(In Liquidation) v Sinclair
[2020] FCA 547
•24 April 2020
FEDERAL COURT OF AUSTRALIA
Carter, in the matter of Townsville Electronics Service Centre Pty Ltd
(In Liquidation) v Sinclair [2020] FCA 547
File number(s): QUD 466 of 2019 Judge(s): GREENWOOD J Date of judgment: 24 April 2020 Catchwords: CORPORATIONS – consideration of an application for interlocutory judgment in relation to a claim against a director for contraventions of s 588G of the Corporations Act 2001 (Cth) Legislation: Corporations Act 2001 (Cth), ss 588G(1) and (2), 588M
Federal Court of Australia 1976 (Cth), s 51A
Federal Court Rules 2011, rr 5.21(d) and 5.23(2)(c)
Date of hearing: 28 January 2020 Date of last submissions: 28 January 2020 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 38 Solicitor for the Plaintiffs: A Narayan, Craddock Murray Neumann ORDERS
QUD 466 of 2019 IN THE MATTER OF TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATOIN) (ACN 160 469 036)
BETWEEN: MOIRA KATHLEEN CARTER IN HER CAPACITY AS LIQUIDATOR OF TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATION) (ACN 160 469 036)
First Plaintiff
TOWNSVILLE ELECTRONICS SERVICE CENTRE PTY LTD (IN LIQUIDATION) (ACN 160 469 036)
Second Plaintiff
AND: BRADLEY JAMES SINCLAIR
First Defendant
CATRINA LOUISE SINCLAIR
Second Defendant
ROSLYN MAREE SINCLAIR
Third Defendant
GEOFFREY PETER SINCLAIR
Fourth Defendant
JUDGE:
GREENWOOD J
DATE OF ORDER:
24 APRIL 2020
THE COURT ORDERS THAT:
1.The solicitors for the plaintiff submit to the Court within seven days proposed orders giving effect to the reasons for judgment published today.
2.Pursuant to s 23 and s 37P of the Federal Court of Australia Act 1976 (Cth), rule 1.32 and rule 1.36 of the Federal Court Rules 2011, these orders and the reasons for judgment in support of these orders are made and published from Chambers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GREENWOOD J:
These proceedings are concerned with an amended interlocutory application by which the first plaintiff, Ms Carter, in her capacity as liquidator of Townsville Electronics Service Centre Pty Ltd (In Liquidation), and the second plaintiff (the “Company”) in liquidation, seek an order that judgment be entered against the first defendant, Mr Bradley James Sinclair, in an amount made up of the amount of the debt incurred by the company between 23 September 2013 and 22 February 2016 to the Commonwealth (in respect of an Australian Taxation Office (“ATO”) running balance account debt at 22 February 2016 of $139,490.24) plus pre‑judgment interest under s 51A of the Federal Court of Australia Act 1976 (Cth) (the “FCA Act”).
The amended application is supported by supplementary submissions filed by the plaintiffs arising out of reasons for judgment of the Court published on 23 December 2019 in Carter, in the matter of Townsville Electronics Service Centre Pty Ltd (In Liquidation) [2019] FCA 2178 (the “primary judgment”).
These reasons should be read together with the primary judgment.
In the primary judgment, the Court was also addressing the plaintiffs’ amended interlocutory application for judgment sought against Mr Bradley Sinclair but also that part of the application by which judgment was sought against Mr Geoffrey Sinclair and Mrs Roslyn Sinclair, the parents of Mr Bradley Sinclair.
The plaintiffs applied to enter judgment against Mr Bradley Sinclair in relation to claims made concerning debts incurred by the company when the company was said to be insolvent and in circumstances where Mr Bradley Sinclair was a director of the company and is said to have failed to prevent the company from incurring debts, in circumstances where a reasonable person in Mr Bradley Sinclair’s position, as director, would have been aware that there were grounds for suspecting that the company was insolvent: s 588G(1), s 588G(2) and s 588M of the Corporations Act 2001 (Cth) (the “Act”).
That application was adjourned to enable the plaintiffs to put on supplementary submissions about aspects of the pleaded facts and related evidence so as to satisfy the Court that the plaintiffs are “entitled” to the relief they claim for the purposes of rules 5.21(d) and 5.23(2)(c) of the Federal Court Rules 2011 (Cth).
