascertain whether any were posted dated. There is no evidence of a deteriorating relationship between Zaps and the Bank but there is simply no evidence that there was a good relationship either, given that the Defendant says he decided in July 05 that the Company was insolvent, the last operations of the Bank Statements seem to be 31 May when the bank continued to dishonour E banking. This is s reasonably short time past the “relevant period” but certainly doesn’t assist the Defendant’s claim that it was in July that he decided Zaps was insolvent. Further the letter from Bendigo Bank dated 9 June 2005 suggests that it was an early time than July that the bank accounts were being paid out. There is evidence of rounded cheques during the relevant period as set out in Mr Tolchers Report at Annexure R. I do not agree with Mr Tolcher’s summary of Zaps being above the Overdraft Limit as set out in his Report at 7.23 in that he has incorrectly recorded the OD being $1.35 million – though the bank statements vary about the Overdraft Limit, I accept that the Overdraft facility remained at $2.2 million from 2 December 04 until it was paid out in June 05. Zaps generally remained within the Overdraft during the relevant period. Creditors being paid outside trading terms was evident with even the late payments made to the Plaintiff in March- they related to pre 14 December accounts and were due and payable in January. Mr Cook accepts that the $150,000 trade creditors (RATA) was owing at the relevant time. Mr Cook also accepts that Zaps was unable to raise either debt or equity capital without support of the shareholders (that is the Defendant). I accept Mr Cook’s evidence that a full analysis of the book value of assets and liabilities as at the date of RATA would be required before any reliable estimate of trading losses to that date could be made – however that cannot be done because Zaps did not keep the books as it should have.

88 Mr Cook says that “the amount paid out by related parties to Bendigo bank around June 2005 was in excess of the limit around the relevant times, which suggests further funds were provided during 2005”. He again says that the Overdraft of $2.2 million being paid off at $2.5 million suggests support by way of excess funds Mr Cook is assuming that the $2.5 million claimed as a debt owing by the Defendant was the amount that settled the Overdraft. Looking at the Bendigo Bank letter of 9 June that is incorrect, the sum paid off was about the same amount owing at the relevant time, accordingly, Mr Cook’s comment that I “further funds were provided” is incorrect. . The overdraft was not paid off by this extra $300,000. There is no evidence from the defendant how he accounts for it as being a debt owing to him. Further, Mr Cook’s statement that the “excess” funds as sufficient to enable the Company to continue in business and pay all its debts ”, is incorrect in a fundamental respect – the company did not continue to pay its debts.

89 Mr Hall makes the submissions that given that the defendant has discharged the secured debts and as such has become an unsecured creditor, the only presumption that can be made is that the Defendant has supported the financial operations of Zaps until such time as it was determined to appoint a company administrator. That is not correct. The Defendant himself says that he decided in May that the company was insolvent. The Overdraft was apparently paid off in June. The company’s indebtedness to the Defendant has nothing to do with trading, it had stopped trading by that time. When the Overdraft was paid off the Company was never ever going to be in a position to repay that amount.

90 Mr Hall submission that the Defendant was prepared to take the loss personally in June in preference to some other outcome is of no moment to whether at the relevant time Zaps was insolvent. Mr Hall says that the Defendant’s preparedness to take the 80% share of the Company’s unsecured creditors is evidence that his carried the company financially prior to the appointment of the administrator. That is nonsensical, what he did after the company stopped trading in at least May and tidying up whatever affairs he did, before placing the Company into administration is besides the point. The support is not required at the point where the Company entered administration it is when and as Zaps incurred the Debts of the Plaintiff that is relevant.