As to that part of the amended application by which judgment was sought against Mr Geoffrey Sinclair and Mrs Roslyn Sinclair, judgment was entered against them for the assessed quantum ($190,000) of an “uncommercial transaction” entered into on 2 September 2016 when they were directors of the company (being the period between 23 February 2016 and the date of the making of the winding‑up order on 15 September 2017), and in an amount ($107,793.33) in respect of, put simply, insolvent trading, together with interest.
The adjourned application so far as it relates to Mr Bradley Sinclair is the subject of these proceedings in the context of the supplementary submissions.
The insolvent trading claim involves these pleaded elements based on the Points of Claim.
The company was insolvent within the meaning of the Act from 23 September 2013 and at all times thereafter: para 42.
The particulars of insolvency involve five considerations.
First, the company’s balance sheets recorded net amounts of a negative value at 30 June 2013 of $21,232.91 and at 30 June 2014, $38,923.83. Thereafter, the negative asset values were significant: 30 June 2015 ($251,498.64); 30 June 2016 ($295,173.33); and as at 31 October 2016 ($319,731.68).
Second, the company incurred net losses in the following financial years: 30 June 2013 ($16,141.27); 30 June 2014 ($27,636.01); 30 June 2015 ($64,118.82); 30 June 2016 ($43,674.71); and as at 31 October 2016 ($24,558.34).
Third, the company had a liquidity ratio below 1 for the following years: 30 June 2013 (0.54); 30 June 2014 (0.868); 30 June 2015 (0.19); 30 June 2016 (0.17) and as at 31 October 2016 (0.16).
Fourth, the company failed to pay amounts due to the ATO “from approximately 23 September 2013” onwards, and for the financial years ending 30 June 2015 and 30 June 2016, the company failed to lodge income tax returns with the ATO.
Fifth, the company failed to comply with its obligation to make superannuation contributions.
As already mentioned, Mr Bradley Sinclair was a director from 24 September 2012 to 23 February 2016. The financial factors at 30 June 2016 remain relevant even though Mr Sinclair retired as a director on 23 February 2016. The plaintiffs plead that the five indicators reveal some matters as at 31 October 2016 which are also relevant to the claim that the company was insolvent, at all times, on and from 23 September 2013.
At para 43 of the Points of Claim, the plaintiffs assert that between 23 September 2013 and 3 January 2017 (and thus including up to 23 February 2016), the company incurred debts including an ATO running balance account debt totalling $139,490.24 between 23 September 2013 and 22 February 2016, and superannuation liabilities to the ATO to 22 February 2016 of $29,864.31.
The plaintiffs plead that when each of these debts were incurred between 23 September 2013 and 23 February 2016 by the company, there were “reasonable grounds for suspecting that [the Company] was insolvent; or [that the Company] would become insolvent by incurring each of the debts”: paras 46 and 47.
At para 48, the plaintiffs plead that a reasonable person in the position of Mr Bradley Sinclair (as director of the company), would have been aware, when each of the debts were incurred, that there were grounds for suspecting that the company was insolvent; or that the company would become insolvent by incurring each debt (having regard to the five factors at para 42 already mentioned); and that there were reasonable grounds for suspecting that the company was insolvent, or would become insolvent, by reason of each debt being incurred.
Moreover, the plaintiffs plead that not only would a reasonable person in Mr Sinclair’s position have been aware of the asserted matters, and that reasonable grounds existed for suspecting the pleaded matters, the plaintiffs contend that, relevantly for present purposes, Mr Bradley Sinclair “was aware” or “ought to have been aware” of the pleaded matters of which a reasonable person would have been aware: para 49.
Thus, it is said that Mr Bradley Sinclair contravened s 588G of the Act in respect of each debt in the relevant period.
The plaintiffs also contend that the company suffered a loss of $169,354.55 by reason of the liabilities incurred to the ATO. They plead that the creditor (the ATO) has suffered a loss as, absent any recovery in these proceedings, the creditors will not receive any dividend.
Thus, the plaintiffs seek to recover the amount of the loss as a debt due to the company pursuant to s 588M(2) having regard to the s 588M(1) factors, and s 1317H of the Act.
Section 588G(1) is an application of laws provision.
It provides that s 588G applies if a person is a director of a company when the company incurs a debt (s 588G(1)(a)); and, the company is insolvent at that time, or becomes insolvent by incurring the debt (or by incurring, at that time, debts including the debt) (s 588G(1)(b)); and, at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent: s 588G(1)(c).
The plaintiffs plead that Mr Sinclair was a director of the company on and from 24 September 2012 to 23 February 2016; that the company was insolvent at 23 September 2013; and that there are reasonable grounds for suspecting the statutory matters at s 588G(1)(c).
Thus, s 588G is said to apply.
Because s 588G applies, the director contravenes s 588G(2) if he or she is aware, at the time the debt is incurred, that there are grounds for suspecting that the company is insolvent or would so become insolvent, or a reasonable person, in a like position in a company, in the company’s circumstances, would be so aware.
The plaintiffs plead that the company was insolvent from 23 September 2013. Ms Carter, in her Solvency Report dated 22 January 2018, expresses the opinion that trading losses for the financial year ending 30 June 2013 (which continued until liquidation), and the additional impact of the company failing to meet its reporting obligations to the ATO from 23 September 2013, rendered the company unable to meet its obligations to creditors from 23 September 2013 and thus the company was insolvent from that date. Ms Carter also expresses the opinion that the directors “would have been reasonably aware of that fact” (that is, the fact that the company was insolvent from that date).
At 23 September 2013, the trading loss for the preceding financial year to 30 June 2013 was $16,141.27. The annexures marked “PQ” and “R” to Ms Carter’s Solvency Report (setting out the Process date and the Effective date for the ATO running balance account) show that between 28 November 2012 and 21 March 2013, the first and only negative entry occurred on 21 March 2013 being an amount -$2,348.51. The running balance account was restored to a positive balance on 29 April 2013 and remained positive until 23 September 2013 when the account balance became negative again in an amount of -$1,796.51. It remained in negative accumulating balances until Mr Sinclair resigned as a director on 23 February 2016. By that date, the balance was -$137,706.24.
In determining whether judgment is to be entered for the plaintiffs for the amount claimed, on the basis of the claims, the Court must be satisfied that the plaintiffs are entitled to the relief they claim, having regard to the pleading of the facts going to the integers of the sections of the Act on which the claim is grounded; the caution to be exercised in entering judgment; and the circumstance that Mr Bradley Sinclair is not represented and there is no contradictor. In addition, the Court ought to have regard, to the extent necessary, to evidence going to the elements of the claim where that would be helpful in assisting the Court in deciding whether the plaintiffs are entitled to the judgment they claim.
The starting point in establishing a liability in Mr Bradley Sinclair as a matter of pleaded fact is that the company became insolvent on 23 September 2013.
Debts incurred by the company on and after that date are the relevant and material debts for the purposes of the claim against Mr Sinclair. The plaintiffs plead that when each debt to the ATO was incurred on and after 23 September 2013 (for example, the amount of $6,215 incurred on 28 October 2013, being the next debt incurred to the ATO after 23 September 2013), there were reasonable grounds for suspecting that the company was insolvent or that it would become insolvent. That pleading is cross‑referenced to the five particulars to para 42. The negative net assets at 30 June 2014 and the net losses at 30 June 2014 were well after 23 September 2013 and do not support the general pleading at para 46 in relation to a period from 23 September 2013 to a particular moment in time when it can be said that there were then reasonable grounds for suspecting insolvency or an “awareness of insolvency” in Mr Sinclair.
However, on 1 November 2013, five separate penalties were imposed upon the company for a failure by the company to lodge activity statements on time for the periods ending 31 December 2012, 31 January 2013, 28 February 2013, 31 March 2013 and 30 April 2013 of $1,700 each: see Annexures “PQ” and “R” to Ms Carter’s Solvency Report.
I accept that, by 30 November 2013, Mr Sinclair was either aware that the company was insolvent or that a reasonable person in a like position in the company’s circumstances would have been aware that the company was insolvent (and thus there were then reasonable grounds for suspecting that the company was insolvent).
The plaintiffs are entitled to judgment against Mr Bradley Sinclair for all debts incurred to the ATO on and from 1 December 2013 until 22 February 2016 together with pre‑judgment interest calculated under s 51A of the FCA Act to the date of entry of judgment.
The solicitors for the plaintiffs will be directed to submit orders giving effect to these reasons to the Court within seven days.
I certify that the preceding thirty‑eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 24 April 2020
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