91 It is my view Zaps was insolvent at the relevant period: - the indicia of insolvency as identified above - Zaps did not pay its debts as they fell due at the relevant period - there is no evidence of third party support during the relevant period, the Defendants claim that he paid off the Overdraft in June, which existed at the commencement of the relevant period was not really “making funding available for Zaps to continue its business and pay its debts. The Defendant did little more than stand by and watch the Company very quickly and resolutely fall collapse during the relevant period. - the lack of cash flow was endemic, it had always been the case, but particularly since 30 June 04, and Zaps was reliant on an ever increasing Overdraft to meet its accruing trading losses, that Overdraft was not increased prior to the relevant period despite the losses continuing - third party support was not provided so that Zaps could pay its debts at the relevant period and Zaps did not pay its debts at that relevant period because of its inadequate funds and had no means other than a complete reliance on third party funding to do so. - the commercial reality for Zaps was that it was not only accruing trade loss but it was also losing customers or had lost customers and was not entering into contracts with new customers and the proposed contracts as set out in the Thornton report were speculative at best, it had always apparently operated with expenses that were greatly in excess of revenue and without third party support was not a viable entity Defences under 588H

92 Mr Hall made submissions about the validity of the debt in relation to the issue of insolvency and said that “Counsel for the Plaintiff never put to Mr Zappia that the emails detailing delivery problems did not exist or that the Defendant was being disingenuous in suggesting…proper basis to defend. the matter….the only inference can be that the Plaintiff was content with the Defendant’s evidence that the Plaintiff’s deliveries were the subject of the problems identified by the Defendant”. That is an utterly improper submission and one that I reject outright. Mr Zappia never entered the witness box, so counsel for the Plaintiff can hardly be criticised for not cross-examining him or putting any proposition to him at all. The Plaintiff’s position was clear in his responding Affidavit (Ex 4).

93 Mr Hall puts forward the Defendant’s reliance on the Thornton Report and the assistance he was given by Mr Morabillo as at December 2004 as a defence, that is, he had reasonable ground to believe and did believe that a competent and reliable person was providing him with adequate information about whether the company was solvent. He says that Mr Morabillo was fulfilling that responsibility and that he, the Defendant, expected on the basis of that information provided to him, that the company was solvent at the time and would remain solvent even if it incurred the debt and any other debts at that time. If the Defendant thought that Mr Morabillio was a reliable and competent employee he wouldn’t have made him redundant. Indeed the Thornton report says that the Director complained about Mr Morabillio’s work ethic. The Director was very much involved with Management in preparing the documents for the Thornton Report. I do not think that he can now say he was relying on Mr Morabillio.

94 Thornton could not verify the accuracy of any information given to him by way of cost analysis, cash flow analysis, or the reliability of the Company’s projection break-even position., but even looking at the Company’s forecast (though it was stated as being inadequate and not verified) Zaps, would still need an injection of funds each month from November 2004 to August 2005, commencing at $716,000 and reducing to $71,175. The total of the monthly sums came to $2.537 million – that is on top of the Overdraft and in a projection where the Management with the Director was suggesting that the sales were going to increases nearly 8fold . The Defendant does not identify in his Affidavit what part of the Thornton report he relied on, just the fact of the Report.

95 The defendant, in his Affidavit says that Mr Martino, the General Manager” and Mr Morabillio the Commercial Manager prepared a series of strategic reports that showed the solvency of Zaps. He says that a document with a cash flow and financial forecasting suggested that the company was solvent. That document is not annexed to his Affidavit and is not part of the evidence in these proceedings. I presume he is referring to the documents prepared for the Thornton Report (Annexure S of the Tolcher Report). They are documents that were properly heavily criticised for their unreliability and inaccuracy certainly did not receive the validation of Thornton. Further, the Defendant, having been appraised of the Thornton report, should have treated any such document Messrs Martino and Morabillio with the same level of concern as expressed in the Thornton Report. However, I note he seems to have been party to their creation - the Thornton report says the Defendant was involved in the preparation of those documents. It is my view that he was or should have been aware how unreliable they were and absolutely after reading the Thornton Report would have been left in no doubt how much trouble Zaps was in.
96 Mr Hall says that the Defendant should be entitled to rely on the report in circumstances where the Report did not suggest to the Bank they should not support Zaps. The Report gives the reader no basis whatsoever to think that all was well with the Company or that the Company had set itself some achievable goals. The fact that the Bank did not increase the Overdraft even though the Report indicated how much more available support Zaps needed to achieve (the, in my view, unachievable) goals set out in the forecasts, may well be due to the adverse comments in the Report. The Defendant’s evidence is absent in relation to this aspect of his reliance on the Report.

97 The only person who had some knowledge about the accounting and office system was Zap’s Commerical Manager Mr Morabillio. The Defendant says in his Affidavit, the reason for terminating Mr Morabillio was because he, the Defendant, was following the recommendation in the Thornton Report. The report made it very clear that Mr Morabillio was the only person who knew the accounting system and it was clear that he needed to pass that information on to someone more able than he. Further, the Report said that an accountant needed to be appointed. The Defendant is silent about such an appointment and from what I have read, one was not appointed. This suggests that by the time the Overdraft facility was increased to $2.2million, Zaps was in worse trouble than it had been prior to the Thornton Report. The Defendant well knew this and accordingly, he has no reasonable grounds to think the company was solvent. Indeed, if he thought otherwise his eyes were deliberately turned away from the stark reality.

98 The Defendant did not have reasonable grounds to expect and I do not think he did expect, that at that time the company was solvent or would remain solvent even if it incurred that debt and any other debts that it incurred at that time. Nor did he have had reasonable grounds to believer, and did believe, that a competent and reliable person was providing adequate information about whether the company was solvent, and on the basis of that information, expected that the company was solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that time that person was fulfilling that responsibility, and keeping the director informed. I am not even satisfied that Mr Morabillio ever gave the Defendant any information for the Defendant to expect that Zaps was solvent or would remain solvent. The Defendant has not made good his defence in relation to either s588H(2) or (3) (nor incidentally has he rebutted the s 588E presumption of insolvency).

99 I am satisfied that Zaps was insolvent at least from the time the Plaintiff provided the services relevant to the invoice dated 20 December 2004 and remained insolvent thereafter. There were reasonable grounds for suspecting that Zaps was insolvent and the Defendant was aware that there were grounds to suspect such insolvency. He is in breach of his duty as a Director because he failed to prevent Zaps from incurring the relevant debts when the debts fell due and payable there were reasonable grounds.

100 I enter judgment for the Plaintiff, for sum of $53,504.58, with the addition of filing costs and interest to be calculated on the usual basis. As to the issue of Costs, I will take short submissions in writing. Those submissions to be filed 14 days hence.

- -

Actions

Download as PDF Download as Word Document

Citations

Grant Baines Transport Pty Ltd v John Zappia [2009] NSWLC 28

Cases Citing This Decision

0

Cases Cited

13

Statutory Material Cited

1

Keith Smith East West Transport Pty Ltd (in liq) v Australian Taxation Office [2002] NSWCA 264

Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163

Lewis v Doran [2005] NSWCA 243

CITATION:	Grant Baines Transport Pty Ltd v John Zappia [2009] NSWLC 28
JURISDICTION:	Civil
PARTIES:	Plaintiff: Grant Baines Transport Pty Ltd Defendant: John Zappia
FILE NUMBER:	240 of 2006
PLACE OF HEARING:	Newcastle Local Court
DATE OF DECISION:	05/26/2009
MAGISTRATE:	Magistrate Truscott
CATCHWORDS:	Breach of duty as a Director, Company presumed insolvent or actually insolvent, debts incurred when there were reasonable grounds for suspecting the company was insolvent
LEGISLATION CITED:	Corporations Act, 2001 (Cth)
CASES CITED:	Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621 Robert Mackay Sutherland & Anor as joint liquidators of Australian Coal Technology & Anor v Hanson Construction Material Pty Ltd &Ors (3 April 2009 NSWSC)
TEXTS CITED:
REPRESENTATION:	M Holmes instructed by Perry Legal T Hall of Hall Partners
ORDERS:	Judgment entered for the Plaintiff in the sum of $53,504.58, plus filing costs and interest to be calculated on the usual basis